Will Rates go Lower & Using your 401K
It feels like the phrase/curse “May you live in interesting times” is as applicable today as most any time in our history. We know less “interesting” times are ahead so in the meantime we travel through this period with whatever positives we can find. One of those positive aspects is homebuying or home refinancing. The interest rates for fixed rates (15-year or 30-year loan terms) available today have created an unprecedented amount of lending activity and effectively lowered the cost to borrow on a home than ever before.
Many people have seen their investments also increase with the rebounded stock market and have inquired about whether those funds can assist them in purchasing a home. The answer to non-retirement related investment accounts is – usually yes. One may use those funds for the purchase of home; however, they will need to be liquidated in advance of the closing in order to evidence to the lender there are adequate funds available from the non-retirement investment source. With a volatile stock market, one’s investment may be negatively impacted by the current environment so acting prudently to liquidate may be wise. Please note, there may be tax implications by liquidating investments funds, so please reach out to a tax professional to understand the consequences.
Retirement investment accounts are another source people inquire as to the ability to access for a home purchase. The two more notable retirement accounts are: IRAs and 401(k). The key aspect to both retirement accounts is using a person’s vested account balance to determine the amount on may have access to utilize.
There is early withdrawal from a retirement account prior to the age of 65 yet such withdrawal has potential penalties of not only the withdrawal amount being taxed as ordinary income but also a 10% penalty on the amount. Please note, the IRS allows for certain hardship exceptions: https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans
Most 401(K) retirement accounts do have an additional option in the form of a loan. When available, it is based on the vested account balance and allows for up to 50% (not to exceed $50,000). The loan terms depend on the plan sponsor and there is an application required to request the loan. It generally takes up to 2 weeks for the process to be completed when a 401(k) loan has been approved before the loan is provided to the borrower. From a lender’s perspective, the evidence of the loan distribution from the 401(k) will be required to account for the deposited funds into the borrower’s bank. To determine if a 401(k) plan offers loans, check with the plan sponsor or the Summary Plan Description.
Will rates go lower?
I have been asked this question more than any – especially recently. The challenge has been the unpredictable and unstable nature of our lending environment. Rates have continually drifted lower over the past three months but there will be a time when they will rebound. Too much fiscal stimulus has been and looks to continue to be injected into the monetary system for there not to be an inflation adjustment in rates – causing rates to rise eventually. And there are so many economic variables providing differing data, it is a challenge to grasp when things will change. The Federal Reserve has commented it intends to keep rates low for an extended period of time, but once the data begins to reflect signs of consistent inflation, the Fed will need to address it by raising rates to ensure inflation does not become a problem.
As I always tell my clients, are the savings (in the case of a refinance) or is the mortgage payment (in the case of a purchase) beneficial or reasonable to your current situation? If the answer is yes, then refinancing or purchasing now may be the right time.
It would be my pleasure to assist you and I wish all of you health and happiness as we get through this year. 😊
Vice-President / Sr. Loan Officer
Altitude Home Loans
Equal Housing Lender