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HELOC vs 401k loan
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Not really sure why I feel confused on these.

Situation have Cash(soon(Dec - Jan ish) a kitchen remodel will drain to near zero), kid in college doing FAFSA so cash on hand is bad. But will need cash to pay for part of tuition bill possibly, but may also need cash for expenses. Have no mortgage.

Thinking HELOC is the way to go, was going to wait till I need cash to apply (to use the low intro rate as much as possible) keep cash on hand to minimum. Although once we do FAFSA app, the cash on hand wont matter till next oct - jan time frame when we play this game again.

Downside's of a HELOC? other way to get a $10k to maybe $20k loan thats better than a HELOC?

Hmmm (I have 1/3 of my 401k in an income fund right (closest to cash I could do) now maybe taking $10k out in a 401k loan then I am paying myself (not sure the interest rate, but thinking its higher than what the income fund will make (about 1-2%) I bet that has lower to no fees vs a HELOC. Now I cant draw more as needed like the HELOC, but the HELOC would still be on the table if I needed more. (changed subject line) Guess I need to look into terms of a 401k loan. how long are they etc.

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
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Re: HELOC vs 401k loan [DavHamm] [ In reply to ]
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If it's a true 401k loan, hands down that IMHO

Term is adjustable. Depends on your plan, but usually a couple months up to maybe 3 years. Don't remember exact rules, but there are regular terms, then terms for house down payments.
Fees depend on your plan, but usually less than $200.
The interest you pay goes back into your 401k.
You do miss out on the interest the principal makes, usually. But the difference between what you would make and what you would pay yourself is going to be much better than what you pay a bank in APR - cause if your making a huge return on your 401k you wouldn't be asking ;)
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Re: HELOC vs 401k loan [scorpio516] [ In reply to ]
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scorpio516 wrote:
If it's a true 401k loan, hands down that IMHO

Term is adjustable. Depends on your plan, but usually a couple months up to maybe 3 years. Don't remember exact rules, but there are regular terms, then terms for house down payments.
Fees depend on your plan, but usually less than $200.
The interest you pay goes back into your 401k.
You do miss out on the interest the principal makes, usually. But the difference between what you would make and what you would pay yourself is going to be much better than what you pay a bank in APR - cause if your making a huge return on your 401k you wouldn't be asking ;)

Yeah, as I look into the 401K loan it is looking like the no brainer, can not find my plans fee yet, terms can go up to 5yrs. interest is 5.25% which is higher than the money I would pull out (yes it all comes from the same place, but I will rebalance to adjust for that withdrawl so that in effect it comes out of the money I have in an income fund (safe and makes about 2% a year)

overall my 401k is up about 7% after the correction the past 2 days. (but I would pull this out of the cash portion so my overall return is not really relevant)

About the only downside, is I have to pay it back if I lose my job, don't think thats happen soon, but how many do ...

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
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Re: HELOC vs 401k loan [DavHamm] [ In reply to ]
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DavHamm wrote:
About the only downside, is I have to pay it back if I lose my job, don't think thats happen soon, but how many do ...

I had that happen. Kinda. Laid off during the recession with owing a couple hundred to a 401k loan - employer paid it off as part of my severance.
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Re: HELOC vs 401k loan [DavHamm] [ In reply to ]
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If you are only looking at maybe $10k target level why not sign up for a credit card offer with the "no interest" promotion and just pay it off before the interest kicks in? There are pleny of 12-18 month offers on new card members out there. Chalk up the fee for fronting the money for balance transfers or writing yourself a check would be on the only cost of the loan if you pay it off before the promo period ends (usually 3-5% fee on total amount fronted).

Or even better one with the same promos that apply to purchases too that don't charge fees on said regular purchases during the promo period. That way you can buy all your appliances and materials in advance then get to work (we are talking flooring, cabinets, countertops, paint, trim,etc). You would be spending more time planning up front to make the purchases right away though and storage of the items might be problematic but could save money compared to the interest on a loan potentially.
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Re: HELOC vs 401k loan [loxx0050] [ In reply to ]
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loxx0050 wrote:
If you are only looking at maybe $10k target level why not sign up for a credit card offer with the "no interest" promotion and just pay it off before the interest kicks in? There are pleny of 12-18 month offers on new card members out there. Chalk up the fee for fronting the money for balance transfers or writing yourself a check would be on the only cost of the loan if you pay it off before the promo period ends (usually 3-5% fee on total amount fronted).

