Home Equity Loan vs. 401(K) Loan Which should you choose?

You've finally decided to add that patio you've always wanted to your home. Now you can enjoy barbecue outdoors and get a little fresh air every now and again. But how are you going to pay for it? If you're like most people, you don't have cash for home repairs just lying around the house. You'll have to borrow. So where should you go to borrow? Mortgage rates are low these days, so a home equity loan would be pretty affordable, as would a home equity line of credit (HELOC) if you have a number of remodeling projects in mind.Then it occurs to you -- "What about my 401(K) money? I can get good terms on a 401(K) loan and borrow the money from myself!" That seems like a good idea. You can borrow the money from yourself and pay yourself back with interest! What could be better than that?.

On the surface, borrowing from your retirement savings may seem like a better idea than taking out a home equity loan. The terms are good either way, and the interest rates are probably comparable. So, why not borrow from your 401(K) account?.There are several reasons why it may not be desirable to borrow from your retirement account:.

Most Americans fail to save enough for retirement, so borrowing from your retirement fund may leave you short later should you default. No one wants to be broke when they retire.
If you have a diversified 401(K) account, you will probably be earning interest on your retirement money. In fact, the interest rate you are earning on your retirement fund may exceed the interest rate you would pay for a home equity loan. In that case, you take out a home equity loan, leave the retirement money where it is, and you should earn a net gain between the two.

If your retirement fund is earning good interest, and in the late 1990's many were earning upwards of 20% per year, then borrowing on your principal could hurt you tremendously in the long run. Due to the nature of compounding, the amount you lose by borrowing from your retirement account could be far more than simply the sum of the loan amount plus interest.
The interest on a home equity loan is tax deductible, up to $100,000. The interest on a 401(K) loan is not.There are certainly some circumstances where you might benefit from borrowing from retirement funds instead of taking out a second mortgage, but those situations are fairly rare. A substantially higher interest rate on the home equity loan than the 401(K) loan would be one such example. If in doubt, you should consult with a financial planner.

Home Equity Loan Beware of the lingering lien!

A problem that often arises when people try to refinance their home is the discovery of a pre-existing lien from a previous loan that was not removed by the lending company. The cost of removing a lien and returning the title to the homeowner, a process known as reconveyance, is usually included in fees associated with a home equity loan. When the loan is paid off, the lender is generally responsible for removing the lien, so that public records show the property to be unencumbered.

There are various reasons for why the lien isnt always removed oversight on the part of the lender, especially during heavy periods of refinancing, is often the problem. Occasionally, the problem can arise when a lender is sold to another company or when that lender goes out of business. No matter what the cause, a lien that hasnt been removed can come back to haunt a homeowner. If a homeowner is in the process of refinancing a home and discovers an old lien that hasnt been removed, the entire refinancing process can be held up for weeks. This can be critical if the owner is trying to lock in an interest rate prior to closing.

The problem can also arise when a homeowner is trying to take out another home equity loan, perhaps to facilitate debt consolidation or home improvements. Here are a few things you can do to avoid this problem: Get a copy of your credit report. If there are any errors, particularly errors showing an open line of credit or a home equity loan that has been paid off, contact your lender.

Keep your paperwork from all real estate loans, even if you have already paid them off. Then you will have them at hand should you need to demonstrate that you have fulfilled your obligations. If the lien shows up on public records or a credit report, but the original lender says that you have paid it, have them send you a copy of their documentation regarding your reconveyance.As with most issues that come up when financing or refinancing a home, this one can be resolved by remaining diligent and keeping proper paperwork.

As always, its a good idea to check your credit report regularly, particularly if you plan on taking out a loan in the near future.

Home Equity Loan Line of Credit Vs. Other Conventional Loans

When it comes to getting money, you have two basic options. If you are a homeowner you can choose to take out a home equity line or credit (HELOC), or you can take out a conventional loan. Both of these products will provide you with the funds needed, but the similarities end there. With varying interest rates and repayment options, you have a wide array of choices. We will discuss the differences between these two options, and then decide on which one is best for the typical homeowner. Remember, that everyone's situation is different, so use your best judgment when choosing a loan product.

You may already be familiar with a traditional loan product. These are usually based on your credit rating and your ability to repay the loan. The lender will review your past tax returns, credit score, as well as your salary. They may also factor in your income potential in the near future, if you are currently enrolled in a higher education program or up for a promotion soon. The main benefit of such a loan is that you have little at stake if you fail to repay the loan. They may have the ability to garnish your wages or hurt your credit rating, but you will be able to keep your home. The main disadvantage to this type of loan is that you can expect to pay a much higher interest rate than that of a home equity loan. You may also find yourself unable to take out as much as you would with a HELOC.

