Home Equity Loan to repay 401(k) Loan?

Question

I took a loan out of my 401(k) to pay for part of my down payment, and for renovations for a co-op I am purchasing. My thought was to repay the 401(k) with a home equity loan, the thought being that the interest on the HEL is deductible, versus no deductiblility for the 401(k). Are there any restrictions about what a HEL can be used for?

Answer 1

Technically, only funds used directly for upgrading property are tax deductible. That said, however, most people do deduct the interest paid on their home equity lines of credit from their taxes and only an audit would require you document the upgrades. Talk to your tax accountant/CPA since you would be using the funds to repay a 401K loan.

There are no restrictions on what you use the funds from a HELOC for. The equity in your home is yours to use as you please.

Answer 2

Neither. Instead, get a HELOC. This is a revolving line of credit secured by the equity in your house. Depending on the state you live in you can get up to 90% of appraised value. The beauty of a HELOC instead of a regular home equity loan is that the interest is calculated differently. The federal government has special laws that provide incentives for lenders to write 30 year mortgages. That's why when you start out in a mortgage (or a home equity loan) the majority of your payments for the first seven years are almost all interest and very little applied to principle. HELOCs are calculated differently. The rates are typically prime -.1%. The interest on say a $25,000 balance is about $130 per month right now. If you pay $1,000 per month on a HELOC, $870 of that goes to principal and $130 goes to interest. That same payment on a mortgage or a home equity loan reverses those numbers - most of what you pay is pure profit for the bank! And the interest you do pay is tax deductible. Don't touch your 401k. That's a bad habit to develop. The next time it'll be easier to tap into it... You get my drift.

Answer 3

no not at all. But they are variable to an index. Look hard at a closed end fixed rated second deed of trust first. In some states the rate on a heloc can go as high as 18% ++
Loan Officer here

Answer 4

I would not do that simply because the interest you pay on a 401k loan you pay TO YOURSELF. Its a way around the 13k maximum contribution per year statute as well for alot of peopel. they hit 13k and cant make any more contributions so they borrow half of th emoney on a very aggressive repayment term (1 year) and make payments to the loan and end up with well over 13k per year in contributions. Uncle sams butt hurts but its legal : )

Answer 5

Bears are big