Using 401k Loan to Get to 20% Equity FHA

[Eric Gutierrez]

I got bored at work today and started taking a look at my options on my FHA loan.

Short background

I have an FHA loan on a duplex that I own. I paid $165k for it in 2011. My FHA MIP is just a hair under $150 per month. Since my loan started before the FHA change in 2013, once I reach 78% equity and have paid the MIP for at least 60 months the insurance goes away. I'm just looking for a logic check, not actually trying to get to the exact $ on this.

Idea

Take a 401k loan @ 4.25% to pay down the principal enough to get me under the 78% threshold on month 60.

Month 60 with no additional payments made prior I would be at $149,800 or 90.7%. 128,700 is the magical 78%. So the 401k loan amount would be for $21,100.

Naturally I would be under 78% in month 127. The max length my 401k loan allows is 48 months, but for this purpose lets assume that I can do a 67 month loan and have the 401k payments end the same time that the MIP would have naturally ended.

So over the 67 month period, I could either pay $150 per month of MIP or $367 per month to my 401k. So I would have to pay an extra $217 per month. Over the 67 month period that would add up to $14,539.

At month 127 under the natural method of paying the MIP and not making any other payments, my remaining balance would be the 128,700. Under the 401k method, I would be right at 101,000 a difference of roughly 28k. So for paying an extra 14.5k over the period I would wind up 28k better off so actually 28k-14.5=13.5k better.

Other considerations

I realize that by using a 401k loan I could potentially miss out on the gains that the 21k would have seen in stock market. Also, paying the extra $217 per month isn't an issue.

Question

I guess what I'm asking is does anyone else follow my logic, or is it flawed somewhere along the way? Any other negative aspects with this idea besides what I mentioned above?

Let me know what you think. This was more for a logic check than anything, I wont be at 5 years until 2016...