Home Improvement- A frequent use of home equity loans or lines of credit is home improvement. This makes sense, as the money used to improve the home by adding a garage, or patio or remodeling a kitchen can actually increase the value of the home. By increasing the home’s value, the equity in the home is increased, which lowers the LTV ratio of the loan. Kitchen improvements offer the best return, as they can increase the value of the home by up to 85% of the cost of the improvements. Lenders are generally all too happy to lend money for home improvements, as loans issued for this purpose tend to have very low default rates. Is the home equity loan the best way to improve your home? Wouldn’t you be better off borrowing from a 401(K) fund instead? Read on below.

 You've finally decided to add that patio you've always wanted to your home. Now you can enjoy barbecue outdoors and get a little fresh air every now and again. But how are you going to pay for it? If you're like most people, you don't have cash for home repairs just lying around the house. You'll have to borrow. So where should you go to borrow? Mortgage rates are low these days, so a home equity loan would be pretty affordable, as would a home equity line of credit (HELOC) if you have a number of remodeling projects in mind.

Then it occurs to you -- "What about my 401(K) money? I can get good terms on a 401(K) loan and borrow the money from myself!" That seems like a good idea. You can borrow the money from yourself and pay yourself back with interest! What could be better than that?.

On the surface, borrowing from your retirement savings may seem like a better idea than taking out a home equity loan. The terms are good either way, and the interest rates are probably comparable. So, why not borrow from your 401(K) account?.

There are several reasons why it may not be desirable to borrow from your retirement account:.

Most Americans fail to save enough for retirement, so borrowing from your retirement fund may leave you short later should you default. No one wants to be broke when they retire.
 

• If you have a diversified 401(K) account, you will probably be earning interest on your retirement money. In fact, the interest rate you are earning on your retirement fund may exceed the interest rate you would pay for a home equity loan. In that case, you take out a home equity loan, leave the retirement money where it is, and you should earn a net gain between the two.
  
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