Advice: HELOC to repay 401K?

Question

Hey all,

First time homebuyer here looking for some advice.

I purchased first home last year using TSP funds (401k) for a down payment. My goal was to try to pay back the TSP within 5 years to start getting my ROI in my investments.

I recently learned of a HELOC loan/line of credit that may allow me to borrow against my equity. Assuming that I could apply and get approved, would it be beneficial to pay off the 401K loan to get my ROI faster?  I am open to any suggestions and can provide numbers if needed.

Thanks!

Andrew Garcia · Answer

@Aaron Miller, since you are okay with paying that rate long-term, a cash-out is probably better for you. That way, you lock in the rate without having to worry about the rate going up and up. However, ask the brokers you are shopping with to give you a side-by-side comparison.

I recommend using both a broker and shopping around. Each broker is priced differently so I would shop around with 3-4 different ones.

To properly shop, make sure you get rate quotes on the same day as rates change daily. Then, you will want to ensure you give each lender the exact same information. Finally, you want to ask for “par rate”. That means you will not pay any points to buy down the rate.

You do not need to fill out an entire application to get a rate quote. The lender only needs to ask you a few questions. You have 45 days from your initial credit pull to shop around with as many lenders as you would like without it hurting your credit.

Hope this helps! Let me know if I can be of any assistance or if you want to shop with me as one of the brokers.

Aaron Miller · Answer

Thanks all for the input!@Andrew Garcia I haven't put them side by side yet, but my ROI over the last year ranged from 4-30% in my 401K. Right now it's only getting 2.5% fixed until the loan is paid off, hence why I'd prefer to pay it now. If 5-6% is the historic high on HELOC, I'd also be okay with paying that long term and getting the ROI with 401K.

The plan has always been to pay it off faster, so it seems like a good choice.

Is it better to just use a broker to find one, or shop around independently?

Corby Goade · Answer

Good advice- just to piggyback on this- most variable rate HELOCs allow you to slice off a balance and begin amortization locked in at the current rate.  HELOCs are my favorite, no reason not to have one at the ready!

Andrew Garcia · Answer

Hi @Aaron Miller, it ultimately comes down to what kind of ROI you would get.

I would do a side-by-side comparison. HELOCs these days will run you between mid-4s and mid-5s most likely, depending on a few factors. As long as you get an ROI higher than that, you are essentially making free money.

I see HELOCs used more often with borrowers that know they will pay it back in a short period of time because adjustable-rate HELOCs have lower rates but they could ultimately cost more with the rising interest rates. There are also fixed-rate HELOCs but those come at higher rates.

Hope this helps! Let me know if I can be of any assistance.

Adam Sieg · Answer

We did the same thing except use a 401k loan to purchase a rental property. We were able to get a HELOC on our primary and I had similar questions - payback 401k or purchase real estate. I went real estate because that provided passive income that I could either continue to grow my portfolio or payback 401k. I’ve completely shifted my mindset about 401k and it’s value at retirement. I’m full steam ahead real estate.