Here’s a sordid tale of how we paid $140k+ to lower our monthly mortgage by $1k!
Warning: This tale contains extreme levels of stupidity and should not be attempted at any time. Please refer to Dave Ramsey’s advice on refinance if temptation grows strong.
Start of the Stupid: In Dec ’07 I was “released” from my employer due to a restructuring initiative (read: laid off to save money in the last quarter of the year). I had no clue how to find the next job so I resorted to the lowest common denominator: submit a bunch of resumes online. Stupid! Because of my lackluster job search, I got a lackluster job with 20% less pay compared to my previous role.
To continue the stupid, we were living in the BDR era (before Dave Ramsey) and didn’t have a budget. While we had cut back expenses due the pay cut, we weren’t acting our “new wage”. And now our mortgage was 50% of my take-home pay. Yipes. Each month had more days in it than the paycheck would allow. We kept going to the credit card to “make up the difference”. Stupid!
The Stupid Gets Bigger (you may want to sit down and have smelling salts nearby in case you are overcome by the waves of stupidity emanating from this paragraph): We decided to refinance our mortgage. That was actually a non-stupid move since we could drop our rate by 2.0%. Here’s what was stupid: to get the great rate and reduce our monthly payment by $1,000 we took out $100,000 from my 401k. I’ll pause there. Are you okay? Do you need some water? Maybe a cool cloth on your forehead?
Super Stupid on Steriods: After that initial pain of handing over $100,000, we were loving the lowered monthly payment! Life was great! Until tax time. What’s that you say? Your 401k withdrawal is treated as taxable income, causing you to jump tax brackets? You’d think that my wife and I would have done our homework about the tax implications of practically draining your 401k. But no…we were sooooooo stupid! Then came the call from the tax preparer. You know it’s bad when your tax guy asks you if you are sitting down before he gives you the numbers. We owed $40,000 total to feds and state. I was beyond dumbfounded.
The Stupid Gets Sponged Up: Although I got laid off again in December ’09 I was prepared this time and quickly found a job with more pay. Now we had a bigger shovel to dig out of the debt hole but the debt hole increased by a Grand Canyon because of our stupid 401k move. Starting in March ’10 we lived on rice & beans, stuck to a budget, graduated from Financial Peace Universtity, and ACTED OUR WAGE. In April ’10 we finished our last payment to the IRS. I have never been so relieved in my life.
We’re still not debt free but I’ll save that for another post.