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Feb 4 2013 12:00AM

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I am 56 with a high maxed out mortgage loan. I have approximately $180,000 in my employer retirement plan. Should I use my employer retirement plan to pay off my mortgage or try to negotiate a deal with my mortgage company? My interest rate is 5.5%.


I’m assuming that by “maxed out” you mean you have little equity left to include in a refinancing arrangement. If you own a single family home the lender usually wants 20% in equity; with a condo it is usually 25%. I also assume that you don’t qualify in those normal terms.  

First, I do not recommend you take money out of your employer retirement plan as that money went in tax deferred. If you take money out the first thing you do is bump up your taxable income by the amount you took out. I do not know your income tax rate, but would guess it might be 25%. So that means if you pulled out $25,000 to get enough equity to refinance, you would actually only get about $17,500 since your income tax bill would go up about $7,500 (30% when federal and state income tax is considered). That doesn’t consider the possibility of a penalty for withdrawing prior to age 59 ½. You’ll also want to check your employer sponsor plan withdrawal rules as well for additional penalties. 

Another reason I do not recommend to take money out of your employer retirement plan is you’ll need that money in retirement. You have about 10 more earning years and should be putting away as much as humanly possible. As an example, an employee retirement plan balance of $200,000 when you retire will produce about $8,000 in annual income. Add that to your Social Security of, let’s say, $24,000 a year and you have just barely enough to get by on with some “scrimping.” Without the knowledge of any other retirement arrangements or supplemental income, it may be unwise to mess with precious retirement money.  

I suggest you call your mortgage loan officer to identify your options. Once they know you are looking to refinance, as long as you aren’t “underwater”, they’ll want to keep your business. Do you have a good credit rating? To find out free of charge, check out your credit report at www.AnnualCreditReport.com. If you have a credit score of 750 or better, the current holder of the mortgage will bend over backwards to keep you.  


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