We have an opportunity to purchase a small investment home ($40K) but are disagreeing how to finance it.
A) Take out a traditional mortgage (at 4.375%). We would have to use our already established HELOC (3% interest rate) on out primary residence for a 25% down payment, plus any improvements or repairs ($13K-$15K total).
B) Borrow against our 401K (currently at $800K). We have an additional $300K in retirement funds, plus ten more years until mandatory retirement.
The income from the rental property should be plenty to cover the mortgage payment, but will only slowly pay back the HELOC. We are already stretched in our month to month spending and I prefer to keep the HELOC available for emergencies and our daughter's private school tuition. My husband says borrowing this small amount will make a bigger impact on the compound interest the 401k is currently earning. We can't afford a summer vacation.  But our retirement assets are worth over $1.1 million? What's the best way to finance this new property? (It will also be our oldest son's primary residence while he finishes college in 2-3 years).