More people are paying attention to
their futures and many financial decisions are based
on what makes the most sense for long-term goals and
dreams. Two of the most common goals are to have a home
paid for and to have sufficient retirement funds to
enjoy those “golden years.”
So when it’s time to take out a loan, is it better
to use the home equity or the 401K as collateral? Take
a minute to consider the possibilities.
If you’ve been paying on your home for a significant
period of time, you’ve probably accrued some home
equity. Home equity is simply defined as a comparison
of the market value of your home to the amount owed
against it. If you owe less than it would bring on the
open market, you have home equity. Here’s an important
thing to keep in mind – Your home equity is an
asset.
If you’ve been working for an employer who provides
a retirement plan, you’ve also been accruing funds
in some type of retirement account. A 401K retirement
account is one of the most popular types. Here’s
another important thing to remember as you’re
working through this process – Your retirement
account is also an asset.
Both your retirement account and your home equity can
be put to work. If you need money, either of these assets
may be mortgaged to help you achieve the loan. There
are reasons to use both and downsides to both plans.
If you take out a home equity loan, you are essentially
pledging that you’ll make the payments as agreed
or that you’ll forfeit the equity you have in
your home. Since it’s impossible for a bank to
repossess 20 percent of a home, failure to meet the
terms of the loan could cost you your home. Keep that
in mind before you take out a home equity loan. On the
other hand, if you put your retirement fund up for collateral,
the lender could simply collect the amount owed, leaving
you the rest of your retirement proceeds.
But that doesn’t mean that the retirement fund
is automatically the best choice. Check with the administrator
of the fund. There could be negative ramifications to
using your retirement fund for collateral for a loan.
Loss of matching funds and interest payments may occur
if the retirement fund is mortgaged.
Finally, take a look at the amount of interest you’ll
be paying on each type of loan. In some cases, home
equity loans offer the lowest interest rates and best
terms available from lenders.
Remember that both your retirement fund and your home
equity are assets. You’ve worked hard to amass
these pieces of financial security and you should put
them to work for you throughout your lifetime. It only
takes a few minutes to fill out an online loan application
on this site. Then evaluate the offers you receive and
decide if it’s time to put these assets to good
use.
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