Best Loan for Home Addition??

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kayakprof
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Joined: Thu Jul 26, 2018 2:46 pm

Best Loan for Home Addition??

Post by kayakprof » Fri Jul 27, 2018 12:12 pm

DW and I bought a 1950s home three years ago that we knew would require a lot of work. We were happy to deal with renovation and addition because of the location of the house. We plan to stay in the home until we retire in about 20 years. DW is ready to add about 700 sq ft. We are working on permits at the moment. We have received several estimates that range from $90,000 to $125,000. My guess is that the $125,000 estimate is the closest to reality. We have lived through renovation and additions before, and are experienced with "roughing it" while construction is under way - so that is not a problem.

We have saved $50,000 toward the cost of the addition. Because my wife wants to do this work now, it looks like we'll have to borrow the remaining $75,000.

We purchased the house for $370,000. We currently owe $312,000. The rate is 3.85%. Zillow claims the house is worth $405,000. If we get an appraisal, I suspect it will be worth more due to work we have already done ourselves (moving walls, opening the kitchen to the living space, renovating the bathrooms, upgrading the septic, adding a large deck).

Our gross income is $146,000. The other debt we have is $12,000 student loan (2.65%) and $18,000 car loan (0%).
Monthly Net Income: $6824
Monthly payments: $1920 (mortgage, insurance, taxes); $200 (student loan); $326 (car loan). Total monthly debt service: $2446. (36% of income).

Edited to Include Retirement Savings, all in index funds:
$110,000 Roth IRAs (Vanguard)
$340,000 403B (TIAA-CREF)
Currently we add 11% of income pretax to 403b. Employer match of 7.5%. Total annual pretax toward retirement is thus 18.5%.
We max out pretax HSA ($6900), and max out pretax FSA dependent care ($5000).

Question 1: Do we have enough equity in our home, and income, to get a HELOC?
Question 2: Is a HELOC better than other loans that we could get?
Question 3 (with explanation): My grandfather purchased a whole life (WL) policy for me when I was born. I am now 45. I didn't know about the policy until he passed away a couple of years ago. Although I know this forum thinks of WL as a very bad deal, the dividends on the policy pay the yearly dues, so it doesn't cost me anything. The "cash value" of the policy is $36,500. The death benefit is $113,000. We like having this no-cost policy because we have small children who would get the benefit if I were to pass away.

Would it make sense for me to borrow about $35,000 of the cash value? Isn't this like "borrowing from myself?" I believe I would be expected to pay back the principle, but not required. However, I would be required to pay interest on the loan, and if I didn't, the policy would expire. Should I borrow from this life insurance first, and borrow the remainder from a HELOC or some other vehicle?
Last edited by kayakprof on Fri Jul 27, 2018 1:33 pm, edited 1 time in total.

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vineviz
Posts: 1987
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Re: Best Loan for Home Addition??

Post by vineviz » Fri Jul 27, 2018 12:43 pm

Honestly, your best bet IMHO is to cash out the whole life policy completely. It's appreciating at just barely over 2.25% which is less than you'll pay on a HELOC, your line of credit, and your student loan debt. The cost of that policy is opportunity cost, because you could pay off your student loan and other higher interest debts. Plus, do you not have life insurance through your employer?

You won't know about the feasibility and cost of the HELOC until you get the appraisal, but it sounds like it's going to be tight on the equity front. If your high estimate is $125,000 you should be prepared for it to actually cost $150k. An overrun like that could be ruinous for a couple with a modest income, small children, and excessive debt. You also haven't mentioned your retirement savings and if those are underfunded this whole scheme could get dangerous quick.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

FlyAF
Posts: 197
Joined: Tue Jan 23, 2018 11:14 am

Re: Best Loan for Home Addition??

Post by FlyAF » Fri Jul 27, 2018 1:22 pm

I too would tap the brakes on my wife wanting to "do this work now." It doesn't seem like you're in a great place financially to do this, but you have left out quite a few key components. Any small overage (quite common to almost a given) turns your plan on its head.

