Should you paydown an investment property borrowing from a 401K?

[Michael Clay]

I'm currently deciding on if I should borrow from a 401k to pay down a Heloc or apply to mortgage. Currently, the Heloc has a loan amount of $45K @ 5.49%. Funds from the 401K can be borrowed @ 2.125% interest for a period of 5 years. The issue is instead of paying off the Heloc, I can apply funds to my rental properties and pay them off sooner.  The goal is to apply principal monthly to my 4 rental properties to pay them off in 6 years.  The Heloc interest of $213.00 will still be payed monthly and any add'l funds received after mortgage principal is paid would be applied.

[Brian Eastman]

@Michael Clay

Using a 401k loan in this situation is a losing proposition.  In addition to the 2.125% interest you will pay on the 401k, there are two "hidden" costs to this transaction: A) the opportunity cost of not having those funds within the 401k and compounding interest, and whatever your tax rate is.

When you borrow from a 401k, there are no taxes or penalties assuming you pay off the loan properly.  However, you put that money into the plan pre-tax, and will be replacing the borrowed funds with after-tax dollars.