TSP Loan Advice

[rayvas]

I know others have asked the same question and I'm expecting the same answer regarding using my TSP to pay off all my debt.

Here's the situation: I'm active duty, 17 years in. I'm looking to buy my home for retirement in Los Angeles county. I'm also getting married in March 2013.

I have one CC with ~13K in charges, a car loan ~$2600, a motorcycle loan $~2000, and a departmental store card ~$2700. Just paying the minimums runs me $869 and all have different interest rates (the CC being the highest and my car being the lowest). I don't use either credit cards any more (but the accounts will remain open for credit purposes). I'm also looking at houses and I have never dove into this realm before, and I understand that your finances have to be in order to qualify for a loan. Because I'm buying in Los Angeles, I want to qualify with an outstanding rate and get a home that I can live in for the next 5-10 years.

I looked at the TSP website and worked the calculator with regard to loans and I can borrow the amount needed to completely wipe out all my debt in one shot, and I'll be saving the average % on all debts because the loan interest is 1.5% as of yesterday. Paying back the loan in 2 years 6 months will make my monthly pay allotment hover around the $720-ish area, saving me over $100 a month. But, because the TSP loan is not reported on my credit score, I'm also thinking that this is a good option to get out of debt to have the best record when applying for pre-approval, and then final approval. Additionally, I will also make additional payments over the course of the year in order to pay that off as fast as possible.

Looking for advice here. I know I'll be taxed twice on my TSP (while paying the loan, and when I withdraw it at 59.5), additionally, I realize that I will lose out on the assumed interest on the account while I'm paying the balance of the loan over 2 years. My question is: considering my timeline of events, would paying off all my debt and going with a near zero interest rate be a better option than to pay down the debt over time, accumulating interest charges along the way that are several %-age points over that 1.5%?

Many thanks!

 

[Mapper]

I'm a novice here and have no direct experience with TSP loans but I think a TSP loan would be appropriate for the scenario you lay out. I've looked a bit at a TSP loan to pay some debts, learned a little but haven't actually done it yet. A couple of caveats:

1. no new additional debt. no new car loan, no additional carried balances on your CC
2. you have no intention of changing jobs. TSP loans really turn into a burden if you leave gov't service
3. Your TSP balance remains sufficiently funded for your retirement plans. i.e. you have ample money in TSP and are not already in a situation where your are trying to "catch-up"
4. you still buy a house within your means. don't think of the TSP loan as additional money you can apply to a down payment on a more expensive house...because it is still a loan. You are, more or less, lending to yourself but your are lending from your retirement.

Now let the veterans chime in.

 

[rayvas]

Mapper - thanks for the input. I do realize that TSP loan is not additional money, and I'm totally looking for a house within my means. However, I do want zero debt going into a new house, as well as a marriage.

 

[Boghie]

Issues to watch:

1. If you leave active duty (and/or Federal Service) you will be forced to pay back the entire balance of the loan. If you do not pay the balance off you will be fined by the IRS for an early distribution and you will have to pay income tax on it. This is a standard 401(k) procedure. Loans have to be fully paid off when you leave employment. It kinda glues you to your current employer - the Big Green Machine. What if there is a drawdown and your lucky number is called. Just thinking...

2. The maximum duration for a TSP loan (not real estate) is five years. You do not have a six year loan option.

Finally, a home loan broker will look at all your fixed expenses. That will include the loan. Bro, you just cannot hide. Maybe use a TSP loan to cover the floating rate credit cards – to include the department store card. Leave the car and fixed rate toy loans alone. You at least know what you have to pay on your toys, the credit card rates will go up at the whim of the company or at the stroke of Bernanke’s pen.

 

[rayvas]

I'm locked in for the full 20. No lucky number coming my way.

I'm not looking to pay the loan off in 5 years. I will pay the loan off in 2.5 (sooner with extra payments).

Thanks for the advice!

