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Personal Loan or HELOC, or "Why No Low-Interest Debt?"

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  • #16
    Have you already looked into how much the loan would be and what the interest rate would be? Not adverse to debt here either...we carry a mortgage and medical school debt and both are around 3.5% interest (fixed). We also got a HELOC when we got the house. But that was 6 years ago when rates were low and interest was 5%. It was ARM and I'm sure the HELOC you get would also be ARM. With rates already higher (our 5% is now 6.5%) and just going up...likely at least 0.5% by December of this year, we're trying to get rid of that ASAP while there's no interest in getting rid of the two other loans ASAP.

    For your situation I really would strongly advise against taking out a HELOC and just save up the cash to do this. I suspect you have the means to eventually get all the cash you need, and the interest on HELOCs are only going up in the short and probably medium-term future. I know when we get around to a renovation it's going to be paid in cash.

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    • #17
      The other thing people forget in these calculations is inflation.

      The thing the other side forgets is behavioral, it is very very difficult not to overspend when you take out a loan vs. cash. Im not sure its ever happened. You will spend less for sure with cash, because it hurts. Home renovations fall squarely into unnecessary consumptive items, and thats fine, but play accordingly.

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      • #18
        There's nothing wrong with using leverage to increase returns.

        Just keep in mind that leverage works both ways.  Leverage is how wealthy people go broke.

        If you don't owe anyone any money, then you can never go bankrupt.

        Leverage makes sense if the interest spread is greater. If you were paying 0.5% for your HELOC, then most of us would say you should go for it.

        Once the rate exceeds 4%, it's not so attractive.  At 6%, there's little to be gained.

        Ask yourself, if you had your mortgage all paid off, would you take out a 30 year mortgage and invest it all in the stock market?  If yes, then use the HELOC.  If no, ask yourself why not.

        Have you seen your investments drop in value by 50% or more?  If you had you might be more cautious.

        Do you own bonds?  If so, they are probably paying you less than you will be paying the bank.  Why would you borrow at 4% to invest at 2%?

        Are you smarter than the bank?  They can invest in the stock market too, but they would rather lend you the money than invest it.  Maybe they know something you don't.  ( Yes, I know there are other reasons why, but still...)

        Bottom line, you didn't just think of something new. There's a reason why most of us are saying no.   But it won't make or break you either way.

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        • #19
          I'm surprised no one has mentioned this yet, but in my mind, the real reason to avoid taking out low interest/zero interest debt for this sort of thing is to help control spending.  The truth is that when you use debt, whether it be a credit card, car loan, mortgage, home loan, etc...you tend to spend more than you would if you forced yourself to pay with cash.

          I don't necessarily see anything wrong with choosing to pay off your low interest student loans or mortgage slowly if you're actually using the extra cash flow to invest aggressively.  Assuming the stock market continues to behave the way it always has, the math will clearly work in your favor over 20-30 years.  In fact, I am having a hard time convincing myself to pay off the rest of my 84k of 2.6% interest student loans for that exact reason.  BUT, I do not think it's wise to take on new debt for the purposes you describe.  Student loans were an investment in yourself with HUGE returns.  Mortgages are kind of a necessary evil and are easy to get out of if needed.  But, outside of those two types of debt, cars, boats, home renovations, TV's, computers, etc. should be paid for with cash to avoid the possibility of over spending.  Home renovations typically yield terrible returns on money invested.  Do you really want to still owe money on a 20 year old kitchen in the year 2038?  Kitchens and bathrooms typically need to be renovated every 15-20 years if you want to sell your home for maximum value.  Would you want to buy a home today with a kitchen renovation from 1998?

          Like Warren Buffett says, "when the tide goes out, you can tell who's been skinny dipping." (or something like that, he's said it many times). You don't want to be in a situation when the stock market crashes and/or the housing market recedes, and you're carrying around a bunch of consumer debt for cars and kitchen sinks, etc. It would be far better to be debt free in a bear market so you can maximize your cash flow into buying cheap stocks.

          Some debt is okay, but you have to be careful not to fall into the over spending trap by using "cheap debt" as your excuse to buy more crap.  Cash flow those renovations!

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          • #20




            I’m surprised no one has mentioned this yet, but in my mind, the real reason to avoid taking out low interest/zero interest debt for this sort of thing is to help control spending.  The truth is that when you use debt, whether it be a credit card, car loan, mortgage, home loan, etc…you tend to spend more than you would if you forced yourself to pay with cash.
            Click to expand...


            No one?  What are Zaphod and I....chopped liver?  

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            • #21
              (assuming you have self control to not overspend, and pay off the loan ASAP...), one advantage for a HELOC (+ cashflow...) is your ability to write any check - today. As we've remodeled our moneypit, it has been nice to not have to think about cashflow this month, etc, but instead realize if I just write a check for 5k to the (insert trade here), the project gets done - this week, ontime, and isn't dragged out. Having "cash" can buy you a shorter, less painful project.

               

              Sometimes your mental health, and ability to move on in life is worth something.

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              • #22







                I’m surprised no one has mentioned this yet, but in my mind, the real reason to avoid taking out low interest/zero interest debt for this sort of thing is to help control spending.  The truth is that when you use debt, whether it be a credit card, car loan, mortgage, home loan, etc…you tend to spend more than you would if you forced yourself to pay with cash.
                Click to expand…


                No one?  What are Zaphod and I….chopped liver?
                Click to expand...


                I must not have read all the posts very carefully, sorry

                Comment


                • #23










                  I’m surprised no one has mentioned this yet, but in my mind, the real reason to avoid taking out low interest/zero interest debt for this sort of thing is to help control spending.  The truth is that when you use debt, whether it be a credit card, car loan, mortgage, home loan, etc…you tend to spend more than you would if you forced yourself to pay with cash.
                  Click to expand…


                  No one?  What are Zaphod and I….chopped liver?
                  Click to expand…


                  I must not have read all the posts very carefully, sorry
                  Click to expand...


                  haha, I'm just kidding

                  Comment


                  • #24
                    I think this post just solidifies why it's good to keep some cash on hand in an emergency fund. You don't have to make choices about selling off funds in a taxable to access your cash and probably a lot less likely to be tempted by a HELOC. I've realized over time I like having the flexibility of having more cash on hand so our EF will grow larger over the next year. We will be looking at a renovation down the road as well ( because we just bought a house with a kitchen last renovated in 91!) And I want to just be able to do it with cash flow once we've figured out what we want to do.

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                    • #25
                      I'm all for low interest, but I don't see a remodel as a necessity. Why can't it be planned for a couple years out? Keep the money in high yield savings until you hit your number for the remodel.

                      The other thought on this..you don't state what your current net worth/financial picture really is. You say you can handle the payment but I think it is a much different situation depending on overall status. Already at 2 million and no matter what you will retire at your goal...go ahead and get the remodel now. If you feel like you are behind then I'd skip an additional loan to keep boosting the net worth.

                      Anything over 3% bothers our household but I've financed a couple cars at >3% because I was going to cashflow the car in 3-4 months...

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