Home Equity Line vs borrowing from 401K vs personal loan

[Royale with Cheese]

So I'm looking to buy a project house...smaller but I want to add to it.  I want to add around 500 sq ft and there's plenty of room for that.

 

I've been told to borrow money from your 401K for a loan, you won't be penalized and you just payback what you took out.  But, there's no interest.

 

Home Equity Line, if the bubble pops...would that put me in a huge hole?

 

I've never taken out a personal loan so I have no idea the years or interest rate on them.

 

I'm going to be putting roughly $35,000 - $40,000 in renovations/additions in the house.

 

What would be my best financial plan?

[teef]

9 minutes ago, Royale with Cheese said:

So I'm looking to buy a project house...smaller but I want to add to it.  I want to add around 500 sq ft and there's plenty of room for that.

 

I've been told to borrow money from your 401K for a loan, you won't be penalized and you just payback what you took out.  But, there's no interest.

 

Home Equity Line, if the bubble pops...would that put me in a huge hole?

 

I've never taken out a personal loan so I have no idea the years or interest rate on them.

 

I'm going to be putting roughly $35,000 - $40,000 in renovations/additions in the house.

 

What would be my best financial plan?

the 401 k loan may be the way to go.  i want to say one of my assistants borrowed off of it recently, and it went smoothly.  i don't remember the stipulations though.  i may be a max amount like 40k, or it may be a percentage of the total amount.  as you said there's no penalty to take out, and no interest, but i think there's a 5 year term to pay back.  i don't remember the specifics, but it sounded like a good deal.  i'm meeting with my financial guy in 2 days, so i'll get clarification.

 

home equity lines are nice to have if you ever need them.  i assume it would be a fix rate based on the times and a personal financial statement.  

 

 

i'd probably go with no interest if i could.

[sherpa]

First, find out if your 401k plan allows it.

Many do not.

That aside, you have not provided near enough information to arrive at a considered conclusion.

What is your payback time?

What is the value you might add to this project worth?

Is your personal status OK to afford either option?

[Royale with Cheese]

7 minutes ago, teef said:

the 401 k loan may be the way to go.  i want to say one of my assistants borrowed off of it recently, and it went smoothly.  i don't remember the stipulations though.  i may be a max amount like 40k, or it may be a percentage of the total amount.  as you said there's no penalty to take out, and no interest, but i think there's a 5 year term to pay back.  i don't remember the specifics, but it sounded like a good deal.  i'm meeting with my financial guy in 2 days, so i'll get clarification.

 

home equity lines are nice to have if you ever need them.  i assume it would be a fix rate based on the times and a personal financial statement.  

 

 

i'd probably go with no interest if i could.

 

I was told by a Finance guy that I can borrow up to 50% and they'll deduct straight from my paycheck.

[Royale with Cheese]

6 minutes ago, sherpa said:

First, find out if your 401k plan allows it.

Many do not.

That aside, you have not provided near enough information to arrive at a considered conclusion.

What is your payback time?

What is the value you might add to this project worth?

Is your personal status OK to afford either option?

 

I'm in the very early stages.  My offer was just approved...just waiting for the appraisal.

[teef]

19 minutes ago, Royale with Cheese said:

 

I was told by a Finance guy that I can borrow up to 50% and they'll deduct straight from my paycheck.

how long do you have to pay it back?

[Royale with Cheese]

4 minutes ago, teef said:

how long do you have to pay it back?

15 days.

[Augie]

51 minutes ago, teef said:

the 401 k loan may be the way to go.  i want to say one of my assistants borrowed off of it recently, and it went smoothly.  i don't remember the stipulations though.  i may be a max amount like 40k, or it may be a percentage of the total amount.  as you said there's no penalty to take out, and no interest, but i think there's a 5 year term to pay back.  i don't remember the specifics, but it sounded like a good deal.  i'm meeting with my financial guy in 2 days, so i'll get clarification.

 

home equity lines are nice to have if you ever need them.  i assume it would be a fix rate based on the times and a personal financial statement.  

 

 

i'd probably go with no interest if i could.

