Cash out retirement to save home?

[Wantmypeace]

After our bk7 is discharged, we can keep our house by cashing out my retirement to bring our 1st mortgage current and settle our 2nd and 3rd to get the liens released (if the lenders will do it...they'll basically get nothing, otherwise). I have about 60K in Cal-STRS (which, if you've been watching the news, could be gone tomorrow! LOL). After 6 months of not working, I can cash it out with a HUGE penalty, but enough to ensure we keep our home. My thinking is that it would be a fair trade to lose the retirement if we were able to keep our home (currently worth 185K), and we would have about 40K equity in it if we settle the 2nd and 3rd and bring the 1st current.

My concern: How hard would it be to sell this house in say, 10-15 years, if we wanted to? It had a lot of work done to it before we bought it "as is," and there weren't permits, etc. on those things. We bought it before CA government tightened up all their rules/requirements which appear to be making it almost impossible to sell a home without virtually rebuilding it to current safety/building specs. If it is going to be close to impossible to sell the house in 10 years without dumping tens of thousands of dollars into it, we may do better to walk away now and use my retirement as a downpayment on a new home in three years or so (after the banks will lend again post bk/foreclosure).

Any thoughts on this? I know it's complicated, and I apologize!

[locolady]

Boy lot of question and no real answer with out a full accounting of your financial picture. I just use my own though on this matter because I faced a similar problem. I live in So/Cal underwater home with unsecured second and money in my 401k. First the second and third I would forget about for now I stop paying mines a 2 year ago (100k PNC) they can't do anything unless the are same as first lien holder. No one can even try to predict real estate prices next year least wise a 10+ year horizon so forget that. Next do you have the income to support the home, how long before retirement, and you mention not working for 6 month to cash out the 401k are you currently employed?
Home Value:
It's not even a trade to cash out a 401k to protect an assets you can't even realize for 10-15 years. The home has codes issue you really don't have 40k in equity if it will take thousand's and extensive repairs to realize it. Now if you like the area or schools or just really like the house and the cost to renting another home in that same area is on par with your current PITI stay there. But if you can rent in the same area for less and your in foreclosure now let them have it move on save you money in three years you can buy a 200k home FHA for 10k down including closing cost and have less than 1k house note. Also you still have your 60k 401k intact for your retirement. I really like my home and will keep it for now unless I loss my job or get sick and then I walk away I have not reaffirmed the mortgage. I just think it make no sense borrowing form 401k,credit card and family to keep a home when (a)you can't afford it (b) it underwater 20+% in Ca. NV. Fl. Ill. just move on. Mines is 45% underwater on the first and there is no way I will stay unless BofA gives me a mod that's more favorable than moving to a rental. Even if they do I will not pay the home off. I still plan to walk away in 7 years letting them have it. At least they get 7 year worth of payment base on the inflated value I purchase it for and not what it would bring in today market..

[Wantmypeace]

That all makes sense. As far as affording the home, we can easily afford the payment on the first (1200/mo) after our bk is complete. We haven't paid on any of the mortgages in three months, and we don't plan to pay on any of them (except the 1st if we keep it). I am not working, and I probably will not be again due to my illness, but it's hard to predict. My husband is working, and all of our decisions are based solely on his income now. My retirement isn't really a 401k. It's a CalSTRS teacher retirement, which is handled a lot like social security (unfortunately). We could not rent a similar house for the cost of the payment on the first, so this is why we were considering trying to settle the 2nd and 3rd while they have no equity and are more willing to settle very low. We're hearing 5-10% settlements are common. If both were to do that, we'd reaffirm the first and keep the house. The loan on the 1st is for 145K and is fixed at 5.5%. The value on the home is 185K right now. My only worry in doing this (because we do love the house and have raised our family in it) is that there will come a time when we want/need to sell, and I've heard of people who are completely stuck because of new regulations, etc. that make it impossible for them to sell their homes. I guess I'm just really afraid of Big Brother...a definite symptom of long-term living in California! LOL!

[mom2crazies]

I know Dave Ramsey says to only cash out retirement to avoid a bankruptcy or foreclosure, but I say to NEVER do it because of the compound interest that you will lose. Plus, you are not certain that you will be able to settle with the other mortgages meaning that you could cash it out and then be right back in the same boat because they won't work with you. In my experience, the 2nd mortgage refused to work with us at all. I cannot imagine having to negotiate with 2-3 different mortgage companies. You are at the age where you need to protect your retirement viciously. Owning a home will not keep you from eating Alpo at 70, but a well-funded retirement left to compound interest might.

