Should I take a 401(k) loan to pay off my mortgage?

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Q. Should I take a 401(k) loan to pay off my mortgage? I only owe $8,000. I could use the money I would have used for the mortgage payments to save and pay back my 401(k) loan.
— Balancing it all

A. Lots of people love the idea of paying off their mortgage in full.

Whether or not you should use your 401(k) to pay off the mortgage depends on several variables, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.

It depends on the current interest rate on your mortgage and the remaining term, the breakdown between principal and interest on the remaining $8,000 balance of the mortgage and at what interest rate you can borrow from your 401(k), he said.

“One of the distinct advantages of taking a 401(k) loan is that the interest you pay on the loan goes back into your retirement account, as you are essentially borrowing the funds from yourself,” Van Leeuwen said.

In a scenario where the mortgage interest rate is equal to or higher than that of your 401(k), it could make perfect sense to borrow from your 401(k), he said.

“You would also get the advantage to dollar cost average back into your investments over a period of time as you pay off the loan,” he said. “In an instance where the majority of your mortgage payment goes towards the principal, a 401(k) loan might make sense.”

But, he said, the loan’s term should be carefully planned out to avoid overpaying the interest.

The decision isn’t without risk.

“A downside of taking a 401(k) loan is if there is a sudden surge in market after taking the loan in which case you may miss out on potential appreciation of your loan value,” he said.

Plus, if you leave or lose your job before paying off the 401(k) loan, you’ll have to repay the loan, otherwise it could be considered an early withdrawal and you could face taxes and penalties.

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This story was originally published on June 17, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.