 

I know NOTHING about 401K loans but I used to do a lot of second mortgage financing. A HELOC (home equity line of credit) will be a variable rate because the line will be out there usually for 20 years and the bank doesn’t want an in-house loans with fixed rates lines of credit that long. If it’s a term loan at a fixed amount for a fixed number of years, they can adjust their balance sheet accordingly. But if you got a line of credit now at say 5%, you could wait 10-15 years until the bank is paying 8%-12% on CD’s or money markets and draw your line fully down to put it back in the bank at a higher rate. Banks don’t like that idea. 

 

We had HELOC’s for many years, just in case an opportunity comes up and you need quick access to funds without moving things around. If you have enough equity banks (or credit unions, don’t forget them!) will usually pay all your closing costs and hope you draw on it at some point. It’s nice to have out there just in case. 

 

Our last HELOC was from a credit union not far from where @Royale with Cheese lives and might be nice to have, regardless of what path you take on this deal. I believe the interest is still generally tax deductible too, so there’s that. And rates are crazy low. 

 

Good luck figuring out the best option and with the whole process. 

[teef]

30 minutes ago, Augie said:

 

I know NOTHING about 401K loans but I used to do a lot of second mortgage financing. A HELOC (home equity line of credit) will be a variable rate because the line will be out there usually for 20 years and the bank doesn’t want an in-house loans with fixed rates lines of credit that long. If it’s a term loan at a fixed amount for a fixed number of years, they can adjust their balance sheet accordingly. But if you got a line of credit now at say 5%, you could wait 10-15 years until the bank is paying 8%-12% on CD’s or money markets and draw your line fully down to put it back in the bank at a higher rate. Banks don’t like that idea. 

 

We had HELOC’s for many years, just in case an opportunity comes up and you need quick access to funds without moving things around. If you have enough equity banks (or credit unions, don’t forget them!) will usually pay all your closing costs and hope you draw on it at some point. It’s nice to have out there just in case. 

 

Our last HELOC was from a credit union not far from where @Royale with Cheese lives and might be nice to have, regardless of what path you take on this deal. I believe the interest is still generally tax deductible too, so there’s that. And rates are crazy low. 

 

Good luck figuring out the best option and with the whole process. 

this makes a lot of sense.  we took one out HELOC when we bought our most recent house to avoid a jumbo loan and keep the rates low.  i want to say ours was a fixed rate, but i don't remember the terms because we paid it off quickly.  it was always explained to me that it was just good to have one if the need ever arises.  i'm in the paying off debt portion of my life, so unless our kitchen costs more than i want it to, no more loans.  we're in the process of refinancing our mortgage to a 10 year to take advantage of the rates now, (which are going up apparently).

1 hour ago, Royale with Cheese said:

15 days.

is this a loan shark type situation?

[Augie]

8 minutes ago, teef said:

this makes a lot of sense.  we took one out HELOC when we bought our most recent house to avoid a jumbo loan and keep the rates low.  i want to say ours was a fixed rate, but i don't remember the terms because we paid it off quickly.  it was always explained to me that it was just good to have one if the need ever arises.  i'm in the paying off debt portion of my life, so unless our kitchen costs more than i want it to, no more loans.  we're in the process of refinancing our mortgage to a 10 year to take advantage of the rates now, (which are going up apparently).

is this a loan shark type situation?

 

The house we just bought was with a 30 year loan, fixed for the first 15 years under 3%. A month after closing we were allowed to pay it down by about half after selling two other properties and adjust the monthly payment. The money is so cheap I hated to pay it down, but we too hate debt. It’s the only debt we have, and we will just pay it off before my wife retires. As much as we hate debt, it just feels wrong not to borrow some of this stupidly cheap money! 

[Royale with Cheese]

1 hour ago, teef said:

is this a loan shark type situation?

 

His name is Grandma.

1 hour ago, Augie said:

 

The house we just bought was with a 30 year loan, fixed for the first 15 years under 3%. A month after closing we were allowed to pay it down by about half after selling two other properties and adjust the monthly payment. The money is so cheap I hated to pay it down, but we too hate debt. It’s the only debt we have, and we will just pay it off before my wife retires. As much as we hate debt, it just feels wrong not to borrow some of this stupidly cheap money! 

