Here’s the ceiling on a 401(k) participant loan: the lesser of $50,000 or 50% of your vested balance, under IRC §72(p). A home equity loan? No statutory cap at all, just a lender-set CLTV ratio that typically runs 80% to 90%. And that structural gap (not the headline rate, which is what most borrowers fixate on) usually settles the choice.
Both products deliver a lump sum. One uses your house as collateral. The other leans on your retirement account. So the decision turns less on which is cheaper this month and more on which downside you can actually afford to absorb, which is a different question entirely.
The Short Answer: What Each Loan Risks
A home equity loan is a fixed-rate second mortgage secured by your home. Miss payments for roughly 120 days and the lender can begin foreclosure under state law. But job loss alone doesn’t accelerate the balance – the payment schedule continues as written.
A 401(k) loan is secured by your vested plan balance. Lose or leave your job with a balance outstanding, and the unpaid amount gets treated as a plan loan offset. Under IRC §402(c)(3)(C), you’ve got until the due date of that year’s federal tax return (including extensions) to roll the offset into an IRA or another qualified plan. Fail to roll it, and the offset is taxed as ordinary income plus a 10% early distribution penalty under IRC §72(t) if you’re under 59½.
Which downside can you actually afford to carry?
Home Equity Loan vs 401(k) Loan: 2026 Comparison
| Factor | Home equity loan | 401(k) loan |
|---|---|---|
| Max amount | Limited by equity and 80% to 90% CLTV | Lesser of $50,000 or 50% vested |
| Interest rate | About 7% to 9% fixed (Nov 2026) | Plan-set, typically prime + 1% to 2% |
| Term | 5 to 30 years | 5 years (longer for home purchase, plan-specific) |
| Closing costs | 2% to 5% of loan amount | $50 to $150 flat fee |
| Credit check | Yes | No |
| Tax deductible | Only for home improvement use | Never |
| Collateral | Your home | Your vested plan balance |
| Job-loss impact | Schedule continues | Potential offset plus 10% penalty under 59½ |
| Opportunity cost | None | Foregone market exposure |
| Time to funding | 2 to 6 weeks | 1 to 3 business days |
How a Home Equity Loan Works in 2026
It’s a closed-end second mortgage. The lender disburses a lump sum at closing, the borrower repays on a fixed amortization schedule, and the loan sits behind the first mortgage in lien priority.
Rate surveys for early November 2026 report a wide range. MonitorBankRates posted a 6.905% average on November 4, 2026. Bankrate’s survey put the average at 8.67% on October 21, 2026. And Fortune’s Mortgage Research Center panel showed 10-year home equity loans at 8.268% in early November. The spread reflects methodology differences across surveys, not a market in flux. For planning purposes, treat 7% to 9% fixed as the realistic working range on publish day.
Lenders cap combined loan-to-value, usually at 80% to 90%. So a $500,000 home with a $300,000 first mortgage leaves $100,000 to $150,000 of theoretical borrowing room at those CLTV ceilings. Minimum loan amounts typically start at $10,000 to $25,000.
Closing costs run 2% to 5% of the loan amount. Expect origination of 0.5% to 1%, an appraisal fee of $300 to $600 for a full URAR (less for an AVM or desktop valuation), plus title, recording and flood certification charges. And TILA §125 gives a primary-residence borrower a three-day right of rescission after closing.
How a 401(k) Participant Loan Works in 2026
IRC §72(p) caps the loan at the lesser of $50,000 or 50% of the vested account balance. Unvested employer contributions don’t count toward that base. Plans may impose a lower cap or decline to offer loans at all. Your plan document controls.
Interest is plan-set. Usually prime plus 1% or prime plus 2%, fixed at origination. Repayment is substantially level, collected at least quarterly through payroll deduction. The standard term is five years, though loans to purchase a primary residence may run longer if the plan permits it.
No credit check runs. No DTI analysis either. The vested balance is the only gate. And IRAs can’t be borrowed against under §72(p), which is why this option is available only to active participants in employer plans.
Your plan document controls. It governs the loan maximum, the number of outstanding loans permitted, spousal consent requirements and whether former employees may continue repayment after separation.
Interest Rates Compared
The headline rate gap is narrower than most borrowers assume. With prime at its November 2026 level, a prime-plus-2% 401(k) loan lands in the same neighborhood as a mid-range home equity loan quote. But a 100 to 200 basis point difference between the two matters less than two structural variables: how long the money stays borrowed, and whether the interest reduces taxable income.
A 15-year home equity loan at 7.5% on $30,000 carries roughly $20,000 in total interest. A five-year 401(k) loan at 9.5% on the same $30,000 carries about $7,700. So the 401(k) loan is cheaper in dollar terms over its shorter term. It’s also paid with after-tax dollars and taxed again on distribution at retirement, which the Kitces analysis flags as the real effective cost calculation.
Tax Treatment
Home equity loan interest is deductible only when proceeds are used to buy, build or substantially improve the home securing the loan. That rule, established under the Tax Cuts and Jobs Act and codified in IRS Publication 936, applies through the 2026 tax year. Debt consolidation, tuition and medical use don’t qualify.
