Remodel using mutual funds or a loan.

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Topic Author
Nick1989
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Joined: Sat Feb 08, 2020 11:15 am

Remodel using mutual funds or a loan.

Post by Nick1989 » Sat Feb 08, 2020 1:46 pm

Long time forum stalker first time poster.

I live in northern Virginia and have had my home for the past 8 years. I’m a hairstylist/business owner making between 100-130k per year. I’m the sole income earner for my family of 5. I invest in my 401k and currently have 45,000 I also have a mutual fund not in retirement currently valued at 100k.

My mortgage has 205,000 left and my house is worth 400,000. My monthly payments are around 1300 per month. We have been contiplating and addition. Building a garage with a master suite. The kids are getting older and the space is getting tight. We would consider moving but it makes more since to stay and we love our home. I estimate the job costing around 90k. My two options would be to refinance to a mortgage at around $2100 per month or use my mutual funds and then Take the extra $800 or so that I would be paying and contribute that to a Roth. Assuming 6% growth it would take 11 years to break even.

What should I do? I don’t like the idea of draining my investments but I also don’t like the idea of being stuck with a high mortgage for 20 years. I’m 30 years old but I worry about the 50+ hours I work per week and if I got hurt I would have more trouble with making ends meet.

What would you do? Anything wrong with my numbers?

sport
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Re: Remodel using mutual funds or a loan.

Post by sport » Sat Feb 08, 2020 2:42 pm

If you cash in your taxable account you will probably have to pay capital gains tax. So, you would need to withdraw more than what you need. You also mention the possibility of being injured. You should seriously consider getting disability insurance. As the sole breadwinner, this is very important, along with life insurance.

Topic Author
Nick1989
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Re: Remodel using mutual funds or a loan.

Post by Nick1989 » Sat Feb 08, 2020 2:50 pm

Thank you for the quick response! I do have an emergency fund (only 12k) I also have a 300k life insurance policy. I do need to get disability insurance though. FWIW I have a lot of family in the area that are quite willing to help if something goes seriously wrong health wise. I’m very proud and don’t like to get help when I don’t need it, but I do factor that into my worst case senario.

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Wiggums
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Re: Remodel using mutual funds or a loan.

Post by Wiggums » Sat Feb 08, 2020 3:09 pm

I’m picturing an attached garage with the master suite above. Meaning you free up one room in your existing house for 90k.

I’m have two things for you to consider:

1) Your emergency fund is too small. My brother in law fell in the shower yesterday. A freak accident and he broke a rib. He is also self employed and sold breadwinner. His ability to physical work will be limited for a few months.

2) When you sell the house, will you get the money out of this type of improvement?

I’m not against the improvement. Just not a slam dunk for me.

sport
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Re: Remodel using mutual funds or a loan.

Post by sport » Sat Feb 08, 2020 3:44 pm

For a family of 5, 300k in life insurance is not very much. I would buy term insurance and increase that to at least 1M. I would even consider 2M. Term insurance is inexpensive if you are younger and your health is good.

Topic Author
Nick1989
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Re: Remodel using mutual funds or a loan.

Post by Nick1989 » Sat Feb 08, 2020 4:31 pm

Thank you for your resonse!

1) Your emergency fund is too small. My brother in law fell in the shower yesterday. A freak accident and he broke a rib. He is also self employed and sold breadwinner. His ability to physical work will be limited for a few months.

Great point, if I decide to use my mutual fund I will double my EF before putting money in my Roth

2) When you sell the house, will you get the money out of this type of improvement?
It’s always hard to speculate, a garage usually recoups value well and a master suite will help the sale of the house in the future. Maybe I recoup 60-80%. but we do plan on staying in our house for at least 15 years.

Topic Author
Nick1989
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Re: Remodel using mutual funds or a loan.

Post by Nick1989 » Sat Feb 08, 2020 4:37 pm

sport wrote:
Sat Feb 08, 2020 3:44 pm
For a family of 5, 300k in life insurance is not very much. I would buy term insurance and increase that to at least 1M. I would even consider 2M. Term insurance is inexpensive if you are younger and your health is good.
Really, is this standard? I did get my life insurance years ago so I would have more income to replace now than before but I can’t see needing that much money. My wife currently doesn’t work and my kids are school age (8-12) so in the unlikely case of my death she could work and the 300k would cover years worth of living expenses and childcare if she needed to. Not trying to be defensive I’m just curious if that much is needed.

sport
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Re: Remodel using mutual funds or a loan.

