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Home
Equity or 401(K) Loan? |
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It is exciting when you decide
to upgrade your home or yard with a patio, pool
or anything else you can think of. Now you need
the money.
Charles Essmeier’s April 20, 2005 article,
“Home
Equity Loan vs. 401(K) Loan -- Which Should
You Choose?” located on MortgageLenders.com,
provides some insight as to why it may not be beneficial
to borrow from your 401(K) retirement fund if you
need money for home repairs.
Initially you will probably think of taking out
a home equity loan. Then you decide it may be wiser
to borrow from your 401(K). Which one should you
choose?
“The terms are good either
way, and the interest rates are probably comparable.
So, why not borrow from your 401(K) 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 retire. 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.”
If this is the case, leaving your retirement fund
alone and taking out a home equity loan is the obvious
decision. But why wouldn’t you borrow from
your 401(K) if it was earning good interest?
“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.”
Regardless of which way you are leaning, if you
decide to take out a loan or borrow from your 401(K),
you should do your homework. If you feel uneasy
about any terms, stipulations or rates, you should
reconsider your action. |
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