Almost nine years ago my wife and I were newly married, deep in debt, and trying to sell an 800 sq ft condo I’d bought in 2005. We had just paid for our wedding in full, we’d paid off my college loans and credit card debt, and sold my impractical car for a Prius. We were making sound financial decisions one after another.
Selling a condo isn’t easy, and it’s not something I ever plan to do again. For one, there’s intense competition. You own a unit, just like every other unit, with little to differentiate yours from all the others on the market. There’s also a lot of foot traffic through your home, as they tend to be more affordable and appeal to a wide range of potential buyers. And in certain markets, there’s a lot of landlords looking to lowball you to add another unit to their portfolio. In short, it’s exhausting.
Our condo had been on the market for months and we’d received nothing but insultingly low offers. While we knew we’d be taking a loss on the sale (I’m the one, I’m the person who lost money in real estate!), we also knew we didn’t have to take such a huge loss. Still, the process of trying to sell went on, and on, and on. While we waited, we watched as every house we’d loved as a potential new home was bought. We’d start looking anew each month, loading up our inventory of possible new homes, and again they’d all sell.
A certain madness sets in when you’re in this situation. We weren’t shopping for a starter home, so we were looking at houses at the edge of our price range, and there wasn’t a lot of inventory. We were saving like crazy, but knew with no equity to leverage we’d never have 20%, or even 10%. So I hedged.
Assuming that no matter what, at some point our condo would sell and we’d need to make an offer to live somewhere new, I borrowed $20,000 from my 401k. And wouldn’t you know it, shortly after we accepted an offer on our condo.
Somehow, by fate, or luck or some other unseen force, we happened to find a home in our price range, and in our target market, the day it hit the market. We saw it that day and made an offer the next. It was accepted and the process of buying our forever home was underway.
The $20,000 I’d borrowed allowed us to put a whopping 5% down on the house while we used all of our savings to pay the nearly $40,000 in buy/sell closing costs (yay New York real estate!), the moving costs, and the $7,000 loss on the sale of our condo.
Most people would tell you that a 401k loan is a terrible idea. Honestly, it probably is. I borrowed the $20k at a 4.5% interest rate (paid back to myself) with a five year repayment term. Only my accountant later told me if I kept the loan for longer than three years it would be considered income by the IRS so I should pay it back in three, not five. I paid it back in about 18 months.
To me, the opportunity cost of not having that money in the market for 18 months was minimal. At the time, $20k represented less than 10% of my total investments. The market was firmly in the midst of its historical bull run, so I did miss out on some gains, but then, I gained a house.
If you’ve read my other posts, I’ve obsessed over optimizing the cost of this house since day one. I’ve done everything I could think of to get the best return on investment for necessary improvements and things we just felt we needed. I had PMI removed from the loan in just a few years. I now have almost 70% equity in the house thanks the the ridiculously inflated home prices and my aggressive payment/refinance efforts. Even if the house dropped down to my purchase price I’d still have 30% equity in the home.
As it stands, despite having bought my previous home at close to the worst time to buy a home in my lifetime, it turns out I bought my house at possibly the best time to buy a home I was going to get. My initial interest rate was historically low (and I’ve only lowered it). I bought for hundreds of thousands less than my neighbors who have moved in since I arrived. My neighborhood has since turned over from mostly old empty nesters to young families like mine. And thanks to careful planning and one big break I’ve gone from just being able to afford the life I built, to living well within my means.
In the end, this feels less like I made a grave money mistake and more like a took a calculated risk and it paid off. I wouldn’t recommend it for most people, but if I had to go back and do it again, I’d absolutely do it the same way.
Freed by 50 