Following up on the topic of 401(k) loans, which was discussed here, there is a new article on CNN Money by Walter Updegrave. This article compares a scenario for two options: borrowing $40,000 through a 401(k) loan and borrowing the same amount through a home equity line of credit. Assuming the two options are available to an individual in need, one comes out better when exercising the home equity line option.
Here’s their calculation:
| Borrow from 401(k) | Borrow from Home Equity Line |
| $40,000 4-year loan | $40,000 4-year loan |
| Monthly payment $934 | Monthly payment $926 |
| $100,000 Beginning 401(k) balance | $100,000 Beginning 401(k) balance |
| - 40,000 Loan | |
| $ 60,000 401(k) balance after loan | |
| + 15,749 Earnings on 401(k) at 6% annual return |
+ 26,248 Earnings on 401(k) at 6% annual return |
| + 44,832 Loan repayment (48 X $934) | |
| + 5,773 Earnings on monthly loan payments at 6% annual return |
|
| $126,354 Ending 401(k) Balance | $126,248 Ending 401(k) Balance |
| + 384 Savings from lower loan payments ($926 vs. $934) + 1,112 Tax savings on home equity loan interest |
|
| $126,354 Final 401(k) balance | $127,744 Final 401(k) balance plus other savings |
Source: CNN/Money
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