Using 401 K money to pay off my primary mortgage - Good or bad idea ?

[Westin Hudnall]

My story : I'm 30. Fully vested with $55,000 in my 401 K . My primary mortgage has a balance of $35,000 left of my original $182,000 loan I got 5 years ago.I made a lot the past few years during the down economy and was able to pay off my house debt rapidly. I now have a baby ; my wife cut her workload by 75% and I no longer make strong enough income to save enough to pay down my debt any further. 

My goal is to have as much monthly savings as possible to build my buy and hold portfolio.

Does it make sense to pay off my home (P&I $950/month) or to leave it in retirement ?

Why or why not ?

Thanks in advance :)

[Destiny Fargher]

Taking an unqualified early distribution from your 401k is a very expensive source of funds. You will pay your marginal tax rate on the funds you withdraw, plus you'll lose another 10% to penalties. It would probably give you warm fuzzies to pay off the last bit of the mortgage, but they will be expensive warm fuzzies and I see little other benefits.

If your goal is to reduce your monthly expenses and save for buy-and-hold properties may I suggest a cash-out refi on your primary residence? You mention your P&I is $950. You could refi to $65k: $35k of existing mortgage, take out $25k for the down payment on a new rental, roll in $5k of the closing costs. Your new payment would be about $350, saving you $600 a month. The closing costs in this scenario are less than the taxes and penalties you'd pay for the 401k distribution, plus you still get to keep your $55k in tact for retirement, plus you can buy a rental right away, plus you reduce your monthly expenses by $600. Win-win-win?