 

You have to wait 6 months minimum for a HELOC now.

[Augie]

11 minutes ago, Royale with Cheese said:

 

His name is Grandma.

 

You have to wait 6 months minimum for a HELOC now.

 

Is this a rule of some sort, or just an inability to get thru processing. We used to process and close  them at same time. It’s the most efficient way to do it BY FAR if you have enough equity. Current appraisal, current title exam, survey, etc.

 

On our recent purchase in December we used a guy in NJ (again) who just steamrolled everything thru. 

 

EDIT: There used to be a government program we used on a house we flipped. I think it was a 203k? You get the purchase money financed and funds for renovations are included that you can get on draws, just like a new construction loan. Might be worth a Google search and asking a mortgage broker if it’s still around. Not everybody handled them, but it was perfect for our situation. 

 

 

.

Edited January 26, 2022 by Augie

[Royale with Cheese]

Just now, Augie said:

 

Is this a rule of some sort, or just an inability to get thru processing. We used to process and close  them at same time. It’s the most efficient way to do it BY FAR if you have enough equity. Current appraisal, current title exam, survey, etc.

 

On our recent purchase in December we used a guy in NJ (again) who just steamrolled everything thru. 

New rule that just implemented recently.

 

With how fast everything is going up, should have plenty.  My boss bought a house last year and his Real Estate agent said if they want to sell…let her know.  She would list it for $180,000 more than what they bought for…after 14 months.

[Augie]

14 minutes ago, Royale with Cheese said:

New rule that just implemented recently.

 

With how fast everything is going up, should have plenty.  My boss bought a house last year and his Real Estate agent said if they want to sell…let her know.  She would list it for $180,000 more than what they bought for…after 14 months.

 

This is part of why I was glad to buy one house (for what they paid 3-4 years ago before it was ever publicly listed) and sell TWO other properties at the same time. It’s insane right now!

 

I looked at our last two neighborhoods in Florida a couple months ago. Out of more than a THOUSAND houses, there was only one active listing. “Sure, ask anything you want!” CRAZY! It’s up to maybe a half dozen now. Yay. 

 

This is unsustainable. It feels like 2004-2005. Then came 2006. You couldn’t GIVE real estate away. If you Google real estate cycles, you are likely to come across articles saying about 18 years. You can do the math. I’m not trying to scare you, but when a college buddy I hadn’t heard from in years called me from Boston in 2005 asking about pre-construction condos in a dumpy part of Florida he had never been to, I knew we were in trouble. 

 

My hope is for an adjustment so I can afford a place back in Sarasota in a few years when things normalize. 

[Royale with Cheese]

45 minutes ago, Augie said:

 

This is part of why I was glad to buy one house (for what they paid 3-4 years ago before it was ever publicly listed) and sell TWO other properties at the same time. It’s insane right now!

 

I looked at our last two neighborhoods in Florida a couple months ago. Out of more than a THOUSAND houses, there was only one active listing. “Sure, ask anything you want!” CRAZY! It’s up to maybe a half dozen now. Yay. 

 

This is unsustainable. It feels like 2004-2005. Then came 2006. You couldn’t GIVE real estate away. If you Google real estate cycles, you are likely to come across articles saying about 18 years. You can do the math. I’m not trying to scare you, but when a college buddy I hadn’t heard from in years called me from Boston in 2005 asking about pre-construction condos in a dumpy part of Florida he had never been to, I knew we were in trouble. 

 

My hope is for an adjustment so I can afford a place back in Sarasota in a few years when things normalize. 

 

It's why I'm keeping my townhouse.  I was gonna sell it but the rental market is insane too.  I will make an additional $600-$700 a month on top of my mortgage.  I've only lived here for 18 months.  I'm going to be aggressive paying this place off to get straight net profit from renters.

[Nextmanup]

5 hours ago, Royale with Cheese said:

 

I was told by a Finance guy that I can borrow up to 50% and they'll deduct straight from my paycheck.

Don't go by what a financial institution will loan you!

 

That is almost certainly a lot more than you can afford...or at least it might be.

 

Figure out if you can afford all of this first and I personally wouldn't finance big project like this unless I had some cash to contribute to it.  I wouldn't want to finance the whole thing.

