Home Equity Loan vs Cash Out Refinance

[hightower]

We currently need about $25-30k for a couple of home improvement projects (exterior painting, masonry work, storm windows, etc).

I don't really want to wait a year or so to save up enough cash for these projects because they are already long overdue and we're excited to finally get them done.

So, I'm considering either a Home Equity Loan or refinancing.  We have a $295k mortgage on a house that's probably worth around $575k.
The home equity loan I've been offered is $25k for 4 yrs at 4%, $570/month.  If I were to refinance I'd probably be able to get a 30 year mortgage at 4% and my monthly payments would go up by about $90.  We already budget $500/month towards "home improvement savings" anyway, so it wouldn't really hurt our budget to do the loan.

Obviously I'd have more cash in my pocket each month if I went with the refinance, which would be nice since I need to boost my taxable brokerage account savings this year.  But, I'd also have to pay for an appraisal and closing costs.

What would you do?

[wideopenspaces]

I personally don't love either of those options. My first choice would be to wait a year and pay cash. Second would be to use emergency fund to cover it with plan to build it back up over the year. Would that be an option for you?

[StarTrekDoc]

HELOC tends to be fee free;  refi cash out you're paying closing fees that's rolled in.   For 25k, HELOC.

[hightower]

I definitely considered using the emergency fund, but that doesnt feel safe. If an actual emergency happens while we're building it back up, we'd be forced to use credit cards.

[Dr. Mom]

Open HELOC, but use your emergency fund.  The HELOC will default to being your emergency fund until you build it back up. Strange why taking out a loan feels safer to you than using the emergency fund.  No way would I tack on more long term mortgage for home repairs.

[AZdoc68]

hightower wrote:

We currently need about $25-30k for a couple of home improvement projects (exterior painting, masonry work, storm windows, etc).

I don’t really want to wait a year or so to save up enough cash for these projects because they are already long overdue and we’re excited to finally get them done.

So, I’m considering either a Home Equity Loan or refinancing.  We have a $295k mortgage on a house that’s probably worth around $575k.
The home equity loan I’ve been offered is $25k for 4 yrs at 4%, $570/month.  If I were to refinance I’d probably be able to get a 30 year mortgage at 4% and my monthly payments would go up by about $90.  We already budget $500/month towards “home improvement savings” anyway, so it wouldn’t really hurt our budget to do the loan.

Obviously I’d have more cash in my pocket each month if I went with the refinance, which would be nice since I need to boost my taxable brokerage account savings this year.  But, I’d also have to pay for an appraisal and closing costs.

What would you do?

Click to expand...

What's the interest rate on your current mortgage?  It's probably pretty low I would guess but if by chance refi'ing at 4% would decrease it, might be worth considering.  Online calculators will tell you your break-even time which is the number of months it will take for reduced interest costs to pay for the refi fees, after which you are saving money for the rest of the loan.

Otherwise, I'd get a HELOC set up (which costs you nothing until/unless you tap it) and try to pay for the project's costs as much as possible with saved cash.

[hightower]

We're currently at 4%, so a refi would probably keep us there

[Craigy]

Heloc or just cash flow it.

Are they all with the same contractor?  Sound like different people.  Just write the checks as you need to.

[hightower]

@craigy, no these are different contractors.  A landscape company for our front stoop project, a mason for some chimney repair, another guy for some storm window installation, and a painter for the exterior painting.   So, the home equity loan would work well because the bank will give me a check for 25k and I can just write checks for each job as they are completed.  I'm capping the amount borrowed at 25k to keep us within budget for what we have set aside for home improvements.  If the costs go over 25k, I'll pay with cash any amount over.

So I keep on going back and forth on this issue, but I think I'm convinced that the loan is the better option. Since this is a home loan and the interest is tax deductible, its like I'm just tacking on an additional 25k to my mortgage and paying it off quickly over 4 years.  What's another $25k at 2.4% (after tax savings) on a $295k mortgage when my home is valued at 600k and I'm 35 years old?  Plus, I'll probably be selling this house in 3-4 years anyway for a nice profit, unless we have another housing crash.

We budget $500 per month for "home improvement savings" anyway, which covers the cost of the loan payments.  So, I'll be able to keep my emergency fund intact and continue to focus on saving extra money in our taxable account rather than re-accumulating money in our emergency fund for the rest of the year.  And yes, we're still on track to be maxing out our 401ks and Roth IRAs.

This is the last big home improvement project our house needs.  Anything else that comes up would be optional (and likely a DIY project) unless there's an unexpected problem and that would still be covered by our emergency fund/insurance.

