401k Loan vs HELOC for short term cashflow needs
401k Loan vs HELOC for short term cashflow needs
Reading through the forum it seems the consensus is that a HELOC is preferred to using a 401k loan in most if not all situations. I am confirming mine is not an outlier.
We were about to pull the trigger on a decent sized home remodel when a home became available that met our needs better than we could ever coax our current home into doing. The owners were very motivated and we ended up settling on a price which is under what our home is valued at but possibly more than it will sell for in the current market. We have enough in cash to cover a 20% down payment and closing costs and a tiny buffer to manage monthly spending fluctuations but no more. We will need to spend some money on our home to get it ready to sell and it would make sense to do some minor things on the new home before we move in (ie replace carpet). Pessimistically we have over $200k in equity and we would pay back any amount borrowed immediately after closing on our home. My 401k is healthy and borrowing the max would be ~5% of its total value. My wife also has this option but it would represent a much larger chunk of her 401k. Additionally we have a Roth IRA with ~$250k which we could borrow from for 60 days for free but that isn't long enough and is really more of a short term hack.
Let's assume the HELOC and 401k loan are the same interest rate ~9%. The HELOC is interest only payments so they would be lower. The 401k is for a period of 10 years if the loan is used for a home purchase.
In retrospect maybe we should have offered a smaller down payment but the contract is signed and I'm not sure we can change that now.
Thoughts?
We were about to pull the trigger on a decent sized home remodel when a home became available that met our needs better than we could ever coax our current home into doing. The owners were very motivated and we ended up settling on a price which is under what our home is valued at but possibly more than it will sell for in the current market. We have enough in cash to cover a 20% down payment and closing costs and a tiny buffer to manage monthly spending fluctuations but no more. We will need to spend some money on our home to get it ready to sell and it would make sense to do some minor things on the new home before we move in (ie replace carpet). Pessimistically we have over $200k in equity and we would pay back any amount borrowed immediately after closing on our home. My 401k is healthy and borrowing the max would be ~5% of its total value. My wife also has this option but it would represent a much larger chunk of her 401k. Additionally we have a Roth IRA with ~$250k which we could borrow from for 60 days for free but that isn't long enough and is really more of a short term hack.
Let's assume the HELOC and 401k loan are the same interest rate ~9%. The HELOC is interest only payments so they would be lower. The 401k is for a period of 10 years if the loan is used for a home purchase.
In retrospect maybe we should have offered a smaller down payment but the contract is signed and I'm not sure we can change that now.
Thoughts?
Re: 401k Loan vs HELOC for short term cashflow needs
Are you able to pay back the 401k loan as a lump sum or does it require regular payments from payroll? Are you still able to contribute to the 401k while you have an outstanding loan?RiskEnvy wrote: ↑Wed Oct 30, 2024 9:08 am Reading through the forum it seems the consensus is that a HELOC is preferred to using a 401k loan in most if not all situations. I am confirming mine is not an outlier.
We were about to pull the trigger on a decent sized home remodel when a home became available that met our needs better than we could ever coax our current home into doing. The owners were very motivated and we ended up settling on a price which is under what our home is valued at but possibly more than it will sell for in the current market. We have enough in cash to cover a 20% down payment and closing costs and a tiny buffer to manage monthly spending fluctuations but no more. We will need to spend some money on our home to get it ready to sell and it would make sense to do some minor things on the new home before we move in (ie replace carpet). Pessimistically we have over $200k in equity and we would pay back any amount borrowed immediately after closing on our home. My 401k is healthy and borrowing the max would be ~5% of its total value. My wife also has this option but it would represent a much larger chunk of her 401k. Additionally we have a Roth IRA with ~$250k which we could borrow from for 60 days for free but that isn't long enough and is really more of a short term hack.
Let's assume the HELOC and 401k loan are the same interest rate ~9%. The HELOC is interest only payments so they would be lower. The 401k is for a period of 10 years if the loan is used for a home purchase.
In retrospect maybe we should have offered a smaller down payment but the contract is signed and I'm not sure we can change that now.
Thoughts?
Note that HELOCs usually have fees if you close them out early.
The objection to 401k loans is that many people tend to use them to cover excess spending. E.g., paying off credit cards.
Re: 401k Loan vs HELOC for short term cashflow needs
I can pay back the 401k in a lump sum. Whatever amount I borrow will not be available to be borrowed again for 1 year after it is paid back.Are you able to pay back the 401k loan as a lump sum or does it require regular payments from payroll? Are you still able to contribute to the 401k while you have an outstanding loan?
