Georgia bill would allow use of 401(k) to pay mortgage debt (two)

Earlier this week, we wrote about the HOME Act, a bill that was recently proposed in the Georgia legislature. Under the act, homeowners would be able to withdraw money from their 401(k) to pay down mortgage debt and hopefully avoid foreclosure or similar financial consequences. Opponents of the bill, however, claim that taking money from secure retirement accounts does not guarantee that homeowners will be able to save their homes from foreclosure at the expense of their financial futures.

But supporters of the bill insist that it could have helped the more than 82,000 metro Atlanta residents who have received default notices so far this year. For example, a homeowner who owes more on the mortgage than their house is worth, known as being underwater, could use their 401(k) funds to pay down that debt and get back above water, refinance at a lower interest rate, and save hundreds of dollars each month. There are currently an estimated 423,130 homeowners in metro Atlanta who are underwater on their mortgage loans.

There are already similar laws that allow 401(k) accountholders to withdraw retirement funds to pay for college tuition or medical emergencies without penalty. In order to qualify for the option of taking penalty-free money from a 401(k), a homeowner would have to meet hardship guidelines similar to those in place for current withdrawal allowances. Most likely, the homeowner will have to show that he or she has an immediate financial need and no other way to meet that need. In addition, the homeowner must have first tried to obtain a nontaxable loan from the 401(k) account.

What do you think? Is the HOME Act a good idea, or could it just cause more harm to Atlanta homeowners in the end?

Source: Atlanta Journal-Constitution, “Pay mortgage with 401(k) funds?” Christopher Quinn, Oct. 24, 2011