Should You Borrow from Your 401k or Get a HELOC?
When you need money, you may be tempted to borrow from your 401k or take out a home equity line of credit (HELOC). Both options have their pros and cons, so it’s important to understand the difference before making a decision.
Borrowing from Your 401k
If you have a 401k, you may be able to borrow up to 50% of the balance, up to a maximum of $50,000. The interest rate on a 401k loan is typically lower than a personal loan or HELOC, and the payments are usually deducted from your paycheck, so you don’t have to worry about making separate loan payments.
However, there are some drawbacks to borrowing from your 401k. If you leave your job, you will usually have to repay the loan within 60 days or else it will be considered a withdrawal and subject to taxes and penalties. Additionally, if you lose your job or become disabled, you may have to repay the loan immediately.
Getting a HELOC
A HELOC is a line of credit that is secured by your home equity. The interest rate on a HELOC is usually variable and based on the prime rate, so it can change over time. The monthly payments on a HELOC are usually interest-only for the first 10 years, and then you have to start paying down the principal.
one of the biggest advantages of a HELOC is that you don’t have to repay it until you sell your house or refinance your mortgage. Additionally, the interest you pay on a HELOC may be tax-deductible. However, keep in mind that if you default on your payments, you could lose your home.
So, which option is best for you? It depends on your individual circumstances. If you need the money for a short-term expense and you are confident that you will be able to repay the loan within a few years, borrowing from your 401k may be the best option. However, if you need long-term financing or you are not sure when you will be able to repay the loan, a HELOC may be a better choice.