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Home Equity Loan vs. 401(K) Loan –Which should you choose?
By Charles Essmeier
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
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Facebook underwriters prop up stock as it nears break-even mark - Los Angeles Times<table border="0" cellpadding="2" cellspacing="7" style="vertical-align:top;"><tr><td width="80" align="center" valign="top"><font style="font-size:85%;font-family:arial,sans-serif"><a href="http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNFj-9ROuCZERjGNRXwnq6TJ5X7oMg&url=http://www.usatoday.com/money/perfi/stocks/story/2012-05-17/facebook-trading/55056312/1?csp%3Dhf"><img src="//nt2.ggpht.com/news/tbn/OuKF6_IczmqD_M/6.jpg" alt="" border="1" width="80" height="80" /><br /><font size="-2">USA TODAY</font></a></font></td><td valign="top" class="j"><font style="font-size:85%;font-family:arial,sans-serif"><br /><div style="padding-top:0.8em;"><img alt="" height="1" width="1" /></div><div class="lh"><a href="http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNFd319a0tvYTBh-v1142lbxmvJUyA&url=http://www.latimes.com/business/technology/la-fi-tn-facebook-trading-20120518,0,6622700.story"><b>Facebook underwriters prop up stock as it nears break-even mark</b></a><br /><font size="-1"><b><font color="#6f6f6f">Los Angeles Times</font></b></font><br /><font size="-1">By Andrew Tangel Buyers did not rush into the market to snap up shares of the social networker. And the big Wall Street banks that brought Facebook public scrambled to prevent the stock from collapsing into declines. 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The Nasdaq Stock Market, <b>...</b></font><br /><font size="-1"><a href="http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNFIq7iE9v-RtQgQp6oZUr1wQq-DCQ&url=http://economictimes.indiatimes.com/markets/global-markets/fb-ipo-facebook-investors-left-guessing-after-nasdaq-glitch/articleshow/13276924.cms">FB IPO: Facebook investors left guessing after Nasdaq glitch</a><font size="-1" color="#6f6f6f"><nobr>Economic Times</nobr></font></font><br /><font size="-1"><a href="http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNFc5Qu55Bn15uhfybvdoCF-ctJlDg&url=http://www.bloomberg.com/news/2012-05-18/zynga-shares-fail-to-resume-following-volatility-circuit-breaker.html">Zynga Trading Pauses Last Too Long Amid Facebook Difficulty</a><font size="-1" color="#6f6f6f"><nobr>Bloomberg</nobr></font></font><br /><font size="-1" class="p"></font><br /><font class="p" size="-1"><a class="p" href="http://news.google.com/news/more?pz=1&ned=us&ncl=dZg4yGw0J-hmjhMED8KAgdPrS2w3M&topic=h"><nobr><b>all 63 news articles »</b></nobr></a></font></div></font></td></tr></table>Hundreds of protesters marching through Chicago - The Associated Press<table border="0" cellpadding="2" cellspacing="7" style="vertical-align:top;"><tr><td width="80" align="center" valign="top"><font style="font-size:85%;font-family:arial,sans-serif"><a href="http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNG5FdFxWEvDH7MpwN2osuPrqA8Svw&url=http://www.google.com/hostednews/ap/article/ALeqM5jNnILvr9IYlDqyAA-a4B9dT07zVA?docId%3Dbbde213fe62a41e6bd5178b13fbe3d45"><img src="//nt0.ggpht.com/news/tbn/kNYve_iU1rWRDM/6.jpg" alt="" border="1" width="80" height="80" /><br /><font size="-2">The Associated Press</font></a></font></td><td valign="top" class="j"><font style="font-size:85%;font-family:arial,sans-serif"><br /><div style="padding-top:0.8em;"><img alt="" height="1" width="1" /></div><div class="lh"><a href="http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNG5FdFxWEvDH7MpwN2osuPrqA8Svw&url=http://www.google.com/hostednews/ap/article/ALeqM5jNnILvr9IYlDqyAA-a4B9dT07zVA?docId%3Dbbde213fe62a41e6bd5178b13fbe3d45"><b>Hundreds of protesters marching through Chicago</b></a><br /><font size="-1"><b><font color="#6f6f6f">The Associated Press</font></b></font><br /><font size="-1">By JIM SUHR, AP ? 1 minute ago CHICAGO (AP) ? 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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 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. 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. Established in 1978, Retro Marketing is a firm devoted to informational Websites, including http://www.HomeEquityHelp.net/ and http://www.End-Your-Debt.com/
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