[Music]
i'm eddie cannell
and i'm tom cannell welcome everyone
this is the mortgage brothers podcast
and today exciting episode
questions we get all the time about
401ks
oh oh yeah oh i can't touch my 401k yeah
i was told never touched my 401k ever
ever touched my 401k
to buy a house right that we're talking
about we're talking about
we're talking about 401ks is it even is
it is it a good idea is it horrible idea
uh what do the numbers look like tom and
i are going to talk about the numbers
comparing what it's going to look like
if you're if you just leave your 401k
alone
don't take the loan don't buy the house
or
take a loan out or you know let's say
we're just going to use a loan
okay a 401k loan these comparisons yep
what else in general well i think
i mean i i i mean i think you know we're
simply addressing all the questions we
get from borrowers and you know
fortunately
you know our borrowers have become you
know more savvy which is good they're
working on saving money
um and there's just this overarching you
know pressure to like not
touch 401k can't touch my 401k yeah
john don't touch your 401 and i think i
think we want to preface this this is
not we are what we're going to talk
about today is right obviously the 401k
but we're not advocating anyone do
anything dumb
or speculate with their 401k or anything
like that
but we're going to challenge the myth
that
pulling out money from your 401k that's
right
bad idea and financial advisors
tax accountants i mean a lot of them
will have opinions on this your friends
your family your dad your
you know everybody's going to have
opinions so
why don't we just say this yeah all
we're talking about is using the
401k as an investment vehicle
uh for you okay which is what that's
what a 401k is supposed to be
but instead of you know having it sit in
the stock market we're saying
um that it might be a good idea not
always but it might be a very good idea
to put it into a home or to put you in a
position
to buy a home we are not saying you know
dissolve your 401k to
buy your fiance wedding ring we're not
saying take out a 401k loan to buy that
you know
honda pickup pilot truck you've always
wanted
no you know the the flat answer this is
actually a really really fun topic you
and i were talking about this before
before we started you know hit record is
that this is
so simple because it does so many people
such amount of good and we literally
have um
a good friend that is a literally case
in point
and if we have more time maybe a year
from now we can we can
you know throw up a better scenario but
our numbers that we're going to be
putting up on the screen
literally fit their description right
they
you know and we're going to be talking
again do you put money into a 401k to go
into a home so we're going to be
comparing
two you know the same person with an
alter ego
that that one alter ego says uh nope
stay a renter
stay in an apartment right um do not
pull money out of your 401k
versus the other ego that says no put
money on your 401k
get out of that apartment get into a
home right so
this person what happens to his net
worth
what happens to that money in this 401k
if he doesn't pull it out and what
what does it look like if he does buy a
house yeah correct all right so you just
want to jump into it
yeah i think that we'll just go right to
this
okay so why don't i do this why don't
you i'm going to do the major
assumptions and why don't you jump in on
the uh
the minor assumptions so the major
assumption the major assumptions here
there are three one is that your monthly
payment for rent
or a home will equal each other okay so
we're not going to get into what is the
interest rate
you know how much is your landlord you
know charging you is it a two bedroom or
three bedroom
we're just simply going off of the basis
that you're in apartment complex
you have a realtor that calls you and
says hey for the exact same money i can
get you into a home
per month so that's just major
assumption number one um
number two that you don't have another
source of money
if you did have money um
you know in a savings account or a
checking account or you had a cd that
your grandfather gave you
now is probably a really good time you
know if you're thinking about buying a
home
to cash that in so the assumption the
next major assumption is you have no
other money to go
so we are not an advocate to attacking
your 401k first
but if it's your only source of money it
it's
you know we're going to recommend that
you do it and then secondly we were not
going to include the principal paydown
because we wanted to give a little more
we want to be a little more conservative
but we did end up
including that on this so we only have
two major assumptions
okay so these are the minor assumptions
which is basically the things like this
this scenario is a three hundred
thousand someone who
could buy a three hundred thousand
dollar house okay
and that house will appreciate with the
average rate of inflation is about one
about three percent
a year okay so every year the home will
appreciate
just at inflation we're not asking we're
not plugging in a number at five percent
six percent it's three percent
appreciation
and assets real assets like like like
home like a home
real estate will at least should average
out that three percent
okay also we're uh assuming that your
home will have expenses we're
basically putting a two thousand dollar
a year expense
like for for what for just general
maintenance
like the uh air filters yeah uh you got
baseboards fall off for a door hinge has
to be replaced you have expenses