Hugs to you for being in this situation. Nobody deserves it.

(PS - here is a link to a calculator on compound interest and it's benefits that you can look at http://www.dinkytown.net/java/CompoundSavings.html )

[locolady]

As far as affording the home, we can easily afford the payment on the first (1200/mo) after our bk is complete My husband is working, and all of our decisions are based solely on his income now.

We could not rent a similar house for the cost of the payment on the first,

How is it homes are value at 185k and rent are more than $1200 a month? Have you look at rental rate in the neighborhood near you and if so how much is the going rate today?

As for My retirement isn't really a 401k. It's a CalSTRS teacher retirement, which is handled a lot like social security (unfortunately).

I understand exactly how that works my older sister is a teacher and she faced a job change to another state. The hit to withdraw was 30% and she had 17 years in at that time. Another reason to leave your money where it is..

[Pandora]

That all makes sense. As far as affording the home, we can easily afford the payment on the first (1200/mo) after our bk is complete. We haven't paid on any of the mortgages in three months, and we don't plan to pay on any of them (except the 1st if we keep it).

.... so this is why we were considering trying to settle the 2nd and 3rd while they have no equity and are more willing to settle very low. We're hearing 5-10% settlements are common. If both were to do that, we'd reaffirm the first and keep the house. The loan on the 1st is for 145K and is fixed at 5.5%. The value on the home is 185K right now.

Want-

First, there IS equity in your house if the current value is $185K and your 1st is owed $145K; thats 40K in equity. You need to know if the 2nd will foreclose since 1. you arent reaffirming and 2. you owe more to the 2nd than you do to the 1st. Given your complex situation - the likelihood of the 2nd foreclosing is extremely high. Due to the equity, you couldnt even file Ch. 13 to strip the junior liens off - which would realistically be the only way to do what you're considering (keeping the house / reaffirming).

Cashing out a retirement plan to pay off debts is a bad idea IMO - you've worked all these years to build it up - does your husband plan on working forever until the day he dies? You need security for the future and your retirement is it at the moment; you werent planning on getting sick and having to quit working, so you need to think about that for the future. What happens if your husband gets sick and cannot work?...something to think about.

Something I'm not quite understanding is if your 1st is 145K @ 5.5% fixed - why are you paying $1200 a month in a payment? I could see if your loan was $190K @5.5% it being $1200, but not at your current amount due. ??? Are you including HOA, PMI or something else in your payment (i.e., escrow) ?

I would not hang onto a house in your situation - chances of you settling the 2nd (if they dont foreclose first) is going to be very hard to do. You're talking about settling for 5-10% which would equate to roughly $9250 upwards of $18500 - they wont settle for that since if they foreclosed, they could walk away with about $40K.

Very risky...

[tobee43]

i know this is a really personal decision...but i really agree with pandora and her view on this situation.....

i understand this is a very difficult decision......and i would say...if you plan on NEVER EVER moving and staying for the rest of your entire life...well then, maybe i would give it a second thought.

ahhhhhhhh....wantmypeace...i so wish i and,...... i guess anyone would know what's going to happen down the road...even in 5 years...shoot ...had i known what was going to happen 10 years ago i would have planned so differently and i THOUGHT i was doing the right thing ...but never could foresee losing our jobs and getting sick...

do what you feel is RIGHT for you and yours....but, once again, i wholeheartedly agreed with what pandora is saying.

i so wish you the best on what ever you decide to do.

[AngelinaCatHub]

I've said it before with intensity, so I'm only going to say "I cast my vote" to leave your future alone. Your penalty will be far above what you think as you will NOT replace that amount and the interest it will currently make you in the future. Take it from one who MADE THAT MISTAKE. I regret this in my retirement now. What just $200 more dollars a month would mean to us living off of SS and unemployment. It would be like a gift from God. DON'T DO IT. 'Hub

[tobee43]

I've said it before with intensity, so I'm only going to say "I cast my vote" to leave your future alone. Your penalty will be far above what you think as you will NOT replace that amount and the interest it will currently make you in the future. Take it from one who MADE THAT MISTAKE. I regret this in my retirement now. What just $200 more dollars a month would mean to us living off of SS and unemployment. It would be like a gift from God. DON'T DO IT. 'Hub

we did it also HUB...and now we have only the SS and pension and we know the unemployment will be stopping soon...and then what...IF we just had that 401 now...and you're so right on this...ours would have been approx 300 a month and meant our entire food budget or utility bills....

