The Pros and Cons of Getting a HELOC, Home Equity Loan, or 401k Loan
When it comes to home equity, most people have three main options: a home equity line of credit (HELOC), home equity loan, or 401k loan. Each one has its own advantages and disadvantages, so it’s important to understand all three before making a decision.
Advantages of a HELOC:
1. A HELOC typically has a lower interest rate than a home equity loan or 401k loan.
2. You only have to pay interest on the amount of money you actually borrow with a HELOC.
3. You can use a HELOC for a variety of purposes, including home improvements, debt consolidation, or investments.
Disadvantages of a HELOC:
1. HELOCs typically have variable interest rates, which means your monthly payments could go up or down over time.
2. If you don’t make your payments on time, you could lose your home.
3. You may be tempted to spend more money than you originally borrowed with a HELOC.
Advantages of a Home Equity Loan:
1. A home equity loan typically has a lower interest rate than a HELOC or 401k loan.
2. With a home equity loan, you receive the money in a lump sum, so you can use it for a specific purpose.
3. Home equity loans have fixed interest rates, so your monthly payments will stay the same over the life of the loan.
Disadvantages of a Home Equity Loan:
1. You may be tempted to spend the money you receive from a home equity loan on something other than what you originally intended.
2. You could lose your home if you don’t make your payments on time.
3. Home equity loans typically have higher interest rates than HELOCs.
Advantages of a 401k Loan:
1. A 401k loan typically has a lower interest rate than a HELOC or home equity loan.
2. With a 401k loan, you can borrow up to 50% of your 401k balance.
3. You don’t have to pay taxes on the money you borrow from your 401k.
Disadvantages of a 401k Loan:
1. If you leave your job, you will have to repay the loan within 60 days or else it will be considered a withdrawal and you will have to pay taxes and penalties on the money.
2. If you can’t repay the loan, your 401k balance will be reduced.
3. You may be tempted to spend the money you borrow from your 401k on something other than what you originally intended.