Evaluating 401K Loans vs. Cash-Out Refinance vs. Equity Sharing Agreements
If you're considering using your retirement savings to finance a large purchase, you have a few options. You can take out a loan from your 401(k), do a cash-out refinance of your home, or enter into an equity sharing agreement. Each option has its own pros and cons, so it's important to weigh your options carefully before making a decision.
401k Loan
Taking out a loan from your 401(k) is one way to finance a large purchase. The advantage of a 401(k) loan is that you're borrowing from yourself, so the interest rates are typically very low. The downside is that if you're unable to repay the loan, you'll have to pay taxes on the unpaid balance plus a 10% early withdrawal penalty.
Cash-Out Refinance
A cash-out refinance allows you to tap into the equity you've built up in your home. The advantage of a cash-out refinance is that you'll usually get a lower interest rate than with a 401(k) loan. The downside is that you're putting your home at risk if you're unable to make the payments.
Equity Sharing Agreement
An equity sharing agreement is another way to tap into the equity in your home. With an equity sharing agreement, you sell a portion of your home to an investor in exchange for cash. The advantage of an equity sharing agreement is that you don't have to make monthly payments. The downside is that you'll give up a portion of the equity in your home.
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