[mom2crazies]

At that penalty it is still WAY too high of a risk to cash it out.

Your retirement is fairly guaranteed. You getting older and needing income is guaranteed. SS may not be as secure as we all hope it will be in the future (ESPECIALLY if Paul Ryan has his way). The mortgages settling and it working out, NOT GUARANTEED at all. They are able to write off your loans as a loss for now and then come after you for the full balance PLUS interest until the statute is up. Not to mention that I would never trust a mortgage company settlement. They can change terms easily and at their whim. There are too many people on this board that are filing bankruptcy because their hardship, modification or settlement did not work out. I am filing because of all 3. My 2nd mortgage REFUSED to settle at all. They wouldn't even take our calls.

I know it's hard to leave your home and it's very sad. I have gone through it and I didn't even like my house! You said a "similiar" house would be too expensive. You could always downsize. We moved into a townhouse that is 1,000 sq. feet smaller than our other house that was foreclosed on and have two children that are growing. It really wasn't that big of an adjustment...and we have a lot of crap!

I never caught your ages, or if you had children still living home with you.

[tobee43]

At that penalty it is still WAY too high of a risk to cash it out.

Your retirement is fairly guaranteed. You getting older and needing income is guaranteed. SS may not be as secure as we all hope it will be in the future (ESPECIALLY if Paul Ryan has his way). The mortgages settling and it working out, NOT GUARANTEED at all. They are able to write off your loans as a loss for now and then come after you for the full balance PLUS interest until the statute is up. Not to mention that I would never trust a mortgage company settlement. They can change terms easily and at their whim. There are too many people on this board that are filing bankruptcy because their hardship, modification or settlement did not work out. I am filing because of all 3. My 2nd mortgage REFUSED to settle at all. They wouldn't even take our calls.

I know it's hard to leave your home and it's very sad. I have gone through it and I didn't even likyoue my house! You said a "similiar" house would be too expensive. You could always downsize. We moved into a townhouse that is 1,000 sq. feet smaller than our other house that was foreclosed on and have two children that are growing. It really wasn't that big of an adjustment...and we have a lot of crap!

I never caught your ages, or if you had children still living home with you.

you're so right mom2....we went from 4500 sq ft to 2000 sq ft...that house was way too big for us and we had most all but 3 rooms shut off....the heat and electric alone ....cost us what this present house cost mortgage, taxes, utilities etc....everything....was it hard......absolutely...we were in that house for 33 years...and we didn't have kids home anymore...

but remember, we need to give our children more credit...kids are rezealant...they can adjust better than we can....we never give them enough credit.

we now have a place we can afford for the rest of our lives...and as i have said before after moving out of a house that one lived for 33 years.....the ONLY box coming out of this one is with ME in it......we all know downsizing is difficult...we had a standard of living...that what.....caused us stress, debt and uncertainty ....i like it much better now...was it and adjustment...absolutely. but it was the right business decision for us in the long run.

best of luck !

[Wantmypeace]

You are all so right! Thank you for being completely open and saying what I need to hear instead of what is easy to say. I'm leaning very heavily toward living here as long as possible (free rent), and then renting something until we can buy again. I say leaning heavily instead of decided because I am not the only vote. However, I am quite persuasive.

My kids are 16, 14, and 12. And, you're right; they are incredibly strong and resilient. We don't give them enough credit.

Our house payment is 1162 and change, but taxes and insurance are included, so that probably makes up the difference. A rental wouldn't include the taxes, and we'd get renter's insurance, but when looking through rentals online and in the paper, a similar size house (1700 sf, 3br/2ba) seems to run around 1000 to 1500, depending on how many sirens we want to hear at night.

The thought of moving is INSANE, but I guess I can look at it as a great way to organize and clean out a lot of stuff. We aren't packrats at all, so it probably won't be as bad as it seems...

(sigh) I just planted a weeping cherry tree in the backyard last spring. Wonder if it will handle being transplanted???

[frogger]

DON'T DO IT. 'Hub

I agree. DON'T DO IT

[HHM]

If we are voting

Don't do it.

Pandora has the correct analysis, no reason to repeat it.

[Wantmypeace]

HHM...the Thrifty Spender Experiment....is that you? I read through some of the assignments, and I'm not sure I "get" what is happening. Is this really an experimental couple doing this, or is this a person doing this to/for himself? It looks very intriguing...