Or even better one with the same promos that apply to purchases too that don't charge fees on said regular purchases during the promo period. That way you can buy all your appliances and materials in advance then get to work (we are talking flooring, cabinets, countertops, paint, trim,etc). You would be spending more time planning up front to make the purchases right away though and storage of the items might be problematic but could save money compared to the interest on a loan potentially.

x2. I get offers from all my CC issuers regularly for 0% APR for promo periods of up to 18 months on good chunks of change. Barclays just mailed me one for 25K or so.
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Re: HELOC vs 401k loan [DavHamm] [ In reply to ]
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I've looked at 401k loans before and the one thing that always steers me away is the repayment with post-tax money.

If it's a traditional 401k, you are withdrawing pre-tax contributions, but will re-pay with post-tax income. So that $10k loan = $10k + ($10k of income tax) + (lost growth - interest)
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Re: HELOC vs 401k loan [loxx0050] [ In reply to ]
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loxx0050 wrote:
If you are only looking at maybe $10k target level why not sign up for a credit card offer with the "no interest" promotion and just pay it off before the interest kicks in? There are pleny of 12-18 month offers on new card members out there. Chalk up the fee for fronting the money for balance transfers or writing yourself a check would be on the only cost of the loan if you pay it off before the promo period ends (usually 3-5% fee on total amount fronted).

Or even better one with the same promos that apply to purchases too that don't charge fees on said regular purchases during the promo period. That way you can buy all your appliances and materials in advance then get to work (we are talking flooring, cabinets, countertops, paint, trim,etc). You would be spending more time planning up front to make the purchases right away though and storage of the items might be problematic but could save money compared to the interest on a loan potentially.

I don't get those kind of offers
I need a longer payback then 1 yr
Don't see why I would pay someone else when I can pay mayself, and make a better APR than I was going to at a lower risk.

I need to eliminate the Cash I have on hand. All the things you mention are coming out of my cash. Its the bills and shit in the following months that I will need new cash to pay for.

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
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Re: HELOC vs 401k loan [SailorSam] [ In reply to ]
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SailorSam wrote:
loxx0050 wrote:
If you are only looking at maybe $10k target level why not sign up for a credit card offer with the "no interest" promotion and just pay it off before the interest kicks in? There are pleny of 12-18 month offers on new card members out there. Chalk up the fee for fronting the money for balance transfers or writing yourself a check would be on the only cost of the loan if you pay it off before the promo period ends (usually 3-5% fee on total amount fronted).

Or even better one with the same promos that apply to purchases too that don't charge fees on said regular purchases during the promo period. That way you can buy all your appliances and materials in advance then get to work (we are talking flooring, cabinets, countertops, paint, trim,etc). You would be spending more time planning up front to make the purchases right away though and storage of the items might be problematic but could save money compared to the interest on a loan potentially.


x2. I get offers from all my CC issuers regularly for 0% APR for promo periods of up to 18 months on good chunks of change. Barclays just mailed me one for 25K or so.

Guess I am in a different marketing space then you I don't get those, but I need a longer term than that and doing a 401k loan will be at effectively a -3% interest rate with lower risk (the money in the income fund would have made 1 - 3% instead the loan will make 5.25%)

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
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Re: HELOC vs 401k loan [GREG_n_SD] [ In reply to ]
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GREG_n_SD wrote:
I've looked at 401k loans before and the one thing that always steers me away is the repayment with post-tax money.

If it's a traditional 401k, you are withdrawing pre-tax contributions, but will re-pay with post-tax income. So that $10k loan = $10k + ($10k of income tax) + (lost growth - interest)

Not following.

