Am I crazy?

[Miknan]

Discharged ch 7 11-21-11, closed 1-21-12. Received a letter from WF saying pay by 3-5-12 or accelerate to foreclosure (but "this letter isn't an attempt to collect"). Anyway my plan all along was doing a land contract with a new builder. The question is when? I haven't paid mortgage in around 10 months so I've saved up a good sum. We found a spec home we love but the builder won't come down as much as we would have liked. So I made a suggestion which he liked. I give him a very big down payment. This is cashed out from my wife's 401k. I don't want to discuss what a bad idea that was but we made that decision for our family and since she is disabled we didn't have to pay the penalty, only taxes. This down payment is the only way any builder will work with us. The number of rentals in this area is nil and i want to keep my kids in the same wonderful school. Starting March 1st, I will pay him a few hundred dollars a month to hold the house for us while we stay in our current house waiting for the sheriffs sale and still saving money, just not as much. We can do this until Sept 1st, then we have to close. I guess it works great as long as the sheriff's sale happens before or soon after Sept. Probably the smartest thing is just stay here as long as possible but this house seems so perfect for us and it'd be guaranteed to be there. Thoughts?

[HHM]

Sounds like emotion got the better of reason...to each his own.

Doesn't really sound like a question.

Don't over think it, if you like the other house, go move.

However, you are calculating the issue of the 401K too narrowly, it is not just the taxes you give up when you cash it, it is the future growth of that money. Generally, depending on the time horizon (10 years, 20 years, etc), the true cost of early withdrawal is about 2-3 times the net amount received. For example, if you liquidate $50K, you lose anywhere from $10-20K in taxes depending on circumstances, but over the course of 10 years, you lose, conservatively, $77K in growth, so the net cost of liquidating that 50K costs you anywhere from $127K - $137K (50K current value + 77K of anticipated appreciation). That is the sad reality. And very few, and I mean very few people, are in a position to replace that loss. So, I hope its worth it?

[Miknan]

HHM, I think your response is dead on. We are letting emotion replace clear thought. I just have a chronically ill wife and three little kids. It's tough to think of the consequences later when I have such needs now. BTW, your $50k example is the exact amount. I'm not so sure I agree on the growth though. Certainly hasn't done that in the last ten years.

[AngelinaCatHub]

Compound interest is the miracle of savings. However in the turmoil this Country is in it is doubtful that the 50k would be worth so much as inflation is starting it's roll up. Most think (and were right once) that saving in IRA's etc. for a lower tax rate when you get old, is now becoming moot. The tax machine is also rolling in.

I question the new house in the fact that if you can't or haven't paid for the current house, how will you folks get a mortgage? If you got a mortgage but aren't able to pay this mortgage how will you pay the new mortgage? Are you contemplating a bk? If so that may cause you to loose that down payment in forfeiture to the spec house owner.

What are your plans on getting this new house while waiting and hoping for a Sheriff sale? If not in bk, then the old house mortgage can sue for the deficiency and it would not be discharged as you are not on any automatic stay. I see a loop called "catch 22". Hope it all works out. 'Hub

EDIT: I stand corrected after re-reading your post. You are discharged from this debt, good. Still, how are you going to get a mortgage with a bk and most of the times you won't get one for two years.

[HHM]

Granted, we can quibble over the numbers, but the point is, you lose future growth of the 401(k), and whether that is 20K or 70K, doesn't really matter, it is not worth it to withdraw.

To Angelina, Looks like the seller is willing to do a Land Contract...(essentially owner financed), but be careful, in a land contract, the seller still "owns" the land until paid and if you are dealing with a "spec" home builder, you need to see what liens are already on the property.

[OhioFiler]

There's much more to consider in terms of the value of an investment than just what interest or growth it may accrue over a period of years. For example, if I have an investment that returns 8% annually but the inflation rate averages 9% annually I will have an investment worth less at maturity than it was worth when I initially invested.

The OP is also betting on the likelihood his new home purchased via land contract will grow in value at a rate in excess of his 401k. That growth rate is calculated on the initial investment ($50,000) rather than the cost of the house. Recent trends aside, one has to believe the housing market will eventually begin to see increased valuations on properties. It's possible his $50,000 investment in a home today will be worth more than had he left the $50,000 in his 401k.

[AngelinaCatHub]

Another thought or question: Is/will the spec house owner self finance you? Still can you afford that payment on the new mortgage? You are in this too deep to pull out and lose that kind of money and you WILL need a place to say if your current house IS auctioned.

