Cashing in to pay off home's a bad idea

DEAR BRUCE: My wife is 63 and I am 50. I have $225,000 in my 401(k). My wife has only a few thousand in an IRA. We have a mortgage of $167,000 with 24 years left on our loan. Our home is valued at $400,000. Our payment each month is $1,300. My wife gets $735 in Social Security benefits each month and she is also self-employed as a child-care provider. She plans to work at her job for about three more years.

My income is about $35,000 a year. We live a very simple life on our two incomes, but it does take both of our incomes to make ends meet. We are considering taking my 401(k) and paying off our home, which we feel is the only real security we have. Everyone says that would be a huge mistake, but I won't be able to access my 401(k) until my wife is 81. We would continue to put money into an IRA, mutual funds or other means of investments. At least our home would be ours and no one could ever take it away if the market fell again. We lost over half then we recently recovered most of it back. Please keep in mind our age difference, which I feel makes our situation different than most. — Anthony, via email

DEAR ANTHONY: I am wondering why you have come to the conclusion that you won't be able to access your 401(k) until your wife is 81. At 591/2, which will make her 73, you could withdraw money from your 401(k) without penalty. You will have to pay the taxes that have been deferred. Whether that is a good idea is another matter. I don't think it would be wise to deplete your cash down to almost nothing to pay off the mortgage. Once again, I don't know what state you live in.

I know that the real estate market is starting to recover in some areas, but whether or not with your modest income under $45,000 a year you should continue to pay on a $167,000 mortgage and live in a home with a $400,000 value. You mentioned your payment is $1,300 a month, but that's only the beginning. I am assuming taxes and insurance are included, but there are other costs such as, maintenance, utilities, etc. which can easily boost your cost of housing to somewhere around $20,000 a year. Almost 50 percent of your income is far too much for housing costs. I would consider having the house appraised and see how much it could generate. After expenses, commissions and so forth, you should walk away with about $200,000.

Once again, I don't know the rental environment in your area, but I am sure you can rent a comfortable condo/apartment with significantly less out-of-pocket expense, a modest income on the $200,000 in cash and a significantly less amount of responsibility. You point out that if the mortgage is retired, you couldn't lose the house, but you can certainly lose value. At your respective ages this could sting a great deal. I would consider putting the house on the market.

DEAR BRUCE: My ex had a promissory note for whenever I sold my house as part of divorce settlement. He is now deceased and had no estate. His widow recently asked about it and I sent her back-up showing debts not repaid (out of pocket insurance costs, insurance premiums, and child support due) that was subtracted from the balance I owed him as an exchange — per his verbal agreement. I told her if she was going to pursue let me know so I could contact a lawyer as I was left with back child support in excess of $4,500 as well as copies of certified letters sent to him/her regarding insurance premiums the divorce decree stated was his responsibility that he never paid (over $11,000). Basically, he owes me $16,000 and I owe him $1,000 when it's all said and done. She has not pursued legal council regarding the Promissory Note. I now want to sell my home. There is no lien as far as I know. Will I incur problems when I sell my home? Laurie via email

DEAR LAURIE: You indicate that your ex who passed away had no estate. How was that determined? If he was broke and nothing in his name, the likelihood is there is nothing to claim against since in this situation it would appear that he would owe you a lot more than you would owe him. There is really no reason for getting into litigation over this. You of course will be settling and you wish to get your house sold. I would call her and tell her that my attorney is going to send the appropriate paperwork so his promissory note will be washed away so that the house is totally encumbered. While you indicate there have been no liens placed up until know, there is nothing to prevent his current wife from filing one and upset a sale. You said she hasn't responded, but understands this. It will be a lot cleaner and cheaper for everyone to have a simple resolution that your attorney can set up.

Send your questions to: Smart Money, P.O. Box 2095, Elfers, FL 34680. E-mail to: Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.

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