Note that HELOCs usually have fees if you close them out early.
The objection to 401k loans is that many people tend to use them to cover excess spending. E.g., paying off credit cards.
I am still able to contribute and would also be able to "catch up" on contributions throughout the remainder of the year if needed.
The HELOC is at a credit union and has no extra fees for early closeout.
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Re: 401k Loan vs HELOC for short term cashflow needs
How much do you actually need to do what you want to accomplish short term?
HELOC easiest, but if you don't have one already, there is the possibility of prepayment penalty, as the other poster said.
You could also consider getting a personal loan from a bank or credit union. I got one for $50k a few years back when I had a cash crunch. Interest rate is probably in 12-14% range now, but not much difference in $$$ if you're in and out quickly. Absolutely no strings other than making the payment, and did the whole thing on my bank's website.
Would use Roth loan only as last resort to avoid chance of penalties/tax snafus.
HELOC easiest, but if you don't have one already, there is the possibility of prepayment penalty, as the other poster said.
You could also consider getting a personal loan from a bank or credit union. I got one for $50k a few years back when I had a cash crunch. Interest rate is probably in 12-14% range now, but not much difference in $$$ if you're in and out quickly. Absolutely no strings other than making the payment, and did the whole thing on my bank's website.
Would use Roth loan only as last resort to avoid chance of penalties/tax snafus.
Re: 401k Loan vs HELOC for short term cashflow needs
50k more or less. Maybe up to 60 depending on how quickly we can get our house sold.AlmostThereCT wrote: ↑Wed Oct 30, 2024 9:39 am How much do you actually need to do what you want to accomplish short term?
HELOC easiest, but if you don't have one already, there is the possibility of prepayment penalty, as the other poster said.
You could also consider getting a personal loan from a bank or credit union. I got one for $50k a few years back when I had a cash crunch. Interest rate is probably in 12-14% range now, but not much difference in $$$ if you're in and out quickly. Absolutely no strings other than making the payment, and did the whole thing on my bank's website.
Would use Roth loan only as last resort to avoid chance of penalties/tax snafus.
I have had a HELOC open since 2021 in case we needed money for a down payment on a new house (have been looking since 2020 but mostly had given up). In that time we saved up just enough to be able to make the down payment in cash and the HELOC has gone from ~4% to ~9% interest.
Good point on the Roth. That could spiral into a mess.
Last edited by RiskEnvy on Wed Oct 30, 2024 9:51 am, edited 1 time in total.
Re: 401k Loan vs HELOC for short term cashflow needs
I'd consider the 401k loan, then.RiskEnvy wrote: ↑Wed Oct 30, 2024 9:33 amI can pay back the 401k in a lump sum. Whatever amount I borrow will not be available to be borrowed again for 1 year after it is paid back.Are you able to pay back the 401k loan as a lump sum or does it require regular payments from payroll? Are you still able to contribute to the 401k while you have an outstanding loan?
Note that HELOCs usually have fees if you close them out early.
The objection to 401k loans is that many people tend to use them to cover excess spending. E.g., paying off credit cards.
I am still able to contribute and would also be able to "catch up" on contributions throughout the remainder of the year if needed.
The HELOC is at a credit union and has no extra fees for early closeout.
The HELOC will hit your credit score, if you're concerned about that.
I wouldn't touch it our Roth. That 60 days is a hard limit. Too much can go wrong.
Re: 401k Loan vs HELOC for short term cashflow needs
OK, ROTH is out. That's good.
I talked to my mortgage broker and said the HELOC would not affect credit for the mortgage, but I assume any credit check after that would be affected?
I asked about switching to 10% down and that all sounded reasonable until he casually mentioned it would require an appraisal for anything < 20%. The property qualified for waiving the appraisal. The cost is $520. I didn't do the math, but I think knowing that the minimal savings and extra effort of going with 10% down instead of 20% is probably not worth it after the appraisal fee... also added pmi at around $40 a month until I closed and recasted the mortgage.
Re: 401k Loan vs HELOC for short term cashflow needs
I’ve had both types of loans, and the 401(k) is much easier to apply for.
Assuming you have several hundred thousand dollars in the combined 401(k)s, it just isn’t going to make much difference in your long-term returns to take $50,000 out for a short period.
Assuming you have several hundred thousand dollars in the combined 401(k)s, it just isn’t going to make much difference in your long-term returns to take $50,000 out for a short period.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: 401k Loan vs HELOC for short term cashflow needs
No taxable brokerage account?
