Refinance w/401K or try to get modification from bank?

mss103March 6, 2013

Let me preface this by saying that I haven't yet talked to the bank, a financial adviser, or a tax adviser. I need some initial direction and some guidance on even what questions to ask.

I was laid off from my job of 7 years last Thursday. I am a widow with a small child, and COBRA for us is $1100/month. Yes, I am looking into getting her on the state's insurance plan, and a private policy for myself, but my private policy will not be cheap. My bigger concern is my mortgage. I tried to refi over the summer, but the house appraised for less than I presently owe, and in order to refi, I would need to bring $70k to closing. I was willing to go $25K, but passed on $70K.

Even without the job loss, I needed to reduce the interest on the loan to get the payments more manageable for me. I called the bank, and they said that I could "apply" for a modification, but there was no guarantee I'd be approved, and that it would take months. FWIW, I do not have a Fannie/Freddie mortgage, either. There is no equity line or 2nd mortgage, just one crappy one.

So now I don't know if I should try to work with the bank. I've heard horror stories about people going back and forth with the bank only to have them foreclose anyway. Or should I cash out the 401K and refi down to a prime rate? If I even apply for the modification with the bank, my credit will tank, making it impossible for me to refinance.

I estimate that my savings and severance will hold us over for about 7-8 months. After that, between UI and my daughter's SS benefit, I would only have $600 left each month, after making the current mortgage payment.

I am very confused, overwhelmed, and absolutely terrified at the prospect of a long period of unemployment and the financial toll it will take on us.

Thanks in advance.

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sushipup1

I would not advise withdrawing from your 401 K. You will pay fed and state income taxes on the money, plus a 10% penalty if you are under age 55. So you can effectively reduce the money you actually get by quite a lot. It's a terrible way to lose money.

Here is a link that might be useful: early withdrawal calculator

    Bookmark   March 6, 2013 at 10:24AM
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mss103

Thanks. I do understand about the penalty and tax. My concern is that I am going to be unable to afford to live here, should this period of unemployment become protracted. If I tried to sell now, I would take at least a $70k loss anyway.

FWIW, my home also suffered some flood damage with Hurricane Sandy, and I have NO idea what that will do to the appraised value of the house. I had a flood in the basement, and all has been remedied now.

    Bookmark   March 6, 2013 at 10:50AM
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gmp3

Before thinking about this you should be looking for work and getting your child on state insurance. If you are healthy call an insurace broker to get a higher deductible policy with a low premium for yourself. My 50 year old husband has one with a $2500 deductible and a premium of about $260/mo. Even if you end up paying the whole deductible (which is unlikely) you will be ahead after a year.

Find a job as soon as you can, if you have severance you can afford to take a job with lower pay while you are looking for a better paying job. It is easier to find a job if you are already employed or have been unemployed a short time, plus it makes you look less desperate. Get your resume together ASAP and get looking, calling and making contacts. Reach out to everyone you know personally and through work.

    Bookmark   March 8, 2013 at 2:02PM
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tinan

You have 7-8 months, so focus on finding a new job. You should be able to find another before your savings run out. Refinancing when you are underwater is not practical. So you qualify for emergency funds, and did you have homeowners insurance to cover your flood damage?

Check the tool below to find health care coverage for yourself and your daughter.

Here is a link that might be useful: Insurance Finder

    Bookmark   March 16, 2013 at 1:18AM
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emma

Also you might check into the cost of hospitalization only insurance. We had friends do that when he was on strike. They paid for the office visits but were insured for hospital stays and doctor's charges there.

    Bookmark   March 16, 2013 at 9:23AM
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chi83

Also, a lot of people who anticipate only being between jobs for a short time will play the COBRA waiting game and use it as a temporary insurance. They give you 60 days to decide so if you don't decline it, you can be covered in the case of emergency for those two months. If you don't end up needing insurance, then you don't pay anything but if you do need it within those 60 days, you can elect COBRA and it covers you retroactively from the day it was offered.

Also, once you elect it, you have 45 days to send in payment, so you could elect it and then just not pay if you don't need it, So in theory you could have over 100 days of emergency insurance for free if you don't end up needing it, and you would only have to pay the premium if you do need it, which is far less than a hospital bill .

I don't know how strictly ethical it is to do that but it's how their rules are set up and it is often a lifesaver for people in difficult situations.

    Bookmark   March 16, 2013 at 10:08AM
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bruceingram1958

The most common reason that many people opt for a 401k loan is that it can be arranged quickly and easily as you donâÂÂt have to go through a lengthy application process or any credit checks. However, be aware that there are various tax implications of a 401k loan. As you pass-up the tax-free compounding of the money that you withdraw, you might end up with a significantly smaller fund on your retirement.

    Bookmark   March 21, 2013 at 10:31PM
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teachertile

What's so bad about only having $600 after your mortgage? What are your other bills? Ca you sell your house and downsize? Don't dip into you 401k! Really get yourself on a strict budget & consider finding a job, even if its a small job to help pay small bills.

    Bookmark   March 25, 2013 at 9:32PM
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