 

[Frixxxx]

I have one CC with ~13K in charges, a car loan ~$2600, a motorcycle loan $~2000, and a departmental store card ~$2700.

Issues to watch:

1....
2....

Finally, a home loan broker will look at all your fixed expenses. That will include the loan. Bro, you just cannot hide. Maybe use a TSP loan to cover the floating rate credit cards – to include the department store card. Leave the car and fixed rate toy loans alone. You at least know what you have to pay on your toys, the credit card rates will go up at the whim of the company or at the stroke of Bernanke’s pen.

Boghie's right (as usual), but I do wanna address your CC. It's not what you owe on a CC that gets you in trouble the most, although it's not good to have a lot of debt there. But, how much debt can you have? My first wife and I thought that having CC available would be nice, so we began accepting every card offer in the mail. Turns out, we got 75K available credit in one year from CCs.

Went to buy a car and got turned down cause we had 75K in revolving available credit. Not one penny was on those cards, but it stopped us from getting a good 3.9% loan on a new purchase. So, Think about what you truly need a credit card for, set the expectation, and limit the ceiling based on your lifestyle.

Good Luck, and thanks for your service!

 

[rayvas]

I've never been a big fan of credit cards, but I did get one to build up credit. So, I only have that one, and I don't use it (like I used to).

 

[Silverbird]

See Boghie's post first - I'm speaking from the Civilian side
1) If you do this you put on the silver handcuffs (I am wearing a pair - I have a real estate loan out) - you have to stay in the military/government service while the payments are deducted from your pay, or you have to pay it all back. If you are thinking about a civilian job in the Federal Government post-military, as a military veteran you do have an easier time getting a job - but that implies there is one available and many Departments have a hiring freeze. The calls for 5% cuts in civilian personell pending in Congress make staying in Government service even after a job possibly risky - so careful. Often it's last in first out in the federal government, especially with all of the early retirements we are losing knowledge faster and faster and they want to keep us middle aged folk around.
2) If you do this, either keep your credit card accounts open and break your credit cards (best action) or keep one in reserve in a place that is inconvinient to get to (if you need to have it in reserve) - just make it so it's not easy to just pull it out of the wallet. Also see Frixx's posting on too many credit cards - try not to close the one you've had the longest (because it shows you have a credit history) but watch the percentage interest (your oldest card may have the highest interest rate so you may have to keep it open but break the card - that's where I am).
3) Yes, indeed, a TSP loan will not show up on your credit report. But keep in mind, if you get a loan based on the credit score you get with the hidden loan, the person supplying the loan you are getting isn't going to know about the TSP item either. You will need to adamant about how much you can afford per month and how big the loan is going to be, no matter what. In addition, if you choose not to tell the lender about the TSP loan (I do not recommend this if you are getting a home loan due to the need for paperwork to get the TSP residential loan) they are going to assume you have more money per month than you do. Plus, some lenders are overly optimistic about how much you can afford per month.
4) If you do take out the TSP loan, one of the plus's you have over other buyers is you will have the down payment in hand, and you can be flexible about when you take possesion (if you have to sell the house you have, there's a problem). You may not be able to get a better price due to the California housing market price deflation like I was able to, but the person with down payment in hand looks better than the one who has to make sure of the sale of their house first. Also, your flexibilty for moving dates can help, moving from one house to the other makes life difficult with the moving date coordination.

 

[ravenstreasures]

Hello, i just went thru a similar analysis. Borrowed from TSP to pay off CC debt accrued in readying condo for sale. (5 yr TSP general loan) The difference in numbers was just too much if i continued to pay CC as much & as soon as i could, altho i ***hated*** breaking down & making that loan. I am paying off TSP loan ASAP and being very frugal w/expenses. Good that TSP allows early repayment. W/lower interest on car & MC, might be best to keep that as is & just borrow from TSP for paying off CCs - just have to crunch the Nos. and see what works best for U. Good luck! PS experts say not to cancel CC because that will be negative on your FICO, due to change in ratio.