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