Ask Terry Questions 401K loan vs HELOC

401K loan vs HELOC

By Terry Savage on January 03, 2021 | Housing / Real Estate

Hi Terry. We are wanting to remodel our kitchen ($35,000) and will possibly be doing some other home improvements such as roofing or window replacement in the next few years. Would it be better to take a loan against our 401K or to get a HELOC? If HELOC, does it help us in any way with our tax return? Thanks and Happy New Year!

Terry Says

Both are dangerous! So this remodeling project better pay off eventually.
The risk with a HELOC is that interest rates will rise — and the loan will cost you more or have to be paid off in a balloon at a time when rates are high and you can’t qualify.

The risk with a 40l(k) loan is your ability to retire! That money could have been working for you on a tax-deferred basis. Even worse, if you lose the job then the money must be repaid immediately (within 6 months) OR it will be considered a withdrawal and subject to taxes and a 10% penalty if you are under age 59-1/2.

A better idea would be to refinance the home at a FIXED rate below 3% on a 30 year loan, NOW, and roll the extra amount into the loan. Lock in that rate for a long time, because if you can’t afford the remodel from your savings it is likely you will be paying on that loan for many years.

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