HELOC vs. 401(k) loan
A 401(k) loan looks free because the interest goes back to you. The real costs are elsewhere.
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Should you use a HELOC or a 401(k) loan?
Usually a HELOC, for larger or longer needs. A 401(k) loan is fast, has no credit check and doesn't touch your home, but it's capped at the lesser of $50,000 or half your vested balance, usually must be repaid within 5 years, and comes due quickly if you leave your job. The money also stops growing while it's out.
On this page
Side by side
| HELOC | 401(k) loan | |
|---|---|---|
| Limit | Based on equity, often $25,000–$500,000+ | Lesser of $50,000 or 50% of vested balance |
| Term | 10-year draw + repayment | Usually 5 years |
| Credit check | Yes | No |
| If you leave your job | No change | Balance due by your tax filing deadline, or it's taxed and possibly penalized |
| Hidden cost | Interest | Lost market growth; repaid with after-tax money |
Use a free calculator, or get your HELOC rate from Shawn.
When the 401(k) loan fits
Small, short needs you'll repay within a year or two, with a job that's secure. Otherwise, protect your retirement and compare a HELOC.
The growth you give up
Money out of your 401(k) isn't invested. If the market returns more than the loan's interest while it's out, you end up with a smaller balance at retirement than if you'd borrowed elsewhere. Over 5 years on $30,000, that gap can run to thousands of dollars in a good market.
Example: $30,000 for five years
401(k) loan: you repay yourself with interest through payroll, roughly $590 a month at a typical plan rate. No credit check, no closing costs. The real cost is the growth the money misses while it's out. If the market returns 7% a year, the money out of the market on average over the loan could cost several thousand dollars in lost growth.
HELOC at 7.75% APR, paid off over five years: about $605 a month and about $6,280 in interest, with your retirement savings left fully invested.
The job-change risk
If you leave or lose your job, the outstanding 401(k) loan is usually due by your tax-filing deadline for that year. Anything unpaid is treated as a distribution: taxed as income and, if you're under 59½, hit with a 10% penalty. That's the biggest reason to avoid large 401(k) loans if your job isn't secure.
Hardship withdrawals are different
A hardship withdrawal isn't a loan. You can't pay it back into the plan, and it's taxed and usually penalized. It's generally the most expensive option on this page.
How to choose
- Small, short need and a stable job: a 401(k) loan is simple.
- Larger amount, longer payoff, or job uncertainty: a HELOC usually costs less overall.
- Both carry risk: the 401(k) loan to your retirement, the HELOC to your home.
Questions to answer before choosing
- How secure is your job for the next five years?
- Would losing the 401(k) loan's tax-deferred growth set back your retirement goals?
- Is your home equity enough to keep 15%–20% after a HELOC?
- Could you repay a 401(k) loan quickly if you changed jobs?
- Do you need the money within days (401(k)) or can you wait weeks (HELOC)?
Example: a down payment on a second home
A 45-year-old with $180,000 in a 401(k) wants $50,000 for a vacation home down payment. A 401(k) loan maxes out at $50,000 and must be repaid in five years through payroll, about $990 a month at a typical plan rate, and comes due fast if she changes jobs. A HELOC on her primary home for $50,000 at 7.75% APR costs about $323 a month interest-only, with flexibility to pay it down faster. She chooses the HELOC, keeps her retirement savings invested, and sets a seven-year payoff plan.
Also asked
Can I use both a 401(k) loan and a HELOC?
Yes. Some borrowers take a small 401(k) loan for speed and a HELOC for the rest. The 401(k) loan payment counts in your debt-to-income ratio when the HELOC lender reviews your application.
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Sources
Official sources behind this guide.
- What is the difference between a home equity loan and a HELOC? · Consumer Financial Protection Bureau
- What you should know about home equity lines of credit (booklet, PDF) · Consumer Financial Protection Bureau
- Find a HUD-approved housing counselor · Consumer Financial Protection Bureau