[Dr. Mom]

hightower wrote:

@craigy, no these are different contractors.  A landscape company for our front stoop project, a mason for some chimney repair, another guy for some storm window installation, and a painter for the exterior painting.   So, the home equity loan would work well because the bank will give me a check for 25k and I can just write checks for each job as they are completed.  I’m capping the amount borrowed at 25k to keep us within budget for what we have set aside for home improvements.  If the costs go over 25k, I’ll pay with cash any amount over.

So I keep on going back and forth on this issue, but I think I’m convinced that the loan is the better option. Since this is a home loan and the interest is tax deductible, its like I’m just tacking on an additional 25k to my mortgage and paying it off quickly over 4 years.  What’s another $25k at 2.4% (after tax savings) on a $295k mortgage when my home is valued at 600k and I’m 35 years old?  Plus, I’ll probably be selling this house in 3-4 years anyway for a nice profit, unless we have another housing crash.

We budget $500 per month for “home improvement savings” anyway, which covers the cost of the loan payments.  So, I’ll be able to keep my emergency fund intact and continue to focus on saving extra money in our taxable account rather than re-accumulating money in our emergency fund for the rest of the year.  And yes, we’re still on track to be maxing out our 401ks and Roth IRAs.

This is the last big home improvement project our house needs.  Anything else that comes up would be optional (and likely a DIY project) unless there’s an unexpected problem and that would still be covered by our emergency fund/insurance.

Click to expand...

What's another 25K?  Slippery slope in that thought process.  Be careful.

[hightower]

You're right that by itself that statement is a slippery slope.
What I meant was, if I had bought our house completely renovated for 600k and put down 280k, we'd have a mortgage for 320k and we'd be well under the 2x salary rule and everyone would say we were in great shape.

Adding this home equity loan to our current house debt (mortgage balance is 295) is no different than that except we'll be paying off 25k of it quickly over 4 years.  That's how I'm viewing this.  Yes, ideally I'd love to have enough in home improvement savings right now to just pay cash for it, but that would take us another 4 years of saving to get to unless we took money from other places in our budget.

[hightower]

So, I'm still struggling with this decision and how to pay for these projects.  In total we need 29k to get the work done on the house.  I have basically exactly that in cash right now.  However, 20k of it is the cash portion of our emergency fund, 4500 is what I have saved up so far for our backdoor roth contributions and another 4500 is ear marked to go towards the taxable brokerage account.

The thought of adding more debt to my plate is kind of bothering me honestly.  I am tempted to just say let's pay cash for it and call it a day.  I'd have to redirect cash flow away from contributing to our taxable account until the emergency fund and roth funds were replenished, but that seems to feel better than adding more debt.

Can't decide:/

[DMFA]

Cash, one job at a time, with HELOC (line of credit, not loan) as backup emergency fund until you can replete it.

How much are the jobs individually?

Ah, the joys of home ownership...imagine dealing with this as a resident, when that would be literally half your annual gross income!

[hightower]

Home ownership...such a pain in the ***, I mean joy
There are 3 separate projects

1. Exterior Painting.  Its a large, old brick building and there's a lot of prep work involved. $9800

2. Masonry. Rebuild a stone wall, re-set old limestone stairs, foundation tuck pointing, add limestone walkway, small patio addition in backyard. It's a LOT of labor. $16,900

3. Add storm windows to 3rd floor and buy screens for remaining storm windows. $2750

Total : $29,450

The house was built in 1885 and we've been renovating it for the last 5 years.  Interior is all done (except for a few more windows I'm restoring and we need to strip paint off the old walnut bannister on our staircase).  This is the last set of expensive projects planned for this house. The house will be more or less "done" after these are complete.  The house will then be in sellable condition (in case we want to sell while the market is hot).  That's why we're excited to finally get this over with.  It will feel like a big relief to finally see it all nice and pretty on the outside.

What I'm thinking would be smart is to use our 20k to pay for items 2 and 3.  We can then put the painting project on a zero interest credit card that I already have that offers 0% for the next 12 months.  That will allow us to leave our taxable account and Roth savings alone.  We will then start redirecting money that would have gone to the taxable account into the emergency fund until its replenished.  By time these projects are complete and the money is actually due, we'll have an additional 9k earned to contribute that would have went to the taxable account.  So, really we'll only have depleted about half of our emergency fund and we'll just have to make sure to pay off the credit card by next June.

[DMFA]

Yeah, zero interest is a p decent call, too, if you *must* spend...

Wait, the house was built in 1885? As in EIGHTEEN eighty-five? Like 132 years ago? Very cool. Was that handed down through generations or something?