I take 10K out (without taxes) and I put back 10K + intrest (not investment in 401k is turning about 1 - 3% I will pay it back at 5.25% so positive growth not negative) I don't get your point on taxes as its all the same either loan will be paid with taxed money and the money in the 401k is without taxes.

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
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Re: HELOC vs 401k loan [DavHamm] [ In reply to ]
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I see your point. That makes sense regarding tax. Not sure why in the past that was part of my equation.

I do think you are mis-calculating the cost of the loan though.

You may only be getting 3% per year, but over say 2 years that’s $600 of lost earnings.

You are now paying yourself 5.25% interest over 2 years. That’s $555 interest. You will earn $335 at 3% as that is repaid.

The actual cost of the original $10k is the lost earnings ($600) + interest paid ($555) - repayment growth ($335) = $820 which is essentially a 7.7% interest rate.

Make sense?

I just read some 401k plans will not allow you to contribute when you take a loan so if that’s the case for yours, you’d want to add that into the opportunity cost as well if it applies to you.
Last edited by: GREG_n_SD: Oct 15, 18 19:58
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Re: HELOC vs 401k loan [GREG_n_SD] [ In reply to ]
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GREG_n_SD wrote:
I see your point. That makes sense regarding tax. Not sure why in the past that was part of my equation.

I do think you are mis-calculating the cost of the loan though.

You may only be getting 3% per year, but over say 2 years that’s $600 of lost earnings.

You are now paying yourself 5.25% interest over 2 years. That’s $555 interest. You will earn $335 at 3% as that is repaid.

The actual cost of the original $10k is the lost earnings ($600) + interest paid ($555) - repayment growth ($335) = $820 which is essentially a 7.7% interest rate.

Make sense?

I just read some 401k plans will not allow you to contribute when you take a loan so if that’s the case for yours, you’d want to add that into the opportunity cost as well if it applies to you.


HUH? I think you have some bad math, when 3% is more than 5.25% Seems you looked at 10,000 over 2 yrs at 3% and then looked at a loan table at 5.25% well If I am paying back, then the 3% loss is not over the whole 2 yrs as the payments - Principle and intrest will be going into the that 3% loan, so the full 10K will only be out for 2 weeks. so If your using amortization tables you need to use them on both sides of the equation.

How is the interest paid a loss or cost its my money that I am giving to myself, the only loss would be the difference in the potential earnings vs the intrest rate. Which since I have money out of the market in cash its return is small 1 - 3% and the interest is 5.25 So It's a positive result. my 401k plan even has an online calculator and it shows as a net positive.

Think of it like this if I had 10K in the account, and it made 3% a year after a year there is 10,300 instead I loan myself the money, and make one payment at the end of the year at 5.25 i end the year with 10,525. (now that 525 is mine not truth growth but since I would be taking a loan anyhow normally I would lose that 525. instead I lost the $300. Net gain 225.

No I can continue to contribute with a loan. Not sure cause I really can't follow but I think the interest paid since its going into the account is a neg in your equation.

EDIT - can someone else who is not looking at this at 1 in the morning when they should be sleeping straighten this mess out.

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
Last edited by: DavHamm: Oct 15, 18 21:55
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Re: HELOC vs 401k loan [GREG_n_SD] [ In reply to ]
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I think the easiest way to do this is run 2 scenarios.
Start with 10K in the 401k making 2% (compounded monthly)

1) leave 401k alone take 10K loan outside, for ease say 2 yr payback so I pay $556 in interest.
end of 2 yrs. ---- 10,408 in 401k negative $556 in savings (had to pay the interest on the loan)
So over the 2 yrs I lost $148

2) take 10K from 401k
End of 2yrs --- neg 556 in savings (having had to pay loan) -- $10,765 in 401k (439.83 monthly contributions at 2%)

So over the 2 yrs I end up positive $209.