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Toons
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Location: Hills of Tennessee

Re: Best Loan for Home Addition??

Post by Toons » Fri Jul 27, 2018 2:45 pm

The debt makes me dizzy
I'd pay off the student and car loan
:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Best Loan for Home Addition??

Post by delamer » Fri Jul 27, 2018 3:07 pm

Just to be clear, you do have term life insurance in addtion to the Whole Life policy, correct?

Assuming that you have adequate term life, I’d cash out the WL.

But I’d pay off the student loan and wait on the addition until you can pay cash or have more equity.. You could get a HELOC now, but you’d be mortgaged to the hilt.

bloom2708
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Location: Fargo, ND

Re: Best Loan for Home Addition??

Post by bloom2708 » Fri Jul 27, 2018 3:13 pm

Toons wrote:
Fri Jul 27, 2018 2:45 pm
The debt makes me dizzy
I'd pay off the student and car loan
:mrgreen:
+1

Wanting to do something and having it be fiscally responsible to do so are two different things. If the student loan and car loan were gone, then I might consider it. Another $75k in debt payments, I would pass on.

I think you will have to visit your bank and show them your details and ask how they would do allow you to do it.

I am not a fan of any whole life for young, healthy people. It is a rip off 99% of the time unless someone is un-insurable.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

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TxAg
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Re: Best Loan for Home Addition??

Post by TxAg » Fri Jul 27, 2018 3:26 pm

$312k + another $75k + car and student debt...all on $146k gross. You're nuts.

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Pajamas
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Re: Best Loan for Home Addition??

Post by Pajamas » Fri Jul 27, 2018 3:56 pm

If you're planning on staying in the house until you die the market value isn't really relevant.

That said, it sounds like you might be putting too much into the house for the neighborhood or just too much for an older house that was really a tear down if the other houses in the neighborhood are worth as much as you plan to put into it in total with the major renovations and additions.

Just something to consider.

Nate79
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Location: Delaware

Re: Best Loan for Home Addition??

Post by Nate79 » Fri Jul 27, 2018 8:21 pm

Get a proper amount of term insurance in place and then cancel the WL cr*p. The amount of insurance in the WL is pitiful and they will keep the cash value. Start paying down the student loan and lifestyle debt even though the interest rates are low. Then keep saving up cash for the addition.

Delayed gratification by living frugally vs the must have now consumer mentality.

kayakprof
Posts: 18
Joined: Thu Jul 26, 2018 2:46 pm

Re: Best Loan for Home Addition??

Post by kayakprof » Fri Jul 27, 2018 8:39 pm

I appreciate the "tough love" that everyone has offered here. I am going to wait and save up the cash to add the addition. It is good to get a reality check.

Grt2bOutdoors
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Location: New York

Re: Best Loan for Home Addition??

Post by Grt2bOutdoors » Fri Jul 27, 2018 8:47 pm

HELOCs sit secondary to first mortgage claims.
Zillow can claim all it wants, the bank on the other hand is going to look at comp's and then if they were smart would apply a discount to that to provide them with a large enough cushion that they could actually collect if the debt went bad. So, Zillow says $405, bank may say $385 and you owe $312. The equity in house is 73, that's less than 20% equity under that scenario. When houses tanked in last downturn, peak to trough the decline was greater than 18%. I think they are either going to pass or they will charge you a very high rate.

Keep saving, HELOC isn't going to save you.

As an aside - you claim to have gone through house renovations before, so then you must be aware that the number you are thinking of $125K could come in as high as $125*1.5 ~ your cost could be much higher. Knocking down walls, you don't know what's behind door number 1 until you open it up.

Unless the house is in a state of imminent collapse where you "need" to make repairs, you should delay this project until you actually have the funds to do so. Right now, you are too levered up and the "want" is not an actual need. I would pass on this project.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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