Home Equity Loan ? Still a Better Idea Than a 401(K) Loan

Anyone who borrows money is always looking for the cheapest source of funding. That makes sense; no one wants to pay more in interest than is absolutely necessary. And anyone with a sizeable amount of debt, such as credit card debt or a student loan, would be wise to consolidate their debt with a lower interest loan. One source of such a loan is a 401(K) account, which many consumers may have through their employer. Since the interest rate on Federal student loans rose on July 1, many students who missed that deadline may be wondering if consolidating through a 401(K) loan is a good alternative. Is it?

In a previous article, we have outlined several reasons why borrowing against a 401(K) account may be less favorable than using a home equity loan instead. The reasons include the fact that the interest on a 401(K) loan is not tax deductible, and that the borrower loses the ability for his or her investment to compound over time. If you have borrowed the money, it can't earn interest and the cost over twenty or thirty years could be dear. In addition to those, there are other reasons why a home equity loan would be a better source of consolidation funds.

The 401(K) loan is tempting. There is no credit check, the interest rate is usually favorable, and you are paying the interest back to yourself. The additional disadvantages are considerable, though. The money you borrow from your retirement account was money invested before taxes. The money you pay back is after-tax money, effectively increasing the amount that has to be paid back. Worse, should you lose your job, the 401(K) loan must be paid back immediately, in full. Should this not be possible, the loan is treated as a distribution, requiring the payment of a 10% penalty in addition to state and Federal taxes. With the job market still rather volatile, the additional risk of borrowing against a retirement account is substantial.

Borrowing against a tax-deferred retirement fund is rarely a good debt consolidation option. The tax disadvantages, the threat of penalties and immediate repayment and loss of compounding generally make such a loan a bad idea. Those with existing student loans should probably keep them; the interest is tax deductible and the rate is still lower than with most other consumer loans. For most anyone else, a home equity loan would be a better choice, offering deductible interest, fewer risks, and a fixed repayment schedule. Anyone considering a consolidation loan should consider all of these options carefully, as the cost of choosing poorly could be substantial.

©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including End-Your-Debt.com, a Website devoted to debt consolidation and credit counseling information and HomeEquityHelp.net, a site devoted to information on mortgages and home equity loans.

---

Securing a US Commercial Mortgage

What's the most efficient way to secure a US Commercial... Read More

Buying a Home With Poor Credit Is Easier Than Ever

Buying a home with poor credit is easier than ever... Read More

Mortgage Information

A mortgage is borrowing money using property as a security,... Read More

How Much Interest is Your Home Equity Earning?

How much interest are you earning on your home equity?... Read More

The Mortgage Loan Application Online - Save Time & Money By Applying On The Internet

"You can save time and money by applying for a... Read More

Essence of Self Certified Mortgages

Your search for a mortgage isn't leading results.Check for any... Read More

Home Buyers Face Decisions that Affect Their Long-Term Financial Picture

Taking the step for prospective home buyers.into home ownership is... Read More

Home Equity Loan ? Home Theater Adds Fun and Value

In days gone by, the family typically spent their evenings... Read More

What Are Home Equity Loans?

A home equity loan is simply borrowing on the difference... Read More

Home Loans ? Lenders Continue to Offer High-Risk Loans

Home prices in the Untied States continue to soar, and... Read More

Think You Cant Get a Mortgage?

You've finally found that dream home that you have always... Read More

Home Equity Line of Credit - Finding The Best Home Equity Lender

Borrowing against the value of your home using a revolving... Read More

Home Mortgage Loans For People With Bad Credit - 3 Ways To Improve Your Chances For Getting Approved

Finding home mortgage loans are a reality for people with... Read More

Homebuyers Loan Guide

If you are a homebuyer, there are a few points... Read More

Home Mortgage Loans - Fixed Rate, Adjustable or Balloon, Which One Is Right For You?

When you're shopping for a new home-especially for the first... Read More

Home Mortgages: How About Those 1.75% Loans?

You've undoubtedly heard or seen ads for mortgages with very... Read More

Bad Credit Loans Authenticate What Is Positive About Bad Credit

This might not be the front page news but it... Read More

California Refinance - Refinancing in California

The real estate market in California is booming. Home values... Read More

The Zero Down 80/20 Mortgage

This is an excellent loan for those that are lacking... Read More

Home Equity Line of Credit ? Great for Remodeling Projects

Many homeowners are lucky enough to find a house that... Read More

Sell Your Home and Invest at the Same Time

I continue to see the same For Sale signs in... Read More

Imagine Cutting Over $8,000 Off Your Mortgage This Year

I once helped a customer cut over $700 off his... Read More

10 Questions To Ask Your Mortgage Rep or Banke

This post is a must read for anyone considering purchasing... Read More

Refinancing Your Mortgage Can Really Save You Money

Refinancing a mortgage is simply taking out a new mortgage.... Read More

Refinance Mortgage Loan ? Tips on Refinancing Your Home Mortgage

Refinancing your home mortgage can come with some great perks.... Read More

Alternative Options For Rising Interest Rates

As interest rates have risen in the last six weeks... Read More

Mortgage ? What, Why, When, and How?

What is a mortgage? Here's what The New Merriam ?... Read More

No Fee Mortgages Coming Soon

Buying a home, especially for the first time, can be... Read More

Say Yes to ISA Mortgages for a Convenient Mortgage Repayment

Customers who opt for an interest only mortgage, and feel... Read More

Choosing The Right Mortgage For You

This article will help you understand the differences between a... Read More

Home Loans For People With Poor Credit - Understanding The Requirements For a Subprime Mortgage

Home loans for people with poor credit demand that you... Read More

Poor Credit Home Mortgage Loans - The Role of the FICO Score

If you have bad credit history and are looking to... Read More

What the Bank Won?t Tell You About Mortgage Refinancing

So you have a mortgage, and you need to refinance... Read More