Net gain between the 2 scenarios -- $357

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
Last edited by: DavHamm: Oct 15, 18 22:09
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Re: HELOC vs 401k loan [DavHamm] [ In reply to ]
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Could somebody actually confirm that 401k loans are paid back with taxed money and if it is retaxed when withdrawals happen in retirement? This has always been my belief, but why would anybody ever get a loan like that? It’s an effective 20+% loan not to mention the interest or gains (or worse loses) on money lost over time Also, remember that the repayment is amortization schedule, so 3.5 on the loan is less interest than 3% on a return of the entire amount.
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Re: HELOC vs 401k loan [DavHamm] [ In reply to ]
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DavHamm wrote:
GREG_n_SD wrote:
I see your point. That makes sense regarding tax. Not sure why in the past that was part of my equation.

I do think you are mis-calculating the cost of the loan though.

You may only be getting 3% per year, but over say 2 years that’s $600 of lost earnings.

You are now paying yourself 5.25% interest over 2 years. That’s $555 interest. You will earn $335 at 3% as that is repaid.

The actual cost of the original $10k is the lost earnings ($600) + interest paid ($555) - repayment growth ($335) = $820 which is essentially a 7.7% interest rate.

Make sense?

I just read some 401k plans will not allow you to contribute when you take a loan so if that’s the case for yours, you’d want to add that into the opportunity cost as well if it applies to you.


HUH? I think you have some bad math, when 3% is more than 5.25% Seems you looked at 10,000 over 2 yrs at 3% and then looked at a loan table at 5.25% well If I am paying back, then the 3% loss is not over the whole 2 yrs as the payments - Principle and intrest will be going into the that 3% loan, so the full 10K will only be out for 2 weeks. so If your using amortization tables you need to use them on both sides of the equation.

How is the interest paid a loss or cost its my money that I am giving to myself, the only loss would be the difference in the potential earnings vs the intrest rate. Which since I have money out of the market in cash its return is small 1 - 3% and the interest is 5.25 So It's a positive result. my 401k plan even has an online calculator and it shows as a net positive.

Think of it like this if I had 10K in the account, and it made 3% a year after a year there is 10,300 instead I loan myself the money, and make one payment at the end of the year at 5.25 i end the year with 10,525. (now that 525 is mine not truth growth but since I would be taking a loan anyhow normally I would lose that 525. instead I lost the $300. Net gain 225.

No I can continue to contribute with a loan. Not sure cause I really can't follow but I think the interest paid since its going into the account is a neg in your equation.

EDIT - can someone else who is not looking at this at 1 in the morning when they should be sleeping straighten this mess out.

It’s 2 years, so roughly $10,600 or 10,000*(1+.03 )^2

And you’re right, you’re repaying yourself $556, but it doesn’t change the fact you lost earnings on the 10k.
If it really is 1 year, it’s so little difference I’d say do whatever is easiest but a longer repayment or if you were earning more on your 401k it would be a much greater cost.
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Re: HELOC vs 401k loan [Litemike] [ In reply to ]
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Litemike wrote:
Could somebody actually confirm that 401k loans are paid back with taxed money and if it is retaxed when withdrawals happen in retirement? This has always been my belief, but why would anybody ever get a loan like that? It’s an effective 20+% loan not to mention the interest or gains (or worse loses) on money lost over time Also, remember that the repayment is amortization schedule, so 3.5 on the loan is less interest than 3% on a return of the entire amount.

Again with the taxes... You borrow say $10k (untaxed money and put it back, its then taxed when you remove it) Yes the money you put back has come from an untaxed source but the original source of the $10k is untaxed and stays that way. Not sure why this seems to be an issue.

The only part you could make a claim of double taxed is the growth of the $10k while it is loaned out. as that money Say $600 will be taxed on withdrawl, and yes you paid it back with taxed money.

I guess if you see this an issue could you please do 2 examples 1 taking the loan from the bank vs 1 taking the loan from your 401k and do some simple 10% tax rate impacts to show why this is such a horrible idea? Every time I run things I come out ahead by being my own bank and taking the loan out from the 401k. Please show me what I am missing.

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
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Re: HELOC vs 401k loan [GREG_n_SD] [ In reply to ]
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GREG_n_SD wrote:
DavHamm wrote:
GREG_n_SD wrote:
I see your point. That makes sense regarding tax. Not sure why in the past that was part of my equation.

