Whether to use HELOC for home improvements

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Topic Author
RussellWilson
Posts: 3
Joined: Fri Oct 18, 2019 10:08 pm

Whether to use HELOC for home improvements

Post by RussellWilson » Tue Jan 14, 2020 6:19 pm

Hello all, my mom needs to decide whether to use her IRA or a home equity line of credit for home improvements. Whether doing the improvements is a good idea isn't relevant, as she's determined to do it.

Her loan choices include interest rates of 6 or 7.1% depending on details I'm not sure about and will have to verify.

Income

$21k annual social security benefit

$15k traditional IRA distribution already made for 2020.

It's unclear if/when she would get another job, years of experience but has been trying for awhile and faces rampant ageism at 63. She had to give up her most recent job because of a move to a new region.

Traditional IRA 230k
Roth 45k,

both accounts invested 80/20 (this itself is a separate important issue but she is comfortable with it).

She needs to stay below the ACA cliff of something like 48-49k

At first it seemed obvious to get the guaranteed return of not paying 6-7% interest.

However the idea that the IRA distribution would mostly be in the 22% bracket (right?) makes it seem like more of an open question. No state tax. It seems obvious not to touch the Roth. Thanks for any insight.

Silk McCue
Posts: 3868
Joined: Thu Feb 25, 2016 7:11 pm

Re: Whether to use HELOC for home improvements

Post by Silk McCue » Tue Jan 14, 2020 6:34 pm

Thirdfederal.com offers prime -1% HELOCs are available in the state she lives. She may very well severely harm her financial future if she over spends on home improvements.

Good Luck.

Cheers

Topic Author
RussellWilson
Posts: 3
Joined: Fri Oct 18, 2019 10:08 pm

Re: Whether to use HELOC for home improvements

Post by RussellWilson » Thu Jan 23, 2020 7:00 pm

She also has the option of refinancing at 3.85 vs 4.375 original... I plugged the amounts into a loan payoff calculator... the new principal would be $22k higher to pay for the improvements... According to the calculator the amount of interest paid on the new amount over 30 years is only $3k higher...so that seems good...Of course without the extra $22k I'm sure the numbers look much better at the new rate so it's really just mental accounting, but it seems fairly painless considering her payments stay the same. The $2600 fee would be $15k if invested at 6% over 30 years, so that's an opportunity cost. There could be something about the math I'm missing. This seems better than the initial idea of a higher interest HELOC.

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Sandtrap
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Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Whether to use HELOC for home improvements

Post by Sandtrap » Thu Jan 23, 2020 7:15 pm

Thoughts:
1. Can she afford the additional monthly expenses, whether HELOC or Other loan, if she remains unemployed?
2. She will qualify for Medicare soon. Will any expenses for medical insurance premiums then be added to net income?
3. Shop around for your options to "refinance". Find the best rates.
4. If the improvements are done with a HELOC, can it be paid down quickly and in a short time once she is re-employed?

j :happy
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