- The Washington Times - Monday, February 27, 2006

Q I’m newly divorced and my husband of 28 years handled the finances. I’m buying a house for $283,000, and I plan to put half down to keep my payments under $1,200. My ex said I should not put more than 20 percent down and to use the cash to make the higher payments.

A: It’s great you are in a position to buy a home for yourself. Not all people fare so well after a divorce.

The more money you can put down on the house, the smaller your house payment will be.

If you only put down 20 percent and keep the rest of the cash to invest, your investments will need to generate a return greater than the interest rate on your mortgage.

Is that possible? Yes, but not without taking some risk. And as you get closer to retirement, you have to question whether it’s worth it or not to take that risk.

If I were in your position, I’d put as much money down on my house as possible. Having a low, manageable mortgage payment will be necessary if you ever want to think about retirement.

Q: My daughter will start college in 2010, and my wife and I need to decide what to do with $35,000 cash. We have house payments of $2,165 a month at 4.99 percent that will be paid off in 2014. We could add the $35,000 to a $17,000 investment account that we have set aside for her, or we could pay down our mortgage.

If we invest the money, we’ll have mortgage payments throughout her college years. If we pay down the mortgage, our home will be paid for in 2012, so there would be a couple years that she’d be in school and we’d have no mortgage payments.

We also have money in Roth IRAs and 401(k) accounts. Can all of the money that was put into the Roth be withdrawn penalty free if used for education? Ae there similar rules for the 401(k) account?

A: Given the low interest rate on your mortgage, I’d stash the money with the other college money you have invested.

You can use the cash to reduce your mortgage balance, but it wouldn’t be that helpful, given that you would still be making mortgage payments during her freshman and sophomore years.

With regard to your retirement accounts, you can access all of your Roth IRA contributions without penalties, regardless of how the money is used.

You can also withdraw any of your earnings for college costs without penalties, but they will be subject to ordinary income taxes. Withdrawals from your 401(k) will be hit with taxes regardless of whether the money is used for college expenses or not.

cWrite to Scott Hanson at [email protected]moneymatters.com.


Q: I am 37 years old and have a 401(k) plan with a balance of $115,034. I’m also paying on a 30-year mortgage at 5.875 percent. Would it be in my best interest to borrow against my 401(k) plan to avoid paying all that interest to the mortgage company? I’m three years into my mortgage, in which I owe $154,000. I’m married with a 5-year-old and a newborn, and I make around $55,000 a year.

A: You wouldn’t be able to borrow enough money from your 401(k) to pay off your home. The maximum that you can borrow is the lesser of 50 percent of your account balance or $50,000.

You could borrow $50,000 from your 401(k) and plunk it down on your home mortgage, but I don’t see how it will help you. Your mortgage payments would remain the same, and you would be stuck making monthly loan payments on your 401(k).

In regard to saving money in finance charges, clearly the less money you borrow from the bank, the less you will pay in finance charges. Paying down your mortgage balance with a 401(k) loan will reduce the amount you will pay in interest, but it might not help you get further ahead.

When you take a loan on a 401(k), investments are sold to generate the cash. This then reduces the amount of money you have working for you. This loss of opportunity is also a cost. In fact, the opportunity cost could very well be more than the 5.875 percent interest on your home mortgage. Forget about the 401(k) loan.

• Write to Scott Hanson at [email protected]


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