How a 401(k) loan works
If your plan allows loans, you borrow from your own balance. The limit is generally up to $50,000 or half your vested balance, whichever is less. You repay with interest through payroll deductions, usually within five years, and the interest goes back into your account.
Plans set their own rules, so check your plan's loan terms before you count on one.
The risks of a 401(k) loan
- The money you borrow isn't invested while it's out, so you can miss market growth
- If you leave or lose your job, the balance may be due on a short timeline
- An unpaid balance can be treated as a withdrawal, which can mean taxes and, in some cases, penalties
- Some people reduce new contributions while repaying, which slows their savings
How a home equity loan works
A home equity loan is a second loan against your home. You get a lump sum and repay it at a fixed rate over a set term, while your first mortgage stays as it is. Your retirement savings stay invested.
The trade-off is that your home secures the loan. You'll go through an application with a credit check, and you need a credit score of at least 620 for a CapCenter loan. You also need enough equity. The maximum depends on the loan type and purpose, and a loan consultant can tell you yours.
Side by side
- Credit check: usually not for a 401(k) loan; yes for a home equity loan
- Amount: limited by your vested balance for a 401(k) loan; by your home's value and what you owe for a home equity loan
- Repayment: often up to five years through payroll for a 401(k) loan; 15 to 30 years at CapCenter for a home equity loan
- Main risk: lost growth and job-change timing for a 401(k) loan; your home is security for a home equity loan
When home equity may fit better
Home equity often fits larger amounts or a longer payoff, like a major remodel. It also avoids pulling money out of the market.
CapCenter home equity loans range from $50,000 to $250,000, with a fixed rate for 15, 20 or 30 years. They come with ZERO Closing Costs (restrictions apply).
When a 401(k) loan may fit better
A 401(k) loan may suit a smaller, short-term need when your job is stable and you can repay quickly. It's usually fast and doesn't need a credit check. It also doesn't put your home on the line.
Questions to ask before you choose
Write down your answers before you talk with your plan administrator or a loan consultant. They often point to the better fit.
- How much do I need, and how fast can I realistically pay it back?
- How secure is my job over the next few years?
- Would pausing or cutting my 401(k) contributions set back my retirement plan?
- Can my budget carry a second monthly payment on my home for 15 years or more?
- Is my home a single-family primary residence or second home, so it can qualify for a CapCenter home equity loan?