Re: 401k Loan vs HELOC for short term cashflow needs
This is 100% true, but I already have the HELOC so I went through that a couple years ago. My wife and I had to go to the bank in person and sit down with an actual loan officer. The place was otherwise empty and we all had masks on as was fashionable at the timedelamer wrote: ↑Wed Oct 30, 2024 10:31 am I’ve had both types of loans, and the 401(k) is much easier to apply for.
Assuming you have several hundred thousand dollars in the combined 401(k)s, it just isn’t going to make much difference in your long-term returns to take $50,000 out for a short period.
Re: 401k Loan vs HELOC for short term cashflow needs
Sadly, no. Have always tried to max out the 401k and Roth IRA and spend and/or save the rest. Lately have been saving for a renovation or down payment and here we are. To your point it may make some sense to back off the 401k maxing out to save in taxable for retirement planning but I haven't gotten my head around that yet.
Re: 401k Loan vs HELOC for short term cashflow needs
No, I wouldn't reduce 401k contributions. The tax benefit is too great.
As others have said, I think the 401k loan is fine if it's not covering up some behavioral problem. As a temporary funding source for a temporary need, it sounds like a good fit.
I had a similar situation when I temporarily owned two houses. In addition to borrowing against financial assets, my wife and I were able to pick up a number of 0% credit card offers. With monthly expenses around $3k, plus a number of one-time costs related to moving (like the moving truck and stuff), we were able to load up over $50k at 0% for 15-18 months. (A single card gave us $10k-$15k, so I think we just had 2 cards each.) When we sold our house, we waited until the last couple of weeks on each one, and paid them off before the 0% period expired.
As others have said, I think the 401k loan is fine if it's not covering up some behavioral problem. As a temporary funding source for a temporary need, it sounds like a good fit.
I had a similar situation when I temporarily owned two houses. In addition to borrowing against financial assets, my wife and I were able to pick up a number of 0% credit card offers. With monthly expenses around $3k, plus a number of one-time costs related to moving (like the moving truck and stuff), we were able to load up over $50k at 0% for 15-18 months. (A single card gave us $10k-$15k, so I think we just had 2 cards each.) When we sold our house, we waited until the last couple of weeks on each one, and paid them off before the 0% period expired.
Re: 401k Loan vs HELOC for short term cashflow needs
That's a good idea. Did it affect your credit in any way?Chuck wrote: ↑Wed Oct 30, 2024 11:30 am I had a similar situation when I temporarily owned two houses. In addition to borrowing against financial assets, my wife and I were able to pick up a number of 0% credit card offers. With monthly expenses around $3k, plus a number of one-time costs related to moving (like the moving truck and stuff), we were able to load up over $50k at 0% for 15-18 months. (A single card gave us $10k-$15k, so I think we just had 2 cards each.) When we sold our house, we waited until the last couple of weeks on each one, and paid them off before the 0% period expired.
Re: 401k Loan vs HELOC for short term cashflow needs
Probably?
I really don't pay much attention to credit scores. Whenever a credit card company wants to give it to me for free, I look. But then I forget what agency or score type it is, so it doesn't impact my thinking. The number fluctuates all the time, even if I'm not doing silly stuff, but it's always in the top category. There's always a "(X) One or more of your credit lines has high utilization" but I don't think it's really that significant. Otherwise they'd stop giving me the credit offers, right?
I really don't pay much attention to credit scores. Whenever a credit card company wants to give it to me for free, I look. But then I forget what agency or score type it is, so it doesn't impact my thinking. The number fluctuates all the time, even if I'm not doing silly stuff, but it's always in the top category. There's always a "(X) One or more of your credit lines has high utilization" but I don't think it's really that significant. Otherwise they'd stop giving me the credit offers, right?
Re: 401k Loan vs HELOC for short term cashflow needs
Sorry, I missed that you already have the HELOC.RiskEnvy wrote: ↑Wed Oct 30, 2024 10:45 amThis is 100% true, but I already have the HELOC so I went through that a couple years ago. My wife and I had to go to the bank in person and sit down with an actual loan officer. The place was otherwise empty and we all had masks on as was fashionable at the timedelamer wrote: ↑Wed Oct 30, 2024 10:31 am I’ve had both types of loans, and the 401(k) is much easier to apply for.
Assuming you have several hundred thousand dollars in the combined 401(k)s, it just isn’t going to make much difference in your long-term returns to take $50,000 out for a short period.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils