Last updated: November 2025
Quick Answer
Borrowing from your 401(k) or using home equity can both provide access to funds, but they carry very different financial implications. A HELOC allows you to tap home equity with flexible repayment and potential tax benefits, while a 401(k) loan pulls from your retirement savings and risks long-term growth. The better choice depends on your goals, risk tolerance, and timeline.
What is a 401(k) loan?
A 401(k) loan allows you to borrow from your retirement savings account, typically up to $50,000 or 50% of your vested balance, whichever is less. You repay the loan with interest over a period of up to five years (longer if used to buy a home), with payments made directly back into your account.
Key features of a 401(k) loan
- No credit check required
- Interest paid goes back to your own retirement account
- No taxes or penalties if repaid on time
- Must follow plan-specific loan rules
This can seem attractive, but withdrawing from your 401(k) early can reduce your long-term retirement earnings by missing out on market growth.
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What is home equity borrowing?
Home equity borrowing refers to taking out a loan or line of credit secured by your home’s value. The most common types are:
- HELOC (Home Equity Line of Credit): Revolving credit line, typically interest-only during the draw period
- Home equity loan: Lump-sum loan with fixed payments and interest
Lenders typically allow you to borrow up to 85% of your home’s appraised value minus your mortgage balance. Unlike 401(k) loans, this borrowing requires a credit check and uses your home as collateral.
Read: What is a HELOC?
Side-by-side comparison: 401(k) loan vs. HELOC
| Feature | 401(k) Loan | HELOC |
| Source of funds | Retirement account | Home equity |
| Credit check required | No | Yes |
| Collateral | None | Your home |
| Interest | Paid to yourself | Paid to lender |
| Repayment term | 1–5 years | Up to 20 years |
| Early repayment penalties | No | No |
| Risk | Reduced retirement growth | Risk of foreclosure |
| Tax-deductible interest | No | Possibly, if used for home improvements |
Learn: How does a HELOC work?
When borrowing from your 401(k) makes sense
A 401(k) loan may be suitable in very specific scenarios:
- You have no home equity, or you do not qualify for a HELOC
- You need funds quickly and privately
- You’re confident in repaying within five years
- You prefer to avoid taking on new debt from a lender
Advantages:
- Simple approval process
- No impact on your credit score
- Pay yourself back, not a bank
Risks:
- Missed market gains on withdrawn funds
- Job loss can trigger early repayment
- Failure to repay can result in taxes and penalties
Learn: Use our HELOC calculator.
When using home equity is the better choice
Home equity loans or HELOCs are often the smarter move if:
- You want to preserve your retirement savings
- You have significant home equity available
- You prefer longer repayment terms
- You’re using the funds for home improvement or major expenses
Advantages:
- Longer repayment timelines
- Lower interest rates (typically)
- Potential tax deductibility on interest
Risks:
- Default could lead to foreclosure
- Interest goes to the lender, not your retirement
- Requires home appraisal and credit review
Read more: How to apply for a HELOC.
How taxes and penalties differ
One of the biggest distinctions between these two strategies is how the IRS treats them:
- 401(k) loans: No tax penalties if repaid on time. But if you default or leave your job, the outstanding balance is treated as a distribution, triggering income taxes and a 10% penalty if you’re under 59½.
- HELOCs: Interest may be tax-deductible, but only if the funds are used to buy, build, or substantially improve your primary residence. Otherwise, the interest is not deductible.
Which option costs less?
While 401(k) loans may appear cheaper—since interest is paid to yourself—they come with opportunity cost. That’s the potential return you lose by pulling money out of an investment account that could be growing tax-deferred.
HELOCs usually carry:
- Interest rates between 6% and 9% (variable)
- Closing costs or origination fees
- Repayment over 10–20 years
In contrast, 401(k) loans are:
- Capped in size
- Repaid over a shorter term
- Exposed to job-change risk
- Limiting your retirement compounding potential
How to choose between the two
Use these criteria to guide your decision:
- Short-term need with high repayment confidence? Consider a 401(k) loan
- Longer-term expenses like renovation or education? A HELOC may be better.
- Strong home equity and stable credit? Home equity borrowing offers better flexibility.
- No homeownership or low equity? 401(k) may be the only option.
Talk to a financial advisor before using retirement funds for non-retirement expenses. You can’t get back lost compounding time.
Know your borrowing options
Both 401(k) loans and home equity lines of credit provide access to funds, but the financial implications differ.
A HELOC keeps your retirement savings intact and offers longer terms, while a 401(k) loan may seem easier but can reduce long-term wealth.
Weigh the trade-offs, including risk to your home or retirement, and choose based on your timeline, stability, and goals.
Discover your HELOC option with HomeEQ in a few minutes
Want to know if you’re approved for a HELOC and how much borrowing power you can access? Check your HELOC rate right now.
FAQ: Borrowing from 401(k) vs. using home equity
Q: Is it better to borrow from my 401(k) or use home equity?
A: It depends on your financial situation. A HELOC preserves your retirement funds and may offer lower payments, but it puts your home at risk. A 401(k) loan doesn’t impact your home but may limit long-term retirement growth.
Q: Will borrowing from my 401(k) hurt my retirement?
A: Yes, it can. Even if you repay the loan, the money you borrow misses potential market gains during the repayment period.
Q: Can I deduct HELOC interest on my taxes?
A: Only if the funds are used for qualified home improvements on the secured property. Other uses do not qualify for deductions.
Q: What happens if I leave my job with a 401(k) loan?
A: The outstanding loan balance may become due immediately. If you can’t repay, it may be treated as a taxable distribution.
Q: Do I need good credit to get a HELOC?
A: Yes. Most lenders require a credit score of 660 or higher, along with proof of income and sufficient home equity.
*This content is for informational purposes only and not a substitute for financial advice. Consult a tax or financial advisor.