I do think you are mis-calculating the cost of the loan though.

You may only be getting 3% per year, but over say 2 years that’s $600 of lost earnings.

You are now paying yourself 5.25% interest over 2 years. That’s $555 interest. You will earn $335 at 3% as that is repaid.

The actual cost of the original $10k is the lost earnings ($600) + interest paid ($555) - repayment growth ($335) = $820 which is essentially a 7.7% interest rate.

Make sense?

I just read some 401k plans will not allow you to contribute when you take a loan so if that’s the case for yours, you’d want to add that into the opportunity cost as well if it applies to you.


HUH? I think you have some bad math, when 3% is more than 5.25% Seems you looked at 10,000 over 2 yrs at 3% and then looked at a loan table at 5.25% well If I am paying back, then the 3% loss is not over the whole 2 yrs as the payments - Principle and intrest will be going into the that 3% loan, so the full 10K will only be out for 2 weeks. so If your using amortization tables you need to use them on both sides of the equation.

How is the interest paid a loss or cost its my money that I am giving to myself, the only loss would be the difference in the potential earnings vs the intrest rate. Which since I have money out of the market in cash its return is small 1 - 3% and the interest is 5.25 So It's a positive result. my 401k plan even has an online calculator and it shows as a net positive.

Think of it like this if I had 10K in the account, and it made 3% a year after a year there is 10,300 instead I loan myself the money, and make one payment at the end of the year at 5.25 i end the year with 10,525. (now that 525 is mine not truth growth but since I would be taking a loan anyhow normally I would lose that 525. instead I lost the $300. Net gain 225.

No I can continue to contribute with a loan. Not sure cause I really can't follow but I think the interest paid since its going into the account is a neg in your equation.

EDIT - can someone else who is not looking at this at 1 in the morning when they should be sleeping straighten this mess out.


It’s 2 years, so roughly $10,600 or 10,000*(1+.03 )^2

And you’re right, you’re repaying yourself $556, but it doesn’t change the fact you lost earnings on the 10k.
If it really is 1 year, it’s so little difference I’d say do whatever is easiest but a longer repayment or if you were earning more on your 401k it would be a much greater cost.

Look at my example in the next post. I think I did all the math right there. Yes the reason this is a no brainer for me is I have a % of my money in a cash like investment so while I have 70% in the market I have 30% sort of safe with a low return. This is going to allow me to put some of that even safer and with a higher return. Yeah if it were 4 months ago when I was all in the market the opportunity cost (COULD) be high. But since I met my numbers and are within 10yrs of retirement I parked some into cash, and this loan makes complete sense to me.

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
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Re: HELOC vs 401k loan [DavHamm] [ In reply to ]
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DavHamm wrote:
I think the easiest way to do this is run 2 scenarios.
Start with 10K in the 401k making 2% (compounded monthly)

1) leave 401k alone take 10K loan outside, for ease say 2 yr payback so I pay $556 in interest.
end of 2 yrs. ---- 10,408 in 401k negative $556 in savings (had to pay the interest on the loan)
So over the 2 yrs I lost $148

2) take 10K from 401k
End of 2yrs --- neg 556 in savings (having had to pay loan) -- $10,765 in 401k (439.83 monthly contributions at 2%)

So over the 2 yrs I end up positive $209.

Net gain between the 2 scenarios -- $357

Ok, lets look at the tax implications... Lets say I cash out 401k after 2nd year and am in the 30% tax bracket (I wish)

Scenario 1) 30% tax on $10,408 I pay 3,122.40 in tax so I now have $7,285.60 and my neg savings of $556 which has no tax impact. Net - $6,729.6
Scenario 2) 30% tax on $10,765 I pay 3,229.50 in tax so I now have $7,535.50 and my neg savings of $556 which has no tax impact. Net - $6,979.5

I still see the 401k loan as the advantage even after looking at taxes. What am I doing wrong? or others just making it sound more complicated than it really is?

Just Triing
Triathlete since 9:56:39 AM EST Aug 20, 2006.
Be kind English is my 2nd language. My primary language is Dave it's a unique evolution of English.
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