HELOC v. Withdrawing from 401(k)

[Meezer_Mom]

Hi.

Friend of mine had an interesting question. I am not a homeowner - but have studied tax law - so I could only give him first impressions and told him I'd post here because you all are awesome.

In sum, he's 69, single and taking SS and his pension. He has about $100k in his 401 (k). He needs to do some re-plumbing. He's hesitant to withdraw from his 401 (k) for repairs because it becomes taxable income. He thought a reverse mortgage would be the way to go; I shared what I knew about them (none good) and suggested he apply for a Home Equity Line of Credit. I suspect any costs associated if used for home repair would more than offset the interest. So, share all your thoughts on this and I will pass them on to him.

Many thanks!

[Lainey]

Second on the HELOC. How much could this plumbing cost anyway? He could pay off the HELOC fairly quickly I think, even being retired.

[jp1]

I'm not an expert on HELOCs but if he can pay it off relatively quickly I'd assume it's probably the better plan since once he takes the money out of the 401k it's out and can't go back in. Also, and this would depend on his situation, isn't the interest on a HELOC tax deductible? If he already itemizes his taxes this would make the HELOC even more attractive.

[bae]

Assuming he is financially responsible, given today's interest rates I'd go for the HELOC. It's simpler, and probably more tax-efficient for him.

[Gardnr]

Reverse mortgages have gotten messy for some people. I would go HELOC. We learned something about those however. If you don't use it, they start charging you monthly fees for the account. We closed ours as we did not need to borrow against it and we didn't want to pay fees. So word of caution.

[Teacher Terry]

He could take a home equity loan at a small interest rate. These can also be paid off early.

[Geila]

Having done both - taking money out of my 401k to travel when I was young and naive and doing a HELOC for home projects - I would go with a HELOC. Now if he still has a small mortgage he can also refinance and take money out of that which would make the payments more affordable and stretch it out to 30 years. This is what I would do if I could at that age with a limited income.

We had our mortgage with a credit union and they offered a HELOC without any fees or penalties. We kept that open emergencies or such. We ended up not using it so will let it close out when the time comes but it didn't cost anything. However, I do think the payment plan is shorter than a regular mortgage, or it might depend on the lender. But I also think that the interest rates is not fixed so the payments can change over time.

[Teacher Terry]

The home equity loan has a lower interest rate.