A clever way to qualify for mortgage refinancing (or, an exercise in creative problem solving)

Over the course of my life, I’ve always truly valued the ability to never give up and attempt to come up with creative solutions to common or complex problems.

I’ve never been one to simply accept a situation and will more often than not (and often to the irritation of those around me, unfortunately) never stop working on solving some issue that’s facing me until it is absolutely and finally too late.

In this case, I was recently faced with the inability to take advantage of the insanely low mortgage rates and refinance my home. The problem was that with the new mortgage regulations, the bank can only lend you 80% of the value of your home. Unfortunately, a recent appraisal revealed that my home value has dropped a bit since the initial purchase (a problem many face, but fortunately, I’m not that far off).

Because my value dropped, the bank would have to give me more than 80% of the value of my home to refinance it. This left me with the options of either a) getting a second mortgage, b) taking out a home equity loan or c) moving on and not refinancing.

I ultimately chose “c,” but as I described above, part of “c” also entailed trying to come up with a way to do it. After talking to my tax accountant at Bodilly in Madison, I found the alternative (or, rather, she did).

Initially, I was thinking of taking money out of my IRA to do it. But that’s something I’ve been well-trained to avoid. The taxes on the money I removed from the IRA would have been ridiculous and would have been like paying $10,000 in closing costs. But the idea is a version of that.

Since I’ve been doing a little marketing and publishing work on the side, we decided I would create my own LLC. Once created, I would set up my own 401K for my LLC.

With the 401K established, I could then roll over a portion of my IRA (as much as I want) into the 401K, tax free. With that money in my LLC’s 401K, I would then draw a loan from my own 401K.

If an employee borrows money from their 401K plan, they have five years to pay it back, and the interest rate on the loan would be nominal.

This plan would make the interest rate far less than a second mortgage or a home equity loan, and I would have it off the books in five years. It also avoids me having to pay the IRA deduction penalties.

I wouldn’t have written this, as it’s pretty wonky. But those who I’ve told found it surprisingly interesting, so I thought I’d share.

To me, this post isn’t so much about refinancing as creative problem solving. If you consult with some knowledgeable or creative people on a problem, you never know what inspiration might hit.

My name is Jon Friesch, and I’m happy to share this message.

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