News by Subject
Complete list of specialty news sections.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Mortgage Industry News
Subscription-based news for people who work in real estate finance.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from

Mortgage News Reprints
Put entire stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed stories for your web site or for your RSS reader.

News Archives
Archive of news entries.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Graphs
Directory of lenders, branch operators and mortgage service providers.
home advertise email RSS about us
HOT Topics Rates Glossary LO License Search
Consumer Mortgage News
Free mortgage news for current and prospective borrowers from a leading online mortgage industry news publication.

Don't Use 401(k) To Payoff Mortgage

A look at costs of early withdrawal

July 12, 2018

By JACK GUTTENTAG The Mortgage Professor (Tribune News Service)

A reader asks: "My current 401(k) balance is about the same as my mortgage balance. I am 45. Would it make sense to pay off the mortgage with the 401(k)?"

Bad idea.

Looking ahead to retirement, your objective should be to accumulate a 401(k) nest egg of financial assets as large as possible and pay off your mortgage as soon as possible. You should pursue these objectives independently, not sacrifice one to obtain the other.

On balance, that would be a loser, for multiple reasons.

  • Early withdrawal costs: Funds withdrawn from a 401(k) before age 59 trigger tax payments on the amount withdrawn plus a 10 percent early withdrawal penalty. While there are exceptions to the withdrawal penalty, paying off a mortgage balance is not one of them. That means that paying off a mortgage balance with a 401(k) balance of the same amount would not be a break-even but would generate a sizable cash outflow.

  • Earnings opportunity loss on the existing 401(k) balance: An even larger loss from liquidating your 401(k) is the future earnings on the funds withdrawn. These earnings accumulate tax free until you are 70, and at that point you pay taxes only on the amounts withdrawn at your tax bracket at that time, which could be a lot lower than it is now.

  • Possible earnings opportunity loss on new contributions: If your intention is to abandon your 401(k) after it has been depleted, given that you are still many years from retirement, the largest loss would be the tax-deferred income you could contribute plus the tax-deferred earnings on those contributions that you would be making in future years. Your major objective should be to contribute as much as possible -- I have no advice on that -- and obtain as high an earnings rate as possible. I do have some thoughts about that.

Over a period of years, the rate of return on your 401(k) should be well above your mortgage rate. At 45, you should be invested largely if not entirely in common stock. A diversified portfolio of common stock will generate high rates of return over long periods along with high short-term variability.

For example, during the period 1926-2012, the median return on the common stock of large companies over 25-year periods was 11.34 percent. The highest 25-year return was 17.26 percent while the lowest was 5.62 percent. Over 10-year periods within the same time span, the median return was 10.52 percent, with a high of 21.43 percent and a low of minus 4.95 percent.

As you get closer to the day when you begin drawing funds out of your 401(k) -- say, about 10 years before-- you should consider shifting as much as half of your 401(k) assets into interest-bearing securities. The reason is that the short-term variability in stock returns can be very costly once you enter the draw-down period.

Avoiding 401(k) Abuses
Not all 401(k)s are created equal. Fund sponsors sometimes use them for their own purposes, reducing their value to the account holders.

Among the abuses that can contribute to the poor performance of a 401(k) are inclusion of the common stock of the company sponsoring the 401(k) as an investment option; long delays in transferring employee contributions to the plan; outright theft of the contributions; high administrative and investment expense ratios, which may reflect services provided to the fund's sponsor.

Employees with poorly performing 401(k)s are not powerless. Help is available from the Employee Benefits Security Administration of the Department of Labor. In addition, several law firms specialize in class action suits against employers who abuse their 401(k) programs. They can be found by Googling "401(k) abuses."

Paying Down Your Mortgage Balance
Your mortgage balance should be paid off by the time you begin drawing funds from your 401(k). If scheduled amortization will not do the job, you should develop an extra payment program that will.

To maintain the discipline needed for a successful extra payment program, make the payments immediately after being paid. Waiting until the end of the pay period is a recipe for failure.

About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.

next story

back to home page

To see more of The Mortgage Professor or to subscribe to the newspaper, go to

Copyright (c) 2018, X,

Distributed by Tribune News Service.

This story was distributed by TNS - Tribune News Service
Refinance News
News about refinance programs, pricing and production.
H A R P 2.0 News
News stories about the H o m e Affordable Refinance Program including expanded program guidelines.

Copyright © 2016 Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

pricing engine directory

wholesale lender directory

More Mortgage News Resources ( full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

free mortgage news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter


mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

refinance news

reverse mortgage news

sales blog

secondary marketing

servicing news

subprime news

wholesale lenders

wireless mortgage news