Post by sport » Sat Feb 08, 2020 4:53 pm

Nick1989 wrote:
Sat Feb 08, 2020 4:37 pm
sport wrote:
Sat Feb 08, 2020 3:44 pm
For a family of 5, 300k in life insurance is not very much. I would buy term insurance and increase that to at least 1M. I would even consider 2M. Term insurance is inexpensive if you are younger and your health is good.
Really, is this standard? I did get my life insurance years ago so I would have more income to replace now than before but I can’t see needing that much money. My wife currently doesn’t work and my kids are school age (8-12) so in the unlikely case of my death she could work and the 300k would cover years worth of living expenses and childcare if she needed to. Not trying to be defensive I’m just curious if that much is needed.
Do you want your kids to go to college? That would mean 12 years of college costs. It seems you are also in a HCOL area. It will be 14 years until your youngest would finish college. 20k per year? Yes, your spouse probably could get a job. However, there is also inflation to allow for. I would be very uncomfortable with that amount of protection for my family. Perhaps others will comment.

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1789
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Re: Remodel using mutual funds or a loan.

Post by 1789 » Mon Feb 10, 2020 2:16 am

Nick1989 wrote:
Sat Feb 08, 2020 4:37 pm
sport wrote:
Sat Feb 08, 2020 3:44 pm
For a family of 5, 300k in life insurance is not very much. I would buy term insurance and increase that to at least 1M. I would even consider 2M. Term insurance is inexpensive if you are younger and your health is good.
Really, is this standard? I did get my life insurance years ago so I would have more income to replace now than before but I can’t see needing that much money. My wife currently doesn’t work and my kids are school age (8-12) so in the unlikely case of my death she could work and the 300k would cover years worth of living expenses and childcare if she needed to. Not trying to be defensive I’m just curious if that much is needed.
OP,

I agree. I think first 2 things I would do is getting disability insurance in place and a life insurance up to a million at least. I imagine updating your life insurance to that level should cost you maybe 20-25$ extra per month.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

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1789
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Re: Remodel using mutual funds or a loan.

Post by 1789 » Mon Feb 10, 2020 2:21 am

Nick1989 wrote:
Sat Feb 08, 2020 4:31 pm
Thank you for your resonse!

1) Your emergency fund is too small. My brother in law fell in the shower yesterday. A freak accident and he broke a rib. He is also self employed and sold breadwinner. His ability to physical work will be limited for a few months.

Great point, if I decide to use my mutual fund I will double my EF before putting money in my Roth

2) When you sell the house, will you get the money out of this type of improvement?
It’s always hard to speculate, a garage usually recoups value well and a master suite will help the sale of the house in the future. Maybe I recoup 60-80%. but we do plan on staying in our house for at least 15 years.
What’s the interest rate on your mortgage? Did you look recent rates for refinancing?
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

GoFish
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Joined: Tue Mar 31, 2015 7:48 pm

Re: Remodel using mutual funds or a loan.

Post by GoFish » Mon Feb 10, 2020 2:47 am

Sorry to pile on, but I also think you are underinsured. $1M is the least term life insurance that you should have. $2M would be better.

You haven’t indicated what your spouse’s earning capacity would be, but presumably substantially less than your own due to time out of the job market. Child care is expensive, too. The thought of a family struggling financially while mourning the loss of husband and father ...

As others have also said, disability insurance on the breadwinner would be wise.

And while I am piling on, what about college funds for the kiddos? Do you plan to fund all or part of their education? It is truly shocking how quickly college expenses come!

I would rather see you finance the remodel and leave your retirement savings alone. If the added monthly payment is uncomfortable, then take that as an indicator you can’t afford the expenditure.

Topic Author
Nick1989
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Joined: Sat Feb 08, 2020 11:15 am

Re: Remodel using mutual funds or a loan.

Post by Nick1989 » Mon Feb 10, 2020 8:20 pm

1789 wrote:
Mon Feb 10, 2020 2:21 am
Nick1989 wrote:
Sat Feb 08, 2020 4:31 pm
Thank you for your resonse!

1) Your emergency fund is too small. My brother in law fell in the shower yesterday. A freak accident and he broke a rib. He is also self employed and sold breadwinner. His ability to physical work will be limited for a few months.

Great point, if I decide to use my mutual fund I will double my EF before putting money in my Roth

2) When you sell the house, will you get the money out of this type of improvement?
It’s always hard to speculate, a garage usually recoups value well and a master suite will help the sale of the house in the future. Maybe I recoup 60-80%. but we do plan on staying in our house for at least 15 years.
What’s the interest rate on your mortgage? Did you look recent rates for refinancing?
My current rate is 4%. It seems like 3.5 is the lowest possible rate I am likely to get.

fyre4ce
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Re: Remodel using mutual funds or a loan.

