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Cashing out your mutual funds to take care of home repairs

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Bills.com Team
UpdatedSep 19, 2007
Key Takeaways:

Is it better to take funds out of our mutual fund or get a loan for home repair?

My husband and I will have to remodel our bathtub due to a major water leak. We have ample funds in our mutual account, but currently not enough in our savings to complete the job. Is it better to take funds out of our mutual fund or get a loan? Note: We just finished paying off our mortgage.

What you will have to keep in mind is the total cost of funds i.e., what is it going to cost you to withdraw cash from your mutual funds in comparison to the total cost involved in getting a home equity line of credit. Keep in mind that the value of your mutual funds will keep changing (depending on the composition of your portfolio) as per the market conditions, so you might not want to withdraw funds if your portfolio is growing. You may also want to have a chat with your accountant or tax advisor. There are many variables to take in account such as exit loads and capital gain tax implications in withdrawing funds from your mutual funds account. In addition, you may want to have the meeting with your broker and tax advisor at the same time to ensure you get all the info you need to make the best decision.

As you have finished paying off your mortgage, the other option for you is a home equity line of credit. Home equity lines of credit (HELOCs) are credit lines given to homeowners based on the amount of equity in their home, and are a common type of loan used by borrowers to access their home equity. Unlike home equity loans, which provide a one-time lump sum loan secured against a home, HELOCs provide an open line of credit, with the credit limit determined by the amount of equity in the home, allowing homeowners to borrow what they need, when they need it. HELOCs are especially popular with homeowners planning home improvements, as they provide much more spending flexibility than traditional home equity loans.

Before taking out a home equity line of credit, you need to first ask yourself what are your goals, and how much money do you need to reach those goals. For example, if you are planning to upgrade and redecorate your kitchen, you need to carefully review your plans, try to obtain price estimates for the work, and determine the cost of the materials and appliances you want to install. Once you have a good idea of how much money you need, you should look at the amount of equity in your home to determine if you have enough equity to fund the project you are planning. You do not want to obtain a home equity line only to find out that you do not have enough credit to see your project to completion. If you do not have enough equity, you will need to reconsider your plans.

Once you have determined how much credit you need, you should contact various home equity lenders to discuss the loan terms they can offer you. It is important that you speak with at least three or four lenders so you can compare the interest rate and loan terms being offered by different lenders; this should give you a good idea of what interest rate you can expect to pay. I also encourage you to visit the Bills.com Home Equity Line Resources page at /home-equity-line/ where you will find a wealth of information and resources for consumers looking to obtain a home equity line. An especially helpful article, which will tell you what to look for in a new home equity line of credit loan, can be found at /home-equity-line-of-credit-loans-articlebills/

Also, if you submit your contact information to the Bills.com Mortgage Savings Center we can have several pre-screened home equity lenders contact you to discuss the loan options available to you.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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10 Comments

BBill, Mar, 2010
I cannot answer your question based on the information provided. A "mutual fund" is a collection of stocks or bonds that is managed by an fund manager. A mutual fund in and of itself has no tax implications or rules regarding withdrawing funds from the each owner's account. A mutual fund may be an alternative to a savings account, or could contain funds designated as an IRA, or a rollover from a 401(k) or similar account. You need to consult with the person who set up the account to determine if the mutual fund is an IRA, trust fund, or some other account that has tax implications if the owner makes a withdrawal.
NNancy Dern, Mar, 2010
My son is 19 and was left money and we put it into mutual funds a couple years ago. We are needing to withdrawl the money what is the penalty or what amount will he be taxed on the whole amount or just what was earned?
BBill, Dec, 2009
Impossible for anyone to say with certainty without knowing your income and the amount withheld from your wages. Go to a tax planner with your pay stubs and a copy of your 2008 tax return to get a precise answer.
DDAWN, Dec, 2009
I HAVE BEEN TAKING MONEY OUT OF MY MUTUAL FUNDS TO PAY MY HUSBAND MEDICAL EXPENCES THIS YEAR. MY HUSBAND LOST HIS JOB AND WE ARE ON MY INSURANCE BUT IT HAS A 6000.00 DEDUCTABLE AND WILL NOT COVER THE EMBREL THAT HE NEEDS. SO FAR I HAVE TAKEN OUT 5,000.00 AND NOW I HAAVE ANOTHER 900.00 IN MEDICAL BILLS WE JUST REC. WHAT IS THIS GOING TO DO TO US COME TAX TIME? I HAVE BEEN TAKING THE 10% TAX OUT WITH EA WITHDRAWL.
BBill, Sep, 2009
Rarely do I think a reader should take a distribution from a retirement account before the reader reaches retirement age. The penalty for doing so is just too high. I really like your idea of taking advantage of the 0% interest on transfers, and paying off the debt when your circumstances allow. That option is the cheapest, and gives you breathing room to handle the debt. That said, if the stress of the debt is the source of a deterioration to the health of you or your spouse, then paying the penalty to get rid of the stress is worth the cost.
MMike, Sep, 2009
My wife and I regularly carry a $0 balance on our credit card, but recently we have accumulated about $2,000 in credit card debt and currently are living check to check for the next few months with no real chance to knock that credit card bill down until after the new year. That lingering debt is causing some stress, particularly for my wife. We are saving money in a Roth IRA and other money in a regular mutual fund. We've considered transferring the $2,000 to a another credit card that would give us 0% interest on transfers for a year. Should we transfer the debt to the new card and pay it off over the next 6 months as things stabilize in term of our income, or should I just withdraw the $2,000 out of the mutual fund? Does that $2,000 get taxed as regular income?
BBill, Aug, 2009
You may be able to make a hardship withdrawal for "Certain expenses relating to the repair of damage to the employee's principal residence." See the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules for details.
BBeverly Gary, Aug, 2009
I need to replace my roof I have water damage due to Ice dames from winter month can I get hardship money from my 401K I can't take out a loan I already have two Thank you Beverly
BBill, Jan, 2009
That really depends on how the mutual fund company disburses the money. I am certain that if you withdraw lump sum, you will end up in a higher tax bracket. Withdrawing in small increments would be the way to go.
jjan, Jan, 2009
I want to withdraw money from a mutual fund I have been saving in for years for a home down payment. I am not buying a home now but maybe within 7 years or less and I want to preserve what I have gained over the years.. what is the best way to withdraw ? concerned about taxes. (I am middle to low income). Should I withdraw in small increments over time and put in savings account or just take the whole lump sum out ?