 

 

[Augie]

29 minutes ago, Nextmanup said:

Don't go by what a financial institution will loan you!

 

That is almost certainly a lot more than you can afford...or at least it might be.

 

Figure out if you can afford all of this first and I personally wouldn't finance big project like this unless I had some cash to contribute to it.  I wouldn't want to finance the whole thing.

 

 

 

I agree with the bolded part. I remember the early 90’s when we would lend to a restauranteur to buy a $500K house in Hilton Head (a lot of money now, a LOT of money then) because we knew we could sell the loan without recourse. I wouldn’t lend this guy money to buy a used car, but we could lend him money for that house. He never made the first payment, but it took years to get him out. It wasn’t our problem, because the loan was sold, then resold. The lender gets paid for that deal, then moves on. Some are not looking out for your best interests. 

 

The question went from “will we get our money back” to “can we sell it before it goes bad”? It all went downhill from there. And that loan is sitting in your pension fund.

 

I have no idea what he can or cannot afford, or what the market will do going forward. I just hope everyone does their due diligence and doesn’t swing for the fences too often.  Being a contrarian rather than a follower can be helpful at times.  

 

Our son and DIL bought their first house in the last year. We warned them and they are fully aware that they are looking at a 5 year minimum window and do NOT freak out if there is a bit of a dip coming up. But they weren’t looking to make a profit, they wanted a home with a yard to start a family. We used to view our home as our largest asset and only invested in ways that would maximize that. Now? We do what we want to the place we live and if it doesn’t yield the best return, at least we got to enjoy it. 

[Gugny]

In theory, the 401K loan is best, because you're paying yourself back with interest.

 

I've done it in the past, multiple times, and it was quick and easy.

 

The caveat, here, is knowing your job stability.  I was laid off with an outstanding loan balance.  That loan suddenly turned into taxable income that was also subject to penalties because it also changed from "loan" to "withdrawal."

 

When Uncle Sam came knocking, it was not pretty ... at all.

 

 

[Tiberius]

14 hours ago, Augie said:

 

This is part of why I was glad to buy one house (for what they paid 3-4 years ago before it was ever publicly listed) and sell TWO other properties at the same time. It’s insane right now!

 

I looked at our last two neighborhoods in Florida a couple months ago. Out of more than a THOUSAND houses, there was only one active listing. “Sure, ask anything you want!” CRAZY! It’s up to maybe a half dozen now. Yay. 

 

This is unsustainable. It feels like 2004-2005. Then came 2006. You couldn’t GIVE real estate away. If you Google real estate cycles, you are likely to come across articles saying about 18 years. You can do the math. I’m not trying to scare you, but when a college buddy I hadn’t heard from in years called me from Boston in 2005 asking about pre-construction condos in a dumpy part of Florida he had never been to, I knew we were in trouble. 

 

My hope is for an adjustment so I can afford a place back in Sarasota in a few years when things normalize. 

I know when people say, "But this time is different!" The bottom usually falls out. But it seems to me that the housing situation now is actually demand driven as population has really shot up. Not that I have skin in the game on this, just wondering what you thought.

[SoTier]

Borrowing from your 401k isn't really a "no interest" loan.   You may not pay interest to the bank and you may not be penalized by the government for borrowing the money from your 401k, but whatever amount you borrow will not be growing tax free in your 401k account, including not compounding.  If you have your retirement funds in bonds, money market accounts or CDs, you probably aren't going to lose too much if you pay back your loan eventually but if you invest in stocks you're likely going to pay a really high cost for that supposed "no interest" loan.

 

I'm retired now with a more conservative stock portfolio than I had when I was working, but my 403b (a 401k for public employees) returned 12.9% last year.  Since the economy turned around about 2011 or so, I've had at least 10+% returns every year and a couple of years of more than 20% returns even though I've been withdrawing various amounts from it since I retired in 2016.   I don't know how you are invested, but for myself, I would be unwilling to give up earning $5,000 on $50,000 a year in order to avoid paying a 3-5% a year in interest. (This isn't even counting the effect of compounding, ie that $5000 earned in year 1 also earns money going forward).