New member and have a question on a real estate loan
Hi all - first time poster, and I have a question on best approach. For my current primary household, I used a 401K loan as a down payment. There's 36k remaining on the loan. I am currently putting an in-law suite addition on the house and using a home equity loan to do the reno; my question is should I pull out an additional 36k from our equity to repay the 401k?
Note: The 401K loan has to be repayed in full if I want to pay it off early, otherwise I have a scheduled $75 payment each pay period for the next 28 yrs.
#2 House Hacking Contributor
- Real Estate Agent
- Los Angeles, CA
It really comes down to the interest rate and what you could use that money for. Could the remaining balance of the HELOC go towards another appreciating asset?
@Michael White Welcome to BP. As @Rick Albert says it depends on the interest rate on the 401k loan. If it is a very low fixed rate i would keep that in place. Also the interest rate on the Heloc is a factor. I assume the interest on the HELOC is adjustable so it could go much higher. It doesn't make sense to pay off a low interest loan with a higher interest loan.
Hi @Michael White, it really depends on the interest on both loans.
I am assuming the HELOAN is for a 30-year term.
Since the difference in term is not that large, the interest rate will be the biggest factor.
If the interest rate is 9% on the HELOAN and 4% on the 401k loan, it's a no-brainer.
Hope this helps! Let me know if I can be of any assistance.
Quote from@Andrew Garcia:Hi @Michael White, it really depends on the interest on both loans.
I am assuming the HELOAN is for a 30-year term.
Since the difference in term is not that large, the interest rate will be the biggest factor.
If the interest rate is 9% on the HELOAN and 4% on the 401k loan, it's a no-brainer.
Hope this helps! Let me know if I can be of any assistance.
The interest rate on the 401k is lower. My thought process is two fold:
1. I can pay back the HELoan as quickly as I want in respect to the piece related to the 401k. This would offset the interest difference and give the flexibility to payoff as quickly as I want
2. I would have the opportunity to reinvest this money at a market low point and this is the big opportunity cost I feel I missing - 35k being invested and gaining over time
Basically I feel like the 401k loan is a loan type I should pay off asap to get that money back in the market and compounding
@Michael White maybe I am not understanding you. If you borrow money to pay off the existing loan, where does the money come from to reinvest elsewhere. If you borrow 36K to pay off $36k there is NO money left to reinvest! ! !
Basically I feel like the 401k loan is a loan type I should pay off asap to get that money back in the market and compounding
You have absolutely the wrong impression. If you pay off the 401k loan it is like investing that money at 4%. If you have $36K to pay off the 401k loan, do you want to invest that money at 4% by paying off the loan or can you find better ways to invest that money?
@Ned Carey yes I think there’s confusion. By get money back in the market I mean to say get the money back in my 401k by paying off the loan. I’m thinking the 401k loan is worse than the home equity loan because of the fixed repayment period (I cannot increase my payment) and because I could have that money in my retirement plan earning for me.
I understand that you could view this as borrowing at a high percent to invest and I agree that’s not a good approach, but the 401k loan is something I feel like I want to undo or correct- I also should note I would have to pay back in full if I wanted to leave my current job.
@Michael White
I think there’s confusion.
Yes big time confusion is on my side. I was thinking you had a 203K renovation loan. Obviously you meant you borrowed from you own 401K retirement account. That is a totally different situation and you can ignore my previous advice.