Home Equity or Borrow against 401-K?
Question: The only debt I have is a small home equity loan on my house. I have no mortgage, just the home equity loan. My question is this: given my objective is to pay off all my debt as cheaply as possible, would I be better off borrowing against my 401-k or maintaining my home equity loan?
The interest I pay on the 401-k loan is paid back to myself. That is, if I have $80,000 in my 401-k and I take a loan out for $30,000, $50,000 remains. During the period of the loan, all interest I pay goes back into the 401-k. At the end of the loan, I wind up with the interest I earned on the remaining $50,000, plus the $30,000 I paid back, plus the interest I paid back, plus the interest I earned on the payments I make every month.
For the sake of argument, assume the following: tax bracket:27% principle (loan amount):$30,000 home equity loan rate (tax deductible):7.5% 401-k loan rate:8.5% rate of return on 401-k investment:10% period of loan (both cases):4 years frequency of payment (both cases):once per month
Answer: I would consider the following – During the period of the loan, you’ll be losing interest on the $30,000 that you borrowed. Depending on how you have the 401K money invested and what your return is, this could be substantial.
Related Posts
Filed under: Home Equity Loan
Leave a Comment
XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
TrackBack URL | RSS feed for comments on this post.