Differences Between 401K Loans vs. Cash-Out Refinance vs. Second Mortgages

401k Loan vs. Cash-Out Refinance vs. Second Mortgage: What to Consider

When it comes to taking out a loan against your retirement savings, there are a few different options to consider. A 401k loan, cash-out refinance, and second mortgage are all viable options, but each come with their own set of pros and cons.

Here are a few things to keep in mind when deciding which route to go:

401k Loan

-With a 401k loan, you are borrowing from your own retirement savings.

-The interest rate on a 401k loan is usually lower than that of a traditional loan.

-You will have to pay the loan back within a certain time frame, typically 5 years.

-If you leave your job before the loan is paid back, you will likely have to pay the entire loan back immediately.

Cash-Out Refinance

-A cash-out refinance entails taking out a new mortgage on your home for more than what you currently owe and using the difference to pay off other debts or make home improvements.

-This option can be beneficial if you can secure a lower interest rate on the new mortgage.

-However, you will be starting from scratch in terms of paying off the principal of the loan, which could take longer than if you had just kept your original mortgage.

Second Mortgage

-A second mortgage is taken out in addition to your first mortgage and is secured by your home equity.

-Interest rates on second mortgages are typically higher than those of first mortgages.

-This option can be beneficial if you need a large sum of money and don't want to tap into your home equity.

-However, you will be adding to your overall debt burden and will have two mortgages to pay off instead of just one.

Whichever route you decide to go, be sure to weigh the pros and cons carefully before making a decision.

Get Started