Comparing a Second Mortgage to a 401k Loan

Both a second mortgage and a 401(k) loan can provide you with money when you need it. Both of these loans have some benefits and drawbacks associated with them. Here are a few things to consider about second mortgages and 401(k) loans.

After-Tax Cost

When deciding which type of loan you should take out, you will need to compare the after-tax cost of each. This is determined by looking at the cost of the loan after taxes have been assessed. With a second mortgage, you will take the interest rate that you are being charged, multiply that by one, and then subtract the tax benefits from your second mortgage. With the 401(k) loan, you have to look at the interest rate that you would have been earning had you not borrowed the funds.

Unemployment

Something else that you might want to consider is what will happen if you become unemployed with each type of loan. With a second mortgage, if you become unemployed, you will still have to make your regular monthly payment for the duration of the loan. If you have a 401(k) loan and you become unemployed, you may have to quickly repay the balance of the loan. In some cases, you will have to come up with the entire amount of money within 4 to 8 weeks.

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