The Desert Homestead Blog
Urban and rural sustainable homesteading in the desert southwest

To borrow, or not to borrow?

I’ve been hit with a few unexpected expenses this past month that has pushed back my repayment plan slightly. First, my daughter needed to borrow $500 for textbooks because her financial aid payment was delayed. Then my roof came in at $700 more than anticipated. Finally, I spent $300 on a chop saw, since I got tired of borrowing my neighbor’s every weekend (and I suspect they got tired of me borrowing it, too!).

I also chose to do something that I’m still ambivalent about. I owe about $2500 on a credit card (at 22% interest, ouch!), and another $13,000 on my property (at 11% interest). I discovered that I could take a loan of up to $7000 on my 401K at 4.25% interest. If I put it against the credit card and property principal, I could reduce my total interest payments by $600 and still have everything paid off by the end of 2012 as I’ve planned.

Believe me, I know the cons of the situation. It’s a lot like taking out an equity loan against your house. Will you really put all of it against higher-interest loans, or will you splurge on a little something? Will you turn around and run those credit card balances back up? What happens if you have a real emergency and no longer have that credit line available to you?

Despite my reluctance, I decided to do it for one reason: I want to own my property outright. I don’t want any chance of losing it because I couldn’t make a property payment (at $300/year, property taxes are easy).

That said, I am paying off the credit card entirely first due to its extremely high interest rate, and then putting the rest of it against the property mortgage. So the property won’t be completely paid off immediately, but it will knock the balance down significantly, I’ll have it paid off by next year, and I won’t owe any more in total than I do now.

Another plus is that if I lost my job, I can take the tax knock and have the loan written off as an early disbursement. Not ideal, obviously, but better than trying to figure out how I’m going to pay next month’s mortgage.  And with the economy still as weak as it is, I’m not too worried about the fact that my 401K won’t grow as quickly with some of the capital out of it … it’s not growing right now anyway.

Altogether I’ll be right around $40,000 owed as of the end of September. Considering I was at $49,500 at the end of April, I’d say I was making decent progress. I’m still on track for having everything — property, car loan, school loan, and now the 401K loan — all paid off by December 2012.

I have to admit, though, the budget is much tighter than I’d like. I’m so impatient building the house that I sometimes spend more than I should (like the chop saw probably could have waited, but I really hate borrowing something repeatedly).  But my struggles with that can wait for another post.


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