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Home Equity Loan versus Cash Payment

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  • Home Equity Loan versus Cash Payment

    My wife and I are physicians who have been in a stable job situation for the past 9 years and own the home we plan to live in until we retire (30 years). We're planning home renovations that will cost about $80-100K. We've taken advantage of employer-sponsored 401a, 403b, and 457b investment opportunities as well as a joint trust taxable account, save at least 20% of our gross income, and have grown our net worth significantly over the past 5-10 years. Interest on my wife's consolidated loans is 3-4% (I have none) and our mortgage is at 4%, currently with 30% in home equity.

    We have money to pay for the renovations outright, but would it be better to take out a home equity loan, if we can get around a 4% fixed rate, so that we can keep that money invested? A quick review of the S&P Index shows a historical average rate of return of around 10%, so mathematically, it would seem to make more sense to take out the loan.

  • #2
    Fixed home loan usually has closing costs.  If not, up to you.

    Another option to consider - roll the consolidated loans and refinance the entire thing and pull out the $$ for the renovation.   just don't top 750k.

    Since sounds like entering mid-career and stable functions with stable home --- either 15 or 30 year is fine -- depending on how much equity you want to build vs invest doubling down into the market on a leveraged home loan.

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    • #3
      Thanks. Yes, I realize there would be closing costs, and that we won't be able to deduct interest on a home equity loan starting in 2018. Those obstacles aside, the real question is whether it makes sense to take out the loan to grow wealth.

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      • #4
        That's the point.  IF you're interested to leveraging your home equity for further investment, full refi into a 30yr (or better yet, interest only) would be the most cost efficient way to do it.

        We personally have leveraged properties, including our primary home during our growth years.   Over the past 5 years, we've moved to a cash flow position since have neared financial independence.

        That said, you'll find little appetite here to do that aggressive type of investment on your primary home.

        First rule - choose the investing style that allows you to sleep better through the night.

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        • #5
          Thank you.

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