Home Equity Loan vs. 401(K) Loan -- Which Should You
Home Equity Loan vs. 401(K) Loan
You've finally decided to add that patio you've always wanted
to your home. Now you can enjoy barbecue outdoors and get a
little fresh air every now and again. But how are you going to
pay for it? If you're like most people, you don't have cash for
home repairs just lying around the house. You'll have to borrow.
So where should you go to borrow? Mortgage rates are low these
days, so a home equity loan would be pretty affordable, as would
a home equity line of credit (HELOC) if you have a number of
remodeling projects in mind.
Then it occurs to you -- "What about my 401(K) money? I can get
good terms on a 401(K) loan and borrow the money from myself!"
That seems like a good idea. You can borrow the money from
yourself and pay yourself back with interest! What could be
better than that?.
On the surface, borrowing from your retirement savings may seem
like a better idea than taking out a home equity loan. The terms
are good either way, and the interest rates are probably
comparable. So, why not borrow from your 401(K) account?.
There are several reasons why it may not be desirable to borrow
from your retirement account:.
- Most Americans fail to save enough for retirement, so
borrowing from your retirement fund may leave you short later
should you default. No one wants to be broke when they
- If you have a diversified 401(K) account, you will probably
be earning interest on your retirement money. In fact, the
interest rate you are earning on your retirement fund may
exceed the interest rate you would pay for a home equity loan.
In that case, you take out a home equity loan, leave the
retirement money where it is, and you should earn a net gain
between the two.
- If your retirement fund is earning good interest, and in
the late 1990's many were earning upwards of 20% per year, then
borrowing on your principal could hurt you tremendously in the
long run. Due to the nature of compounding, the amount you lose
by borrowing from your retirement account could be far more
than simply the sum of the loan amount plus interest.
- The interest on a home equity loan is tax deductible, up to
$100,000. The interest on a 401(K) loan is not.
There are certainly some circumstances where you might benefit
from borrowing from retirement funds instead of taking out a
second mortgage, but those situations are fairly rare. A
substantially higher interest rate on the home equity loan than
the 401(K) loan would be one such example. If in doubt, you
should consult with a financial planner.
©Copyright 2005 by Retro Marketing. Charles Essmeier is
the owner of Retro Marketing, a firm devoted to informational
Websites, such as http://www.HomeEquityHelp.net/
MORE RESOURCES updated Sat. March / 06 / 2021
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