Post by fyre4ce » Mon Feb 10, 2020 8:29 pm

I would lean more toward a cash-out refi and take the $90k from that, rather than selling mutual funds. If you refinance to 75% LTV that will just about cover the renovation. You'll get a lower rate too.

Topic Author
Nick1989
Posts: 8
Joined: Sat Feb 08, 2020 11:15 am

Re: Remodel using mutual funds or a loan.

Post by Nick1989 » Mon Feb 10, 2020 8:34 pm

GoFish wrote:
Mon Feb 10, 2020 2:47 am
Sorry to pile on, but I also think you are underinsured. $1M is the least term life insurance that you should have. $2M would be better.

-seems to be a consensus, I promise to look into that.

You haven’t indicated what your spouse’s earning capacity would be, but presumably substantially less than your own due to time out of the job market. Child care is expensive, too. The thought of a family struggling financially while mourning the loss of husband and father ...

-true, my wife has had various part time jobs and business that she has done well with. I do respect her hustle and have faith in her ability to earn income but her work experience is almost non existent (we’ve been married and had our current arrangement since we were teenagers). She has an associates degree which will her get the in the door but not likely earn 6 figures any time soon.
As others have also said, disability insurance on the breadwinner would be wise.



And while I am piling on, what about college funds for the kiddos? Do you plan to fund all or part of their education? It is truly shocking how quickly college expenses come!

- I do want to give my children the option for college but I admittedly place college funds as a low priority. Maybe it’s my non degree bias but I believe that it is more important that we are set up to help them as they come into adulthood than that we are poor but have kids with debt free sheepskins. Plus I’ve herd that having college funds actually lessen your ability to qualify for financial aid. Have you herd of this?

I would rather see you finance the remodel and leave your retirement savings alone. If the added monthly payment is uncomfortable, then take that as an indicator you can’t afford the expenditure.

-it’s not that I worry about the cost of payment (I always worry about new payments). I’m worried about continuing a payment for 22 years when my job depends on my body and also my income fluctuates (commission with no base salary). This further makes me realize the importance of disability insurance. But the idea would be that I essentially loan myself the money and pay myself back there by saving on interest rates as well as reducing the likelihood of losing my home should I have a reduction in income.

Topic Author
Nick1989
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Joined: Sat Feb 08, 2020 11:15 am

Re: Remodel using mutual funds or a loan.

Post by Nick1989 » Mon Feb 10, 2020 8:37 pm

fyre4ce wrote:
Mon Feb 10, 2020 8:29 pm
I would lean more toward a cash-out refi and take the $90k from that, rather than selling mutual funds. If you refinance to 75% LTV that will just about cover the renovation. You'll get a lower rate too.
Thanks for the insight! I have two questions.
1. Forgive my financial ignorance but I don’t know what a 75% LTV is.
2. What makes you lean more towards that over the mutual fund cashing?

fyre4ce
Posts: 546
Joined: Sun Aug 06, 2017 11:29 am

Re: Remodel using mutual funds or a loan.

Post by fyre4ce » Mon Feb 10, 2020 8:56 pm

Nick1989 wrote:
Mon Feb 10, 2020 8:37 pm
fyre4ce wrote:
Mon Feb 10, 2020 8:29 pm
I would lean more toward a cash-out refi and take the $90k from that, rather than selling mutual funds. If you refinance to 75% LTV that will just about cover the renovation. You'll get a lower rate too.
Thanks for the insight! I have two questions.
1. Forgive my financial ignorance but I don’t know what a 75% LTV is.
2. What makes you lean more towards that over the mutual fund cashing?
1. LTV means "loan-to-value" and it's a ratio. Generally, lenders don't like to lend you more money than 80% of the value of the property that you're putting up as collateral. The reason being, in a real estate price crash, it is generally expected that prices will drop up to 20% (whether this is accurate or not is a separate issue), and if the house value drops below the loan amount, they're worried you'll walk away from the property and leave the lender having to eat the difference. That's why putting 20% down gets you a good rate. That's also why when refinancing, you can usually go up to about 80% of the value of the property today, although I've occasionally seen numbers higher or lower than that. If you refinanced up to 75% LTV, you would borrow ($400k x 75% =) $300k, and after paying off the existing mortgage ($205k) you'd have $95k left over for your remodel. Seems to work out nicely.