right we've included that that's right
these are things these are not
um what am i trying to say these are not
utilities or anything like that this is
just minor repairs plumbing issues that
you would
your landlord would typically take care
of you're going to take care of now
that's right two thousand dollars a year
okay um
and then the what we're gonna since
we're gonna be buying a house at
300 000 in this example we're going to
use three percent down payment just the
minimum down three
so that would be nine thousand dollar
down payment okay what we'll do
is we'll take so in this sample we're
going to
borrow from our 401 k 9 000
plus 3 000 for closing costs okay okay
so 12 000 we're going to withdraw from
our 401k
so you're telling me that that if we had
uh this
also assumes that you can take 100 of
your 401k which you can't because
usually it's 50
but to keep things simple you're telling
me that if you had 12
000 in your 401k you could either a let
it sit in the 401k
and earn interest or b take that money
apply it towards down payment and
closing costs
and be able to buy about a three hundred
thousand dollar house yeah that's right
so
again this would be for someone who has
at least twenty four thousand dollars in
their 401k
i guess is what you're yeah they could
take 12 000 out
okay all right dude they're first time
home buyer they
they can do three percent down plus the
so
12 000 would be able to do that okay um
now one more assumption we're also
building in the cost to sell the home
because we have to if someone's going to
buy a house we have to look at the
penalty
if that person decides to sell between
you know
year one year two and we're gonna we're
gonna take
both both numbers on the 401k
if you leave it in the 401k the money in
the 401k and if you if you buy a house
take it out 10 years okay and when
people are asking
what is what are the costs to sell home
you have realtors
and you've got uh some escrow and title
fees that you have to pay
not to the lender but to the actual
title company so in order to sell your
home unless you sell it you know for
sale by owner which we do not recommend
um you can if you're very advanced and
technical but uh to get a realtor to pay
those fees to pay the
uh the escrow fee and what not to say
your home it's about seven percent
so it's definitely seven percent money
yeah so we're going to add that in there
the seven percent cost sale okay okay so
maybe
tom what what i'll do is i'll start with
the 401k
i'm the guy i represent the person here
we have the exact same scenario
i put i do i want to rent i do not want
to touch with my 401k i'm going to rent
i keep my 12 000 one year goes by
okay oh and we forgot this my money and
my 401k is going to appreciate
10 a year holy cow that's fantastic
that's fantastic
i mean that's awesome can you give me a
can you give me that mutual fund that
does that because i might want to invest
right
david talks about 10 percent it really
is the very long-term average
maybe you know anyway that's aggressive
10
so my 12 000 after one year will be
worth
uh well okay 10 percent of 12
000 is 1200. so that my future value
after one year would be 13
200. so from 12 000 to 13 000
so so we were to call each other and say
hey what's your net worth
yeah okay after after after year one if
you take out your initial investment
your net worth
would be what 1200 1200 1200
okay well yeah at the very beginning
1200 at the very beginning
after year one it i increased my net
worth twelve hundred dollars
okay and if you were to call me and ask
me what my net worth
would be i would tell you with a little
tear in my eye it'd be worth
minus about nine thousand a little over
nine 000.
i knew it i knew i should have bought
real estate
hey you just you just hanging in there
yeah i was
lucky you you were lucky now
we have two exceptions as to uh
you you might not take money out of your
401k one is if you plan to go into
foreclosure
okay always a bad idea if you know
you're gonna go into a foreclosure
you just end up walking away from you
know any down payment and then two
if you plan on selling your home within
the first year or two
and you're gonna see why so if you sell
your home within the first year
the the person sitting in the apartment
is gonna be 1200
richer the person sitting in the house
will be about nine thousand dollars
poorer
okay so year two comes and after year
two
my net worth changes now i'm twenty five
hundred
twenty five twenty so just just a little
over twenty five hundred dollars
twenty five hundred okay and i am up
drum roll three thousand okay
so man so you feel you year two you
barely overtook me i mean like
barely worth just a little bit more now
okay after year two and you know what's
interesting about
your your situation i'm looking at the
numbers
you know you the principal was bought
after these two years the principal's 11
thousand dollars less
yeah pay you if you pay down eleven
thousand dollars on that principle
so remember we said the the rental
payment uh for the apartment
or frankly if you're running a home or
the mortgage are the same
so remember your mortgage payment's not
all interest and it's not all principal
it's
it's the majority of it's gonna be
interest but you're gonna have some of
it a decent amount that's going to be
principal
so every every month you don't realize
that in your bank account
but you realize it in your mortgage
statements when you see your mortgage
statement your principal balance goes
down by that amount right
so even with the cost of selling your
home the seven percent of fees you know
and sell your home with the real estate