This sure sounds like something I have done in the past. I learned to think things out at a slower pace in my older years. I've done similar over "falling in love" with a car or house under the influence of the buying erg. 'Hub

[AngelinaCat]

I just hate to see someone raid a 401K. We raided 'Hub's years ago when we were still gainfully employed--and unaware of potential drawbacks. Fast-forward a few years when we have both lost our full-time employment, and have been through a CH7 BK. 'Hub is now 'retired' and is of retirement age. I am 59, still have a small PT job, and at my age have been passed over for three FT jobs. Our monthly income is 'Hub's SS, a minuscule pension, and the little bit I bring in. We certainly could use that 401k now...

[OhioFiler]

We found a spec home we love but the builder won't come down as much as we would have liked. So I made a suggestion which he liked. I give him a very big down payment. This is cashed out from my wife's 401k. I don't want to discuss what a bad idea that was but we made that decision for our family and since she is disabled we didn't have to pay the penalty, only taxes. This down payment is the only way any builder will work with us. The number of rentals in this area is nil and i want to keep my kids in the same wonderful school. Starting March 1st, I will pay him a few hundred dollars a month to hold the house for us while we stay in our current house waiting for the sheriffs sale and still saving money, just not as much. We can do this until Sept 1st, then we have to close. I guess it works great as long as the sheriff's sale happens before or soon after Sept. Probably the smartest thing is just stay here as long as possible but this house seems so perfect for us and it'd be guaranteed to be there. Thoughts?

I would stay in the current house as long as possible THEN consider making the offer of a large deposit/land contract with the builder. If he builds spec houses you can reasonably expect that one or one similar in his inventory will be available later this year. Why pay him a few hundred dollars per month to hold a house for you when it's likely the same deal will be available to you when you really need it several months from now?

[AngelinaCatHub]

Granted, we can quibble over the numbers, but the point is, you lose future growth of the 401(k), and whether that is 20K or 70K, doesn't really matter, it is not worth it to withdraw.

To Angelina, ('Hub)Looks like the seller is willing to do a Land Contract...(essentially owner financed), but be careful, in a land contract, the seller still "owns" the land until paid and if you are dealing with a "spec" home builder, you need to see what liens are already on the property.

HHM, I've used land contracts in the past "Contract for Deed). If he is on one, they have advantages. First advantage is they have no recourse. You can walk away without getting sued, or having your credit dinged. The land just goes back to the owner. Once paid the owner must give a Deed. BUT, you MUST stay current or the owner can put you out. Watch how this is worded for sure. 'Hub

[OhioFiler]

'Hub is now 'retired' and is of retirement age.

Why did you marry such an old man?! ;-)

[AngelinaCatHub]

I would stay in the current house as long as possible THEN consider making the offer of a large deposit/land contract with the builder. If he builds spec houses you can reasonably expect that one or one similar in his inventory will be available later this year. Why pay him a few hundred dollars per month to hold a house for you when it's likely the same deal will be available to you when you really need it several months from now?

I strongly agree. If the OP has not yet pulled the money out, let it stay until the need arises. If the down payment has not been made, that spec house owner could get a bit "hungrier" by Sept. Houses are like street cars. A better or cheaper one will come by.

Remember he is in Mich a much more hurting state than FL. However, in our County, houses are selling at a quarter of their once appraised values. BUT, nobody has even that little amount of money. There are two spec houses we have been watching (no we are NOT in the market) but they are now 5 years old and never sold and lived in.

Not too far from our town is a little town with spec development with all new utilities paved streets and 100 lots. 25 spec houses up, all but two with unfinished tile and carpet to be chosen by the buyer. Only two of the 25 have been lived in and one of those two are currently occupied. The other has been repoed. It is a buyers market for those who have the money. 'Hub

[AngelinaCatHub]

Why did you marry such an old man?! ;-)

LOL! We were younger then. I wiser her less informed and I got the bargain. At this time my doc tells me the mind is the second thing that goes, but I forget what the first was.

'Hub

[OhioFiler]

LOL! We were younger then. I wiser her less informed and I got the bargain. At this time my doc tells me the mind is the second thing that goes, but I forget what the first was.

'Hub

Let me help you! Cialis runs ads every 5 minutes on TV! ;-)

[AngelinaCatHub]

Let me help you! Cialis runs ads every 5 minutes on TV! ;-)

What's Cialis, Viagra, etc. used for?

OK, back to subject before I get banned again. LOL.