Fed Rate Increase: When to Tap Your 401(k) or Home Equity to Save on Interest

Fed Rate Increase: When to Tap Your 401(k) or Home Equity to Save on Interest

With the Federal Reserve’s recent announcement of a rate increase, many people are feeling the pressure to make sure their finances are in order. Whether it’s saving for retirement or paying off high-interest debt, the debate of when to use your 401(k) or home equity to save on interest is very real and can be paralyzing. But with this blog post, we will help you break down exactly when tapping into your retirement funds or home equity is the right decision. We’ll cover how rate increases affect different types of investments and loans, as well as strategies you can use to maximize savings on interest.

The current state of interest rates

The current state of interest rates in 2023 is one of an upward trajectory. In the past 12 months, the Federal Reserve has increased its federal funds rate seven times, from a low of 0-0.25% at the start of 2021 to 4.25%-4.50% as of January 2023. According to the Federal Open Market Committee (FOMC), this trend is likely to continue into 2023, with the federal funds rate peaking at around 4.9%.

This increase in interest rates has had a direct impact on savings rates. Savings accounts typically pay interest at a rate that is directly tied to the federal funds rate, meaning that as the federal funds rate increases, so too do savings rates. For example, when the federal funds rate was 0.25% in 2021, savings rates were generally between 0.1-0.5%. As of January 2023, however, savings rates are averaging closer to 3-4%, and if the FOMC’s prediction holds, they could reach as high as 5% by the end of the year.

The rising interest rates have also impacted consumer debt levels. As rates increase, individuals tend to take out fewer loans, as borrowing becomes more expensive. At the same time, those with existing debt may choose to refinance their loans in order to take advantage of the lower interest rates. This could ultimately lead to a decrease in total consumer debt levels by the end of 2023.

Overall, the current state of interest rates in 2023 is one of steady growth, with the FOMC expecting the federal funds rate to peak at around 4.9%. This rise has led to an increase in savings rates, with individuals now earning more from their deposits than ever before. Additionally, the higher rates have dampened consumer borrowing, leading to a potential decrease in overall levels of consumer debt.

Whether to tap into your 401(k) or home equity to save on interest depends on your specific financial situation and goals. Here are a few things to consider:

First, it’s important to understand the current state of interest rates. The Federal Reserve has signaled that it plans to raise rates slowly and steadily over the next few years. This means that borrowing costs are likely to rise as well.

Second, you need to think about your own personal financial situation. If you have good credit and a steady income, you may be able to qualify for a lower interest rate on a new loan. On the other hand, if you’re carrying a lot of debt, you may want to consider consolidating your debts into one low-interest loan.

Third, you need to decide what type of loan makes the most sense for you. Home equity loans and lines of credit typically offer lower interest rates than other types of loans. However, they also come with risks: if your home value declines, you could end up owing more than your home is worth. Retirement account withdrawals can also be subject to taxes and penalties.

Fourth, you need to compare interest rates from different lenders. Shop around and compare offers before making a decision. Keep in mind that the lowest interest rate isn’t

How rising interest rates will affect your 401(k) and home equity

If you’re carrying debt, the Federal Reserve’s rate increase could affect how much you pay in interest. Here’s a look at how rising rates could affect two common types of debt – your 401(k) loan and your home equity line of credit (HELOC).

401(k) loan: If you have a 401(k) loan, your payments will usually stay the same, but the amount of interest you pay will go up. For example, if you have a $10,000 401(k) loan with a 5% interest rate and the Fed raises rates by 0.25%, your new interest rate would be 5.25%. over the life of a five-year loan, that would add about $62 to your monthly payment.

HELOC: A HELOC is like a credit card that’s secured by the equity in your home. Your monthly payments could rise if the Fed increases rates and your HELOC has variable rates. For example, if you have a $50,000 HELOC with a 4% variable rate and rates go up by 0.25%, your new rate would be 4.25%. On a $50,000 balance, that would add about $20 to your monthly payment.

When to consider tapping into your 401(k) or home equity

When the Federal Reserve raises interest rates, it’s important to consider how that will affect your borrowing costs. If you have a 401(k) or home equity, you may be able to save on interest by tapping into these sources of funds.

401(k) loans are typically taken out at a low interest rate, and the payments can be deducted from your paycheck pre-tax. This can make them an attractive option for those who need to borrow money. However, there are some risks to consider with 401(k) loans. If you leave your job, you will typically have to repay the loan within 60 days or it will be considered a withdrawal and subject to taxes and penalties. Additionally, if your employer offers a match on your 401(k) contributions, you may miss out on that match if you take out a loan.

Home equity lines of credit (HELOCs) offer another potential source of low-cost funding. HELOCs are often used for home improvements or other major expenses. The interest rate on a HELOC is usually variable, based on the prime rate plus a margin. This means that as the Fed raises rates, your HELOC rate will likely increase as well. However, since your home serves as collateral for the loan, HELOCs can still be an attractive option for those who need to borrow money at a relatively low cost.

The pros and cons of tapping into your retirement savings

When the Federal Reserve starts to increase interest rates, as it did in December 2015, savers finally get a break. For years, deposit rates have been virtually zero, while loan and credit card rates increased. This made it very difficult to save money.

Now that rates are on the rise, there are some new considerations for consumers who want to keep their hard-earned cash safe. One question many face is whether they should Tap Their (k) or Home Equity to Save on Interest. Here we will explore the pros and cons of each option:

Option 1: Tapping Into Your Retirement Savings


  • – If you have a 401(k) through your employer, you may be able to take out a loan against it without penalty.
  • – The interest you pay on the loan goes back into your account.
  • – You can usually repay the loan over five years.


  • – You are borrowing from your future self, which means you will have less money saved for retirement.
  • – If you leave your job before the loan is repaid, you may have to pay it back all at once or face penalties.
  • – If your investment portfolio loses value, you may be required to repay the loan with money that is worth less than when you borrowed it.

How to make the decision that’s best for you

When it comes to deciding whether to tap into your home equity or 401(k) to save on interest, there are a few things you need to take into account. First, think about how much debt you currently have and what your monthly payments are. If you have a lot of debt, then you may want to consider using your home equity to pay off some of it. However, if your monthly payments are manageable, then you may want to leave your home equity alone.

Next, think about the interest rates on both your home equity and 401(k). If the interest rate on your home equity is lower than the rate on your 401(k), then it makes sense to use your home equity to pay off debts. However, if the interest rate on your 401(k) is lower than the rate on your home equity, then you may want to use that money to pay off debts instead.

Finally, consider the risks involved with each option. With home equity, you run the risk of losing your home if you can’t make the payments. With a 401(k), you could lose out on potential earnings if the market takes a downturn. Ultimately, the decision of which route to take depends on a variety of factors and should be made after careful consideration.


A Fed rate increase can have a major impact on your finances, but that doesn’t mean you have to suffer. By taking the time to understand when it’s best for you to tap into your 401(k) or home equity in order to save on interest, you put yourself in control of your financial future. With careful consideration and planning, these strategies can help you manage debt more effectively and keep more money in your pocket.

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