HELOC vs 401(k) Loan: Which Should You Tap for Cash?

Both feel like borrowing from yourself. A HELOC taps your home equity. A 401(k) loan taps your retirement savings. Either way, it's your money, right?

Not exactly.

These two options carry fundamentally different risks. One puts your home on the line. The other puts your retirement at stake. And the "cost" goes far beyond interest rates.

The short answer: For most homeowners, a HELOC is the better choice. But there are exceptions—and understanding when each makes sense could save you tens of thousands of dollars.

Quick Comparison: HELOC vs 401(k) Loan

At first glance, the 401(k) loan looks attractive—no credit check, fixed rate, you're "paying yourself back." But there's a hidden cost that changes everything.

The Hidden Cost of 401(k) Loans: Opportunity Cost

Here's what most comparisons miss: when you borrow from your 401(k), that money isn't just sitting there waiting for you. It would have been growing.

Let's do the math:

Say you borrow $30,000 from your 401(k) for 5 years.

During those 5 years, the S&P 500 averages its historical 10% annual return. Here's what happens to that $30,000:

That $30,000 loan costs you over $18,000 in lost retirement growth.

Yes, you're "paying yourself back with interest." But you're paying back what you would have had anyway—minus the gains. You're not making money on the interest. You're just recovering some of what you lost.

And it gets worse. That $18,315 you lost? It would have continued compounding for another 20-30 years until retirement. A 45-year-old who misses out on $18,315 loses roughly $100,000 by retirement age.

"Borrowing from yourself" sounds harmless. The math says otherwise.

When a HELOC Is the Better Choice

1. You're doing home improvements

HELOC interest is tax-deductible when you use the funds to "buy, build, or substantially improve" your home. 401(k) loan interest? Never deductible.

On a $50,000 project, that deduction could save you $1,500-2,500 in taxes.

2. You need more than $50,000

401(k) loans cap at $50,000 or 50% of your vested balance—whichever is less. Most HELOCs let you borrow up to 85% of your equity, often reaching $100,000+.

3. Your job situation is uncertain

This is the 401(k) loan killer. If you leave your job—voluntarily or not—most plans require full repayment within 60-90 days. Can't pay? The IRS treats it as a distribution: income taxes plus a 10% early withdrawal penalty if you're under 59½.

A $30,000 loan becomes a $10,000+ tax bill overnight.

HELOCs don't care where you work. Lose your job, and you keep the same payment schedule.

4. Your retirement accounts are growing well

If your 401(k) is earning 8-12% annually, borrowing from it is expensive. You're trading guaranteed growth for debt.

When a 401(k) Loan Might Make Sense

1. Your credit score blocks HELOC approval

401(k) loans don't require credit checks. If your score is below 620 and you can't qualify for a HELOC, this might be your only option.

2. You need a small amount for a short time

Borrowing $5,000 for 6 months? The opportunity cost is minimal (~$250), and you avoid HELOC closing costs.

3. You don't have enough home equity

If you bought recently or home values dropped, you might not have the 15-20% equity most HELOC lenders require.

4. Your 401(k) is in low-growth investments

If your 401(k) is parked in money market funds earning 2%, the opportunity cost argument weakens. But honestly? That's a bigger problem you should fix.

The Real Risk of HELOCs

Fairness demands honesty: HELOCs carry risks too.

Your home is collateral. Default on a HELOC, and you could face foreclosure. A 401(k) loan can't take your house.

Rates are variable. Today's 7.5% could become 10% if rates rise. 401(k) loans lock in a fixed rate.

The draw period trap. During the first 10 years, most HELOCs let you pay interest only. Feels manageable—until the repayment period hits and payments double.

These risks are real. But they're also manageable with discipline. The opportunity cost of a 401(k) loan? That's built in, unavoidable, and permanent.

How to Decide: 3 Questions

1. What's the money for?

• Home improvement → HELOC (tax deduction makes it clear winner)
• Debt consolidation → HELOC (longer repayment, potentially deductible)
• Emergency → Depends on amount and timeline

2. How stable is your job?

• Secure for 5+ years → Either option works
• Any uncertainty → HELOC is safer (no job-loss trigger)

3. How much do you need?

• Under $10,000 → 401(k) loan might work if you'll repay fast
• Over $50,000 → HELOC is your only real option

The Bottom Line

Financial advisors almost universally prefer HELOCs over 401(k) loans. The reasons are clear:

1. Opportunity cost is real. Borrowing $30,000 from your 401(k) for 5 years costs roughly $18,000 in lost growth—and potentially $100,000+ by retirement.

2. Job loss turns bad to worse. A 401(k) loan becomes a tax bomb if you leave your employer.

3. Tax benefits favor HELOCs. Use it for home improvement, and you get a deduction. 401(k) loans? Nothing.

Your home equity exists partly for situations like this. Your retirement savings exist for one purpose: retirement.

For most homeowners with decent credit and stable employment, the HELOC is the smarter choice.

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Compare Your HELOC Options

Wondering how much you could access through a HELOC? HonestCasa helps homeowners compare HELOC offers from multiple lenders—no credit impact, no obligation.

See Your HELOC Options →

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Frequently Asked Questions

Is it better to borrow from my 401k or get a HELOC?

For most homeowners, a HELOC is better. The opportunity cost of borrowing from your 401(k)—lost investment growth—typically exceeds HELOC interest costs. Plus, HELOCs don't have the job-loss risk that makes 401(k) loans dangerous.

What is the downside of borrowing from your 401k?

Three main downsides: (1) Lost investment growth while the money is out, (2) If you leave your job, the loan is due immediately or becomes a taxable distribution with penalties, and (3) You're reducing the compound growth that makes retirement savings powerful.

Can I use a HELOC to avoid taking a 401k loan?

Yes, and this is usually the better strategy. A HELOC lets you access cash without interrupting your retirement savings growth. Just make sure you can handle the payments and understand that your home serves as collateral.

What happens if I leave my job with a 401k loan?

Most plans require full repayment within 60-90 days. If you can't pay, the outstanding balance becomes a taxable distribution. You'll owe income taxes plus a 10% early withdrawal penalty if you're under 59½.