Clark Howard’s Simple Rule for 401(k) Loans: Don’t Do It, Even If Rates Look Good

On the May 13, 2026 episode of The Clark Howard Podcast, a caller named Lucas from Oklahoma faced a temptation millions of homeowners encounter: “I just hate seeing 80% of mortgage payments go straight to interest.” His plan was to take a 6.75% loan from his 401(k) and use the proceeds to pay down his 6.5% mortgage.

Howard’s response was instant: “The answer is don’t do it.”

Why the verdict is correct

Howard is right, and the math is straightforward. Lucas would borrow at a rate higher than the rate he’s trying to escape. A 401(k) loan at 6.75% to pay down a mortgage at 6.5% is a guaranteed loss of 0.25 percentage points before fees. Howard noted there are typically loan setup charges on top of that, which only widens the gap.

That arithmetic settles it. The bigger problem is what disappears from the retirement account while the loan is outstanding.

The compounding hole most borrowers miss

When you pull $40,000 from a 401(k) as a loan, that $40,000 stops being invested in the market. You repay yourself with interest using after-tax payroll dollars, but the balance you removed misses every dividend, reinvestment, and market gain during repayment.

Howard framed it cleanly: “Your 401(k), look at it and look what the compounding effect is over time. And it grows tax-free if you’re in the Roth version of the 401(k). It grows tax-free. And when you spend it later, it is tax-free.”

Run a plausible scenario. A 40-year-old borrows $40,000 against a 401(k) earning 7% annually and takes five years to repay it. The sidelined dollars would have grown to roughly $56,000 had they stayed invested. By retirement at 65, that $56,000 compounding at 7% for another 20 years lands north of $200,000. That is the real cost of using retirement money to shave 0.25% off a mortgage rate.

The job-loss landmine

There is a second risk Howard’s caution rests on, and it has real teeth. If you leave your employer with a 401(k) loan outstanding, the unpaid balance is typically due by your tax filing deadline. Miss it and the IRS treats the balance as an early withdrawal: ordinary income tax plus a 10% penalty if you are under 59½.

The labor market is steady but not bulletproof. Unemployment sits at 4.3%, and touched 4.5% as recently as November 2025. A homeowner who funds a mortgage paydown with retirement money bets on uninterrupted employment for the full repayment term.

Why waiting is the smarter play

Howard closed with strategic advice: “An opportunity will come along, sadly, in the next recession where you’ll have an opportunity to refinance that mortgage into a better deal.” The current rate environment supports patience.

The 10-year Treasury yield is almost 5%, near the top of its 12-month range, and the federal funds rate upper bound stands at 3.75%, down from 4.5% in September 2025. The Fed is in an easing cycle. When the economy softens, mortgage rates typically follow Treasuries lower, and a clean refinance becomes available without raiding retirement.

The variable that flips the answer

The single factor that would change this calculus is the spread between the two rates. Howard’s verdict holds because Lucas’s 401(k) loan rate is higher than his mortgage rate. If a borrower had a 3% legacy mortgage and a 401(k) plan offering loans at prime minus a discount, the surface math could look different, but lost compounding and the job-loss trigger would still apply. Even a favorable rate spread rarely compensates for those two costs combined.

What to do instead

1. Run the real opportunity cost. Pull your 401(k) balance, pick the amount you’d borrow, and compound it at 7% annually through retirement. That is the dollar figure you’d trade away.
2. Set a refinance trigger. Decide the rate at which refinancing your 6.5% mortgage saves money after closing costs. Most homeowners need at least a 0.75 to 1 percentage point drop. Watch the 10-year Treasury.
3. Attack interest the safe way. One extra principal payment per year on a 30-year mortgage knocks years off the loan without touching retirement assets. Biweekly payments do something similar.
4. Build a cash buffer first. The personal savings rate is roughly 4%, down from 6.2% two years ago. Thin cushions are exactly why borrowing from retirement starts looking reasonable. Fix the cushion before touching the 401(k).

The mortgage interest line on your statement looks ugly. The retirement statement you’d write yourself by raiding the 401(k) would look worse.