A Home Equity Line of Credit is a completely different time of loan. The bank will determine the amount of equity that you currently have in your home (value of the home- amount of liens= equity). They will then allow you a credit line that is a percentage of your equity. You will likely receive checks or a bank card that will allow you to make withdrawals on your own schedule. You can borrow as little, or as much as you want as long as it is within your credit limit. You will then make monthly payments based on the balance of the loan. Most lines of credit will require a minimum payment to cover interest, but the actual payment amount is up to you. The process is very similar to that of a regular credit card, except that you have your home backing up your purchases. The main advantage to this type of loan is that you can usually enjoy a much lower interest rate, and pay as much or as little during the life of the loan. The main disadvantage is that if you fail to pay the balance off, you could lose your home. So it is important to only take out what you can repay.

Which one is better? It all depends on your personal situation. If you have had trouble in the past with credit cards and revolving credit, a HELOC could be a very dangerous thing. Maxing out your HELOC has a lot more at stake than maxing out a typical credit card. So it is important that you have your finances and budget in place, prior to taking out such a loan. If your credit is poor, a HELOC may give you options where a traditional loan would not. Bottom line; understand your situation and you should have no trouble deciding the right loan product for your needs.

About the author:
John Ross is a freelance author, providing tips and ideas relating to home equity loans. You can find more of his articles at: home equity loan company, online home equity loans, and fixed rate home equity loan. The Loanchbox is a user friendly website designed to teach the basics behind home equity loans.

Home Equity Loan With A Reverse Mortgage, Your Home Pays You!

The home equity loan has become quite popular in the last five years, and Americans have tapped into the equity of their homes in record numbers. The reasons vary, although home improvement and debt and debt consolidation are the most common reasons for borrowing against a homes equity.

The home equity loan has become quite popular in the last five years, and Americans have tapped into the equity of their homes in record numbers. The reasons vary, although home improvement and debt and debt consolidation are the most common reasons for borrowing against a homes equity.

In the last fifteen years or so, a new twist has arrived in the home equity market - the reverse mortgage. Like a traditional home equity loan or line of credit, a reverse mortgage allows you to borrow against the equity in your home. Unlike those other options, you dont have to make payments in order to pay it back. The repayment takes place when you die, when you move, or when you sell your home. You must be at least 62 years of age to qualify, but unlike other loans, you do not have to have any appreciable income in order to get a reverse mortgage.

There are a number of advantages of a reverse mortgage over a traditional home equity loan:

# Your options of receiving the money from the loan include a monthly payout, although you may also elect to receive a lump sum or a credit line. A monthly payout would effectively provide you with a regular income during the remainder of your time in your home.


# The loan isnt due until you move, sell the home, or die. There is no repayment schedule, as with regular installment loans. At the time of your death or when you sell the house, the loan must be repaid with interest.


# The amount you have to repay cannot exceed the value of your home. With this feature, you are protected should your home decline in value. The lender cannot force you to pay more than the value of the home.


Due to the age restrictions on reverse mortgages, they are not for everyone. But if you qualify, it could provide an excellent opportunity to have an income during your retirement years.

About the Author: Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including http://www.End-Your-Debt.com/ and http://www.HomeEquityHelp.net/

Home Equity Loan vs Home Equity Line Of Credit

Many people confuse a home-equity line of credit with a home-equity loan. With so many different kinds of loans it can get confusing. So lets look at the difference so you can get a better understanding of what works best for you.

Home Equity Line Of Credit

Home-equity lines have experienced unprecedented growth in the past two years and presently represent 80 percent of the home-equity market.

A home-equity line of credit is a varible interest rate loan that works like a credit card. You get a pre-determined loan amount that is secured by your home.

Most come with checks and credit cards that you can use to draw on as you need the money.

Most lenders only require an interest only payment for either 10 or 15 years. After that the loan must be paid in full. The reality is most people will sell their home and pay the loan off before it actually comes due. You could always refinance if you decide you want to stay in your home.

An important thing to remember on a home-equity line of credit is it is based on varible interest rates. These varible rates will cause your payment to change as the interest rates move up or down.

Home Equity Loan

A home-equity loan has a fixed interest rate and fixed payment. These loans are more like a standard second loan on your home. Like a home-equity line of credit, these loans are also secured by your home.

You borrow a certain amount of money for a specific period and get the whole sum at the close of the loan. The payments a on home-equity loan are typically based on 10 to 15 years and are level.

People who aren't comfortable with an adjustable or varible rate payment tend to favor a home-equity loan instead of a home-equity line of credit. As interest rates rise, these loans become more popular than home-equity lines of credit.

A home-equity loan will have a higher interest rate because it is fixed. Varible rate loans usually have lower starting interest rates. But if interest rates are rising, a varible rate could catch up or even get higher than what the fixed rate is.

About The Author

Gary Gresham is a mortgage loan officer and the webmaster for http://www.1stopshoppingonline.com. He offers you purchase, refinance, debt consolidation or home equity loans at competitive rates at http://www.1stopshoppingonline.com/home-loan.html Gary@1stopshoppingonline.com