agents and the closing costs which was
22 000
after a year too you still overtook me
just a little bit
yeah okay so let's see let's just maybe
just jump to year five
okay okay five years go by i look at it
and now i at from year one to year five
i am seventy
three hundred dollars uh you know
holy cow more rich more rich okay
you should have followed my advice
because right now i'm 43
000 more rich that's crazy man
that's crazy and you have to see the
numbers to believe it you know so that's
why i'm looking
yeah look at numbers okay so that means
year five
i have 73 over those five years i gained
seventy three hundred dollars in net
worth you gained forty three thousand
forty two thousand networks and again
our numbers here are again
assuming they're they're conservative
numbers these numbers should be actually
higher if you were to plug in
um you know a much more sophisticated
formula um
so this is assuming a sale this is
assuming you know three percent
appreciation
yeah we've had five six seven eight
percent appreciation years yeah we've
had you know a couple
you know some negatives but overall
three should be very very conservative
that's right and exactly most people
don't talk about the cost of selling
that money isn't your bank account so
you could sell put that money in your
bank account right and then that's
that's the net
that's right okay so let's go all the
way to 10 years 10 years goes by and
everyone can see here after 10 years
my net worth between has increased over
10 years
to increase 19 125 dollars
wow it sounds good yeah sounds pretty
good
20 000 basically all right and then i'm
sitting there looking at my
uh mortgage statement calculating in my
little head that i'm dreaming
uh based upon what my home is worth what
it's going to cost me to sell
all my principal pay down that i should
have a
net value or a net worth of 120
000 more 120 10 years
and that sounds almost almost too good
to be true but we literally we've got a
friend a good friend
who's been in a situation uh filed
bankruptcy i can't remember if you felt
bankruptcy or not but
it's been almost almost 10 years and
i've been renting since then
yeah you know in in kind of cocktail
conversation
we've talked about it being about a
hundred thousand dollar hit to his
overall net worth
these are real real numbers so look at
those numbers on year 10
tom's okay so you bought the house for
three hundred thousand only three
percent appreciation per year just just
with inflation
three percent per year the house is now
worth four hundred and three
but it seems very reasonable but i had
some expenses i spent about twenty
thousand dollars i didn't do any
upgrades these are not
right we were just talking about this
general maintenance just maintaining the
home so twenty thousand dollars
you know some people might argue that
some people might argue that it's more
than that but the point is
twenty thousand i think that's a lot of
that's pretty good there's a lot of
plumbers
that's a lot of some electricians in
their house that's some drywall repair
that's what
you know okay but look and then you you
pay down your principal 60
almost 65 000 dollars
that's huge and then when you deduct the
cost of the sale
of the home for commissions and closing
costs you still left up with that 120.
anyway so even how about this even if
you and i were drinking when we did this
and we were off 50 okay
which we're not well i think we're
actually low but even if we were
you know drunk when we did this you'd
have a sixty
thousand dollar increase in in
uh or have a six thousand dollar
increase because of a home sale
versus 20 keeping it in 401k that's real
money
you got one one shot at this you know
you don't have too many 10 year period
so it's not like after the first 10
years you can sit there and be like well
let's go and change our mind
and yeah absolutely and i think that
before we finish just quickly
i think the important thing too about
the home tom you had mentioned this
before i want to make sure you can
follow up on is that
a home is so much more than just what we
call it
and people call it investment i mean
it really does set you up like what is
four years of your life five years ten
years of your life spending
where you spend your ten years of your
life yeah
if you are postponing that because you
want your 401k not to be touched
it's something just said absolutely
you're trading something
yeah you you could probably even do a
super psychoanalysis on you know
productivity levels
and the productivity level of you
sitting in your own home for 10 years
versus being in someone else's um
property with tenants above below and to
the side of you
i i i just think that's just the the
opportunity is endless
when you get into your home so we're
we're happy yes we're in the business of
doing loans we're in the business of you
know helping people get into homes
but part reason why i think we're doing
this is because
of how you and i took advantage of the
home ownership when we you know we were
first out of the
or into the workforce it was really
important for you and i
dig to get into homes and that was
before we were even even in mortgages so
yeah i don't believe it okay everyone we
do this
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awesome
hey thanks folks take care hey guys
thanks for listening to the mortgage
brother show
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questions you'd like us to answer on
this podcast
you can email your questions to tom
azmortgagebrothers.com
or yours truly at eddie
azmortgagebrothers.com
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