Wisdom of taking 401k loan to payoff HELOC? (1 Viewer)

[Todd Hochard]

I was considering taking out a 401k loan to cover my HELOC. I have this HELOC as part of an 80/10/10 loan package I used to buy my ridiculously overpriced home here in Northern VA, just like everyone else is apparently doing. I know this seems like a REALLY stupid idea, but consider-

1. I'm concerned about market stagnation over the short-term (next couple of years). Wouldn't this be a decent way to guarantee myself a return on a portion of my money?
2. I have a variable rate HELOC, and I'm hating the ever-increasing finance charges.
3. I put a CRAPLOAD of money into my 401k, so I think the payoff would go rather quickly.

Has anyone considered this? I know the risk of it becoming due if I lose my job, but the reality is that I cannot/ would not afford this home if I lost it, anyway.

I need to fully look at the rules from my company, but just thought I'd throw it out there for general opinions.

Todd

 

[Todd Hochard]

Advice to self-

Rates on payback are only 3.75% (I'd prefer higher, since I'm paying myself), and must be done with after-tax deductions (which seems obvious in retrospect, but didn't at first, for some reason).

Not looking so attractive.

 

[Michael_K_Sr]

I've taken out a 401k loan, but it was to pay off a credit card issuer that arbitrarily chose to double my finance charge to 20%. In spite of the taxes I incurred, the savings for me was a no brainer. I wouldn't use a 401k loan to pay off a home equity loan because the interest rates are so much less and I'm able to deduct my interest on the home equity loan.

 

[Todd Hochard]

On an actual "loan" from my 401k, there should be no taxes, according to the literature I just looked at. That, and the penalty, only comes into play if I default.

Thinking this over more, I may simply resume my unnecessarily-aggressive payoff schedule (I've paid it down 30% since we moved in in January, thanks to overtime), putting family-fun on the back burner, once more.

 

[Michael_K_Sr]

Todd, at least with my plan I'm not taxed upfront. But the money that I repaid back into the loan on 401k was not tax deferred. For my regular contributions to my account, I obviously am not taxed on that money. I forgot that I also took out a 401k loan years ago when I bought my first house. I used it as half my down payment and was able to avoid paying PMI because of it.

 

[Andrew W]

Don't be confused by the tax deferred contributions to your 401K account.

A loan from your 401K is a totally separate transaction.
You will pay back your loan with after tax dollars and the IRS requires that reasonable interest be paid on the loan. The good part is that you are paying the interest to yourself and it goes back into your retirement account along with the principle. In my case, the only money I was out was the $75 application fee.

Bear in mind, the loan will come from your vested funds and you could also be out the potential gain on the borrowed amount if it exceeds your interest rate.

Another thing, don't think you can get away with not paying it back. In that case, it WILL become a disbursment and you will be heavily taxed if you are not over 62 or whatever the retirement age is this month.

 

[ChristopherDAC]

It's better to be paying interest to yourself than to somebody else. Likewise, it's best to have your property as unencumbered as possible. I say do it; and try to pay yourself back as fast as you can.

 

[Todd Hochard]

Well, the part that I don't like is paying on 3.75% to myself. I'd honestly prefer it to be higher, closer to the "going" rate these days.

I'm going to have to sit down and work the math, and see if I end up ahead in five years.

 

[ChristopherDAC]

The lower the rate, the faster you can pay it off, and so the faster it gets back into more productive investments. Seriously, if you have the choice between throwing money down a hole in the ground [bank interest] and saving it up for your old age, it's pretty clear; besides which it improves your net asset position.

 

[Joe Szott]

Todd-

I wouldn't heap one snap (and maybe bad?) decision on top of another. From your post it seems you put a bunch of money into your 401k while your 2nd mortgage is stealing you blind. Here's a safer if not easier set of suggestions:

Back your 401k contributions off to a more minimum level (usually down to whatever your company will match). Take that extra cash and funnel it into your 2nd mortgage to start paying it off. This way what you have now in your 401k is secure from a loan default and you can take off the interest from 2nd mortgage from taxes in meantime. If worse comes to worst and you must declare bankruptcy (don't shirk this point, it happens) you can get out of an upside down house loan and they cannot touch your 401k. Otherwise, in the 401k loan scenario you outline you can lose your 401k savings and still have to go into bankruptcy. In a worst case scenario like this, leaving your 401k vulnerable is a bad choice.

or...

You can sell your home and get something more in the level you can comfortably afford. This is really a stop-gap against a possible housing bubble burst, you have to think about prices in your area to assess this point. But think of this: if your house lost 25% of its current value and you were out of a job, how bad of a crunch would that leave you in?