Three qualifiers travel together. The improvement-use test is the first. Itemizing on Schedule A is the second, and with the 2026 standard deduction at a historically high level, most households no longer clear the itemizing threshold. The $750,000 combined mortgage debt cap is the third.
401(k) loan interest is never deductible. The borrower repays interest with after-tax dollars. Then those same dollars are taxed again on distribution at retirement. Only the interest piece faces this double taxation – principal repayment restores previously taxed money.
Consult a tax advisor before relying on any deductibility position.
Job-Separation Risk
A 401(k) loan is tied to active employment at the sponsoring employer. Separate, voluntarily or not, and the plan triggers a loan offset for the outstanding balance.
Current law gives the participant until the federal tax return due date for that year, including extensions, to deposit the offset amount into an IRA or another qualified plan. Before the TCJA extension, that window closed at 60 days. Miss the rollover window, and the offset gets reported on Form 1099-R and taxed as ordinary income. A participant under age 59½ also owes a 10% early distribution penalty under IRC §72(t).
Worked example: a $30,000 outstanding loan, a borrower in the 24% federal bracket, age 48 at separation. The offset generates $7,200 in federal income tax plus a $3,000 penalty – a $10,200 bill triggered by the job change alone. And state income tax, if applicable, sits on top of that.
SECURE 2.0 includes provisions that may let plans offer post-separation repayment, but adoption isn’t universal and implementation details vary. Confirm with your plan administrator before relying on this option.
Opportunity Cost
A 401(k) loan removes principal from market exposure for the term of the loan. The S&P 500 long-run annualized return is often cited at 7% to 10%, but those are historical averages, not forecasts.
A $30,000 loan repaid over five years at a 9.5% plan rate returns about $37,700 to the account in total payments. The same $30,000 compounding at an assumed 7% market return over the same five years would have grown to roughly $42,100. The gap – about $4,400 in this example – understates the full cost, because many borrowers quietly reduce or pause their contributions during repayment to keep the payroll bite manageable, and that pause forfeits part of the employer match (which is money you simply can’t recapture once the vesting year closes).
The 7% figure is an illustrative assumption. Actual returns can be materially higher or lower.
Five Scenarios
$40,000 kitchen remodel, stable W-2, 15-year horizon. A home equity loan is the stronger fit here. Improvement use preserves interest deductibility if the borrower itemizes, and the longer term keeps the monthly payment affordable without compressing retirement growth.
$20,000 debt consolidation, stable job, under 45. Home equity interest isn’t deductible for consolidation use. So compare the after-tax cost of each rate against the foregone market return over the remaining working years before signing.
$15,000 emergency medical expense, uncertain employment. The 401(k) loan’s job-separation exposure is the binding risk. But a home equity loan on a stretched budget still carries foreclosure risk if income collapses.
$50,000 down payment on an investment property. Home equity loan interest on investment-use proceeds may be deductible against rental income under IRC §163 and §469, but the tracing rules are specific. A CPA call is warranted before signing.
Age 58, seven years from retirement. 401(k) loan opportunity cost concentrates at the worst possible point on the accumulation curve. A home equity loan with a term shorter than the planned retirement date is usually the cleaner choice.
Texas homeowners should review the state’s 50(a)(6) home equity rules separately; they carry their own loan-structure constraints.
The Bottom Line
Match the loan to the risk you can afford to carry. A home equity loan threatens the house in a worst case and typically prices lower across a longer term. A 401(k) loan threatens retirement in a worst case and charges nothing against your credit file, but it ties repayment to continued employment – which is fine right up until it isn’t.
Standard disclaimers: Consult a tax advisor on deductibility rules before closing. Consult a financial planner on the retirement impact of a 401(k) loan before signing. Confirm all plan-specific rules, including loan caps, repayment terms and post-separation options, with your plan administrator. Your plan document controls.
Frequently Asked Questions
Which has the lower interest rate in 2026? The two products often price within 100 to 200 basis points of each other. Home equity loans run roughly 7% to 9% fixed, and 401(k) loans typically price at prime plus 1% to 2%.
Is home equity loan interest tax deductible in 2026? Only when proceeds are used to buy, build or substantially improve the home securing the loan, only if the borrower itemizes, and only up to $750,000 combined mortgage debt.
What happens if I leave my job with a 401(k) loan? The outstanding balance becomes a plan loan offset. You’ve got until your federal tax return due date (including extensions) to roll the amount into an IRA or qualified plan. Miss the window, and the offset is taxed as ordinary income plus a 10% penalty if you’re under 59½.
Does a 401(k) loan affect my credit score? No. Plans don’t report 401(k) loans to credit bureaus.
Can I borrow from an IRA like I can from a 401(k)? No. IRC §72(p) applies to employer plans. IRAs offer a 60-day rollover rule, not a loan.
How long does it take to close a home equity loan? Most lenders fund in two to six weeks after application, assuming a clean appraisal and standard underwriting.
