I wanna pay down a HELOC with a 401K loan.
- Thread starter daves66nova
- Start date
I would never touch my 401k - I don't think the math will work w/r to the lost growth on that money over the time before using for retirement and the interest on the HELOC. I realize you pay it back with interest but you lost growth on it.
and taking your money out of the market has potentially huge risk, because nobody knows what the market is going to do.
JTK
$100 Site Donor 2025
Dave, sorry if I missed it, but out of curiosity, what's your interest rate for a 401k loan? I've been with my employer's Fidelity account for ~27yrs. It's something crazy now like 9.9% for a max of 60 months with my Fidelity now. In the past I took loans for major home improvement projects. This was back when I could borrow from my 401k for ~2.9%. and the payment came out of my weekly paycheck. Fidelity will map how a loan can effect your long term earnings. The loans I took in the past certainly did not financially ruin me. Obviously it's not the best financial choice to borrow from your 401k, but everyone's circumstances is different.
This plus as I stated, he might get away with it for 6 months (or whatever short term), but NO ONE looks like a genius being out of the market for 2-3-4 years............
Interest rate on the HELOC matters as you are paying someone else. Interest rate on the 401k loan doesn't, as you are paying yourself.
I'm confused why not take the 401k loan to begin with instead of taking the HELOC?
If you're having positive cash flow vs the cost of the HELOC, pay it off ASAP and save on the interest. You'll thank yourself in 9 years when you're ready to retire.
If you're having positive cash flow vs the cost of the HELOC, pay it off ASAP and save on the interest. You'll thank yourself in 9 years when you're ready to retire.
I couldn't pull out what I needed back then, plus the HELOC was 2.0% for 6 months when I got it
@daves66nova - Your title suggests a 401(k) withdrawal. Many of the responses have taken this to be the meaning.
But you’re suggesting a loan. Very different idea - so, thread title updated a bit.
But you’re suggesting a loan. Very different idea - so, thread title updated a bit.
Tradeoff between lost potential growth while you are out of "the investment" in 401k versus current "known" rate of the HELOC that I am assuming floats based on interest rates.
I'm surprised how anti-401k loan the responses are although I do agree re the risk of losing/changing job and the immediate payback potential.
I'm surprised how anti-401k loan the responses are although I do agree re the risk of losing/changing job and the immediate payback potential.
JTK
$100 Site Donor 2025
Really? With our group of BITOG masterminds?
You are missing that while yes, you putting more back into the 401k than you took out b/c of the interest you pay back on it, that money is no longer working for you earning investment income which over a long period will dwarf the little bit of HELOC interest you are paying.
I'm not anti-loan or anti-interest at all BTW, I just can't believe how many people would borrow against their retirement and lose that future value/investment growth - folks really should do the math and make sure they understand the lost value of doing this...maybe for some it's not huge/isn't as much as the interest paid out. I'd rather take out a loan for home improvements, cars, etc. all through a regular loan than ever borrow against all I have to retire and again, I have no issues with loans at all, it's a part of life for most of us that aren't independently wealthy/isn't some horrible thing, just have to understand the math.
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I don't disagree with anything you said. Personally I'm all for time in the market, broad index approach. And I think the withdrawing from the market and missing growth opportunity is real - I'm all about dollar cost averaging. I don't have a stellar answer to the OPs question based on long range S&P rate of return versus current interest rate on the HELOC.I only said what I did as most threads go the "don't have a loan" route and expected the route to be pay yourself back through the 401k loan and known return (not paying interest on the HELOC). It's been a while since I have seen a "should I pay off my mortgage" thread, but all the ones I recall typically circle the pay off your loan and live debt free route.
JTK
$100 Site Donor 2025
I kid about the BITOG group, but in general, if you want reasonable information for just about anything, your chances of getting it here is pretty darn good with the group we have.
I knew someone that took a 401K loan for house down payment back in 2010-11 timeframe.
Paid it all back in 5 years.
It depends.
You have a HELOC at 8.5% APR, and you have an investment in your 401k / IRA that increase a certain amount as an opportunity cost. Do you get above 8.5% ROI on your 401k / IRA? One is a 8.5% risk free and the other is a typical average 10% with some short term risk.
One of the problem with 401k loan is if you are leaving your job you may have to pay back the loan asap. I think IRA might be safer but not 100% sure.
Still the best would likely be refi your HELOC to a lower rate mortgage instead.
You have a HELOC at 8.5% APR, and you have an investment in your 401k / IRA that increase a certain amount as an opportunity cost. Do you get above 8.5% ROI on your 401k / IRA? One is a 8.5% risk free and the other is a typical average 10% with some short term risk.
One of the problem with 401k loan is if you are leaving your job you may have to pay back the loan asap. I think IRA might be safer but not 100% sure.
Still the best would likely be refi your HELOC to a lower rate mortgage instead.
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