401k Loan vs. Second Mortgage vs. Reverse Mortgage: What to Consider
When it comes to securing extra funds for big financial goals, homeowners have a few options available to them. They can take out a loan from their 401k, get a second mortgage, or get a reverse mortgage.
Each of these options has its own set of pros and cons that need to be considered before making a decision. This article will lay out some of the key considerations for each option so you can make the best choice for your situation.
If you have a 401k account, you may be able to take out a loan against it. This can be a attractive option because the interest rate is usually lower than other types of loans and the repayment terms are often more flexible.
However, there are some downsides to consider as well. If you leave your job, you will typically have to repay the loan within 60 days or it will be considered a withdrawal and subject to taxes and penalties. Additionally, if you default on the loan, you could be hit with taxes and penalties as well.
Taking out a second mortgage is another option for homeowners looking for extra funds. With a second mortgage, you are essentially taking out another loan against your home. The interest rate on a second mortgage is usually higher than a first mortgage, but lower than other types of loans like credit cards or personal loans.
One thing to keep in mind with a second mortgage is that your home is used as collateral, so if you default on the loan, you could lose your home. Additionally, second mortgages typically have shorter repayment terms than first mortgages, so you’ll need to be prepared to make larger monthly payments.
A reverse mortgage is another option for homeowners aged 62 or older. With a reverse mortgage, you borrow money against the equity in your home and don’t have to make any payments until the loan is due (which is typically when the borrower dies or sells the home).
Reverse mortgages can be a good option for seniors who want to stay in their homes and don’t have the income to make monthly loan payments. However, there are some downsides to consider as well. For example, the interest rate on a reverse mortgage is usually higher than other types of loans and the loan balance can increase over time if the borrower doesn’t make any payments. Additionally, if the borrower dies or sells the home before the loan is paid off, any remaining balance on the loan will need to be repaid from the proceeds of the sale.