Hello, everyone. I had an idea. I currently have a 15 year mortgage and if I save for about 5 years, I could pay pay off my mortgage with a 401k loan and the savings. Otherwise, it will probably take 8 years to pay it off with savings alone.

Here's what I was thinking. My mortgage interest rate is not very high, but the interest on the amortization schedule for those last 3 years amounts to $13,860. The 401 loan only costs $220 to set up and $25 a year to maintain. From everything I have read, the interest you pay on a 401k loan goes back into your 401k account to make up for the lack of money invested. I realize this would take away half my 401k from being invested for a couple years, but then again, I haven't been very impressed with the returns it has earned so far.

Is this idea sound or am I missing something? By my calculations, I could take those last 3 years and get a 2 year 401k loan for less per month than my mortgage payment is now. It seems like a good way of knocking a year off paying off my house. Instead of 8 years, I could have it paid off in 7. Any thoughts?

I think it is a horrible idea:

-don't forget the opportunity cost of investing
-mortgage interest is tax deductible, so you would essentially be loosing the tax deduction
-if you are to loose your job for ANY reason, you will most likely have to pay it ALL back within usually 30 days (rules vary plan to plan)

Why not do a no cost refi into a 5 or 7 year ARM?

I agree with Bichon Frise on all points. Especially point 3 about the 30 day payback. I know someone who had this exact same thing bite her real bad. She didn't even lose her job. Her company was bought out by a bigger company and when they moved her over to the new payroll system she had to pay back the loan IN FULL within 30 days.

As far as the 5-7 year ARM idea, I would probably just pay your current mortgage. Yes, rates are low. Yes, they will most likely stay low. But I'd be willing to "pay up" to keep the certainly you already have.

Let me just reiterate this one more time. On a scale of 1 to 10. 10 being a great idea, 1 being a horrible idea. Paying off your mortgage with a loan from your 401k rates about a negative 4.277777777.

Thanks for the responses. I don't know if my plan would require full payment of the loan if I lost my job. If it does, then that will completely kill the possibility of doing this.

I did refinance very recently (15 yr loan) and that has encouraged me to save & pay it off even faster.

Thanks again for everyone's input!

I can almost guarantee that your plan does require quick payback if you lose your job. I think it is the law. The problem is that if it did not then it would open up a huge tax loophole for high paid individuals much like the option backdating scandal of 10 years or so ago. Money could be put in your 401k that you then have to pay back in say, 1000 years...so it is essentially income that is not taxed.

So what you were proposing is paying off debt (House) with debt (401K loan)...

I don't think the quick payback is the law. In fact, some plans (very very few) allow people who have terminated employment to take a loan out against their 401k.

I do agree that almost every plan makes you pay back the dough relatively soon. So, the OP may be lucky, but I am skeptical. Also, a plan may not allow a loan to be taken out for the reason the OP wants. And finally, penalty for not paying back the loan when terminated under a plan which requires payback is and issuance of a 1099 for the amount due. Meaning, taxes, and most likely a 10% penalty and the loss of the money in the 401k.

Ok, so it is not the law...and the law avoids the potential loophole my devious mind saw with the $50,000 cap and 5 year payback.

But, I still think that your plan will require payback quickly since most do. I would not do what you plan.