Sunday, August 23, 2009

Finished Paying Off 401K Loan Ahead of Schedule

In Apr 2006 we took out $26k at 4.5% from my 401K for the down payment on our primary residence. We added this to the $17.8k we had and put 20% down to avoid paying private mortgage insurance (PMI). The remaining balance was financed with a 15 yr fixed at 5%.

The 401K loan was actually taken out from my military Thrift Savings Plan (TSP). Interest paid is redeposited back into my TSP account. I always like using TSP loans whenever I'm buying a house or need emergency funds. The interest is getting paid back to you and my military job is quite secure. Anybody using a 401K loan in a secure job since 2000 has fared fine since the stock market has done poorly and you would have paid the interest to yourself.

Ten months ago I targeted a payoff date of Sep 2009 for this TSP loan. My wife and I were happy when we were able to cut a check for $7900 this month and pay the loan off ahead of time. This puts my TSP balance at $52.7k. I'm fine with having only $52.7k in my TSP since this is a back-up to my military pension which should be a minimum $40k a year if I get no more promotions and stay in another 81 months. I actually intend to stay in much longer (15 more years) if I get promoted to O-5 (Commander), equal to Lieutenant Colonel in Army & Air Force.

We still have one more TSP loan with a balance of $23.5k. This last loan was taken with an interest rate of 2.75% payable over 5 years. We needed this for $23k in exterior repairs at one of our investment properties. We currently plan on letting this loan run close to the full 5 years. In the mean time, we will funnel most of our spare cash to paying off all three of our investment properties.

Ten months ago we also set a goal of paying off our least expensive investment property in March of 2010. We bought the property for $86.8k in January 2005. It currently appraises for $140.5k and we owe $19.7k left on it.


Robert said...

Interesting article. I have always heard you should not borrow against your 401K but this is a different situation since this is a backup to your pension.

I am trying to build up some whole life insurance policies to borrow against, much like you are doing here.

Yuri said...

How do you have your contributions allocated?