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Financial Learning Center

Pre-Retirement Withdrawals from Your 401(k)

Another Option: Home Equity Loans

A large number of homeowners in the country have taken advantage of home equity loans to buy everything from a new roof to a car. As of January, 2018, interest paid on home equity loans is not deductible on your tax return unless the loan is used to “buy, build or substantially improve” the home that secures the loan.

Most banks will allow you to borrow up to 80% (but it can be more, depending on the lender) of the value of your home, minus the principal balance on your mortgage. Let's say your home is worth $300,000 and you have a mortgage of $120,000. The maximum home equity loan you should be able to obtain is $120,000 ($300,000 x 80% - $120,000.)

Instead of getting a home equity loan, you may want to consider a home equity line of credit. With a line of credit, the bank will extend you an amount that you can borrow and you only withdraw the money from the credit line when you need it. This way, you borrow only what you need, when you need it.

In evaluating 401(k) loans versus home equity loans, you need to consider several things: First, do you have sufficient equity in your home to qualify for a home equity loan? Second, do you really want to tap into your retirement savings for cash to spend today? Third, you need to calculate and compare the true cost of borrowing from your 401(k) plan to the home equity loan to see which is less costly.

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