Not having enough money to pay your mortgage means making some tough choices. One choice that some homeowners find themselves pondering is whether or not they should take money from their retirement savings to make their mortgage payments.
Taking money from your retirement account is a big decision with serious consequences. Whether it's a good or bad idea for you depends on how much retirement savings you have and what's causing you to have trouble paying your mortgage.
When Spending Retirement on Mortgage Makes Sense
Taking a withdrawal from your retirement account to pay your mortgage could make sense if you have a ton of money in your retirement account and are experiencing a temporary hardship caused by a one-time expense.
It's not the end of the world as long as you can quickly return to making mortgage payments from your earnings like normal and replenish the money you withdrew over time. In that case it could be worth it to use retirement savings to make a few payments and avoid falling behind.
When Spending Retirement Money on Mortgage Is a Bad Idea
If you have more serious problems with your mortgage caused by a loss of employment or other major hardship, then taking money from a retirement account is much riskier.
It's dangerous to pay your mortgage from your savings in the hope that you will get a better job that allows you to afford the monthly payment. If the job never comes, you could spend your savings on your mortgage and then lose your home to foreclosure anyway. That's the nightmare scenario that you want to avoid. Don't sacrifice your future to pay the mortgage on a home you won't be able to keep anyway.
Penalty For Early Withdrawal
Also, keep in mind that there are penalties for taking an early withdrawal from a retirement account, such as a 401k or IRA. Taking a distribution when you're younger than 59 ½ means you have to pay a 10% early withdrawal penalty plus state and federal taxes. That's a big loss, and it means that you have to put more back in to your retirement account to get back to where you were.
If you want to retire by 65, financial advisers recommend that you have four times your annual salary saved by age 45 and an additional year's salary every five years after that. Many Americans don't have any retirement savings or they have much less than they'll need. Borrowing from what you have saved to pay your mortgage is going to make the future that much more difficult.
There are other options to help you with your mortgage problems.
Permanent Fixes For Mortgage Problems
If you know that you can't afford to keep your home but can't sell it in a regular sale, you should consider a loss mitigation option such as a deed in lieu of foreclosure, short sale, or cash for keys agreement. Sometimes the bank even pays the homeowner a few thousand dollars to relocate, which is a big help.
If you want to keep your home after you've fallen behind on the payments, you should consider a loan modification. A loan modification is a permanent change to one or more of the terms of the mortgage. If the loan is in default, it will be reinstated and returned to normal servicing when the final loan modification is approved.
Loan mods can result in a significantly lower monthly payment, even a lower principal balance. It's often the only hope homeowners have to save their home from foreclosure, but loan modifications can be very difficult to get. It's a lot of work to apply. A package called a Request for Mortgage Assistance (RMA) has to be submitted to the mortgage servicer that includes documentation of all the borrower's finances. Applicants are often denied.
Whatever you do regarding your mortgage and retirement, make sure you're making decisions based on good information. This blog has a lot of information about foreclosure defense and loan modifications that you can view for free.
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