2. It's not an easy decision, and is a variation on the classic "pay off debt or invest" trade-off. Mathematically it comes down to whether you could earn a higher rate of return after taxes on your investments than the after-tax interest rate on the loan. (Given your circumstances I'd expect you're not able to deduct mortgage interest, so your nominal rate is after-tax.) I think it's reasonable to expect high-quality investments to perform better than 3.5% over the next 5-10+ years. Another plus is that you avoid triggering capital gains tax by selling taxable mutual funds, which almost surely have unrealized capital gains. Paying capital gains tax will lower your long-term investment performance. For those reasons, I would lean toward the cash-out refi.

However, it's far from a slam dunk. The market could crash tomorrow and cut the value of your investments in half, in which case you'd wish you had sold them at market highs to pay for the remodel rather than stick yourself with a bigger mortgage payment. The larger mortgage payment also makes you less tolerant to drops in income. (You could live of off the mutual funds if you had to, but this is less than ideal.) And many people have behavioral issues borrowing money. A contributing factor to the 2007 housing collapse was people treating their houses like ATM's and borrowing up to the max every time the appraisal went up. If you don't think you have the financial responsibility to handle a ~50% larger fixed payment every month, look at other options.

hidradenitis
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Re: Remodel using mutual funds or a loan.

Post by hidradenitis » Mon Feb 10, 2020 11:53 pm

Consider the marginal cost of additional life insurance. Although you may question the value of the additional coverage, you may find that the premium difference between 300,000 and 1 or 2 million to be comparatively small.

I don't believe in being overinsured, but I would much prefer it to being underinsured, particularly if the price difference between the two is not large.

Topic Author
Nick1989
Posts: 8
Joined: Sat Feb 08, 2020 11:15 am

Re: Remodel using mutual funds or a loan.

Post by Nick1989 » Thu Feb 13, 2020 1:00 pm

fyre4ce wrote:
Mon Feb 10, 2020 8:56 pm
Nick1989 wrote:
Mon Feb 10, 2020 8:37 pm
fyre4ce wrote:
Mon Feb 10, 2020 8:29 pm
I would lean more toward a cash-out refi and take the $90k from that, rather than selling mutual funds. If you refinance to 75% LTV that will just about cover the renovation. You'll get a lower rate too.
Thanks for the insight! I have two questions.
1. Forgive my financial ignorance but I don’t know what a 75% LTV is.
2. What makes you lean more towards that over the mutual fund cashing?
1. LTV means "loan-to-value" and it's a ratio. Generally, lenders don't like to lend you more money than 80% of the value of the property that you're putting up as collateral. The reason being, in a real estate price crash, it is generally expected that prices will drop up to 20% (whether this is accurate or not is a separate issue), and if the house value drops below the loan amount, they're worried you'll walk away from the property and leave the lender having to eat the difference. That's why putting 20% down gets you a good rate. That's also why when refinancing, you can usually go up to about 80% of the value of the property today, although I've occasionally seen numbers higher or lower than that. If you refinanced up to 75% LTV, you would borrow ($400k x 75% =) $300k, and after paying off the existing mortgage ($205k) you'd have $95k left over for your remodel. Seems to work out nicely.

2. It's not an easy decision, and is a variation on the classic "pay off debt or invest" trade-off. Mathematically it comes down to whether you could earn a higher rate of return after taxes on your investments than the after-tax interest rate on the loan. (Given your circumstances I'd expect you're not able to deduct mortgage interest, so your nominal rate is after-tax.) I think it's reasonable to expect high-quality investments to perform better than 3.5% over the next 5-10+ years. Another plus is that you avoid triggering capital gains tax by selling taxable mutual funds, which almost surely have unrealized capital gains. Paying capital gains tax will lower your long-term investment performance. For those reasons, I would lean toward the cash-out refi.

However, it's far from a slam dunk. The market could crash tomorrow and cut the value of your investments in half, in which case you'd wish you had sold them at market highs to pay for the remodel rather than stick yourself with a bigger mortgage payment. The larger mortgage payment also makes you less tolerant to drops in income. (You could live of off the mutual funds if you had to, but this is less than ideal.) And many people have behavioral issues borrowing money. A contributing factor to the 2007 housing collapse was people treating their houses like ATM's and borrowing up to the max every time the appraisal went up. If you don't think you have the financial responsibility to handle a ~50% larger fixed payment every month, look at other options.
Very helpful. Thank you!

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