Best option to finance major home improvement

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Topic Author
van_sun_38
Posts: 92
Joined: Tue Apr 07, 2020 12:56 pm

Best option to finance major home improvement

Post by van_sun_38 »

Needing some feedback on the best way to finance a major home improvement. We recently bought a house in HCLA. We got the house under our budget, however, it is an older house that needs some updates. Spouse really wants to do it sooner than later. Rough estimate is around 250k. Some options to finance:

1. Open a HELOC against the first house (the rate will be higher since it is not primary residence). We are currently renting it out and not planning on selling soon. We have about 340k equity in this house.

2. Withdraw money from the taxable investment (currently have ~250k). The market is obviously not doing great right now but tax will be lower. We have saved decent amount in 401k (400k at age 35), have a 6 month emergency fund, stable jobs and not planning to retire anytime soon. We don't have any other debt outside of mortgages.

3. Cash out refinance: not a great option since we refinanced our 1st house at 2.5% and got a very good rate for the current one.

What else do I miss? I think HELOC makes the most sense but wanted to double check if any other options available? Also, what should be taken into consideration when taking a HELOC?
Last edited by van_sun_38 on Fri May 13, 2022 10:17 am, edited 2 times in total.
turno77
Posts: 46
Joined: Tue May 14, 2013 2:45 pm

Re: Best option to finance major home improvement

Post by turno77 »

I recently completed a big home renovation project, and chose option 2: sell taxable to pay for it. I decided it was better than taking on more debt (through HELOC). Now I'm paying myself back instead of the bank.

Some things to consider:
1) your rough estimate could be (way) off. Cost of renovations has increased dramatically over the last couple of years. Only after you have bids for the work can you decide the best course of action.
2) a combination of options 1 & 2 may be necessary if you don't have enough to cover with just option 2.
3) it seems like you are not selling the first house. Will it be a rental property now or still primary residence (and house 2 is vacation and/or rental property)? There could be ways to pay for/finance renovations to an income property that I'm not aware of and that would have tax advantages.

Obviously, there are many other things to consider! These are just some of my thoughts.
Mike Scott
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Joined: Fri Jul 19, 2013 2:45 pm

Re: Best option to finance major home improvement

Post by Mike Scott »

So you probably have 6-12 months lead time to plan and save before you even start the project? Maybe open the heloc to have it available but not draw on it unless necessary, divert new income to savings and then you can spend down the emergency fund. Maybe this gets you close enough? You can always access the other funds for an emergency and rebuild the emergency fund after the project is done. This also sounds like a completely discretionary adventure. It can wait until you can afford to pay for it.
Californiastate
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Re: Best option to finance major home improvement

Post by Californiastate »

I'd double check your estimate before securing financing. Material pricing alone is going through the roof.
Topic Author
van_sun_38
Posts: 92
Joined: Tue Apr 07, 2020 12:56 pm

Re: Best option to finance major home improvement

Post by van_sun_38 »

turno77 wrote: Fri May 13, 2022 10:13 am it seems like you are not selling the first house. Will it be a rental property now or still primary residence (and house 2 is vacation and/or rental property)? There could be ways to pay for/finance renovations to an income property that I'm not aware of and that would have tax advantages.

Obviously, there are many other things to consider! These are just some of my thoughts.
Thanks for the input. It is now a rental property, I have edited the original post to make it clear. I will do research on that.
Topic Author
van_sun_38
Posts: 92
Joined: Tue Apr 07, 2020 12:56 pm

Re: Best option to finance major home improvement

Post by van_sun_38 »

Mike Scott wrote: Fri May 13, 2022 10:32 am So you probably have 6-12 months lead time to plan and save before you even start the project? Maybe open the heloc to have it available but not draw on it unless necessary, divert new income to savings and then you can spend down the emergency fund. Maybe this gets you close enough? You can always access the other funds for an emergency and rebuild the emergency fund after the project is done. This also sounds like a completely discretionary adventure. It can wait until you can afford to pay for it.
Yes that is the plan: opening the HELOC and trying not to tap too much into it. Unfortunately saving rate has not been great since there are costs associated with fixing random things around the new house.
exodusNH
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Re: Best option to finance major home improvement

Post by exodusNH »

van_sun_38 wrote: Fri May 13, 2022 9:58 am Needing some feedback on the best way to finance a major home improvement. We recently bought a house in HCLA. We got the house under our budget, however, it is an older house that needs some updates. Spouse really wants to do it sooner than later. Rough estimate is around 250k. Some options to finance:

1. Open a HELOC against the first house (the rate will be higher since it is not primary residence). We are currently renting it out and not planning on selling soon. We have about 340k equity in this house.

2. Withdraw money from the taxable investment (currently have ~250k). The market is obviously not doing great right now but tax will be lower. We have saved decent amount in 401k (400k at age 35), have a 6 month emergency fund, stable jobs and not planning to retire anytime soon. We don't have any other debt outside of mortgages.

3. Cash out refinance: not a great option since we refinanced our 1st house at 2.5% and got a very good rate for the current one.

What else do I miss? I think HELOC makes the most sense but wanted to double check if any other options available? Also, what should be taken into consideration when taking a HELOC?
With the HELOC, be aware that the rate can be a teaser. You might get a year or two of a good rate, then it resets to prime +/- premium.

The HELOC is really a second mortgage. If you ever want to refi the primary mortgage, you'll need to get the HELOC company to agree to be subordinated. That's not usually a problem, but it can delay.

Also, watch out for early termination fees. The no upfront cost HELOCs often require that you keep the line open for 1-3 years. When you have a HELOC (even at a $0 balance), you probably won't be able to get a new HELOC or a home equity loan, since then they'd be third in line.

As some else noted, costs are going to be much more than expected. You may have to settle for 3rd+ choices on materials.

As an example, I had to reroof in October 2021. Only half of the roofing companies called me back. What would have been a $8000-$10000 job 3 years ago cost $17,000. Only three colors of shingles (GAF) were available nationwide, including jet black, which I absolutely didn't want.
Mike Scott
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Joined: Fri Jul 19, 2013 2:45 pm

Re: Best option to finance major home improvement

Post by Mike Scott »

"Unfortunately saving rate has not been great since there are costs associated with fixing random things around the new house."

Then I recommend getting your personal finances back on track before even thinking about a major renovation project. Take an objective look at how over stretched you may be already.
sailaway
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Re: Best option to finance major home improvement

Post by sailaway »

Can the project be broken into a number of smaller projects without greatly increasing the price? So maybe you get rolling with a $75k project now and only start the next project once that is complete. Obviously, that doesn't work well if you are changing the whole floorplan, but if it a kitchen renovation and some work in another part of the house it can be beneficial.
Topic Author
van_sun_38
Posts: 92
Joined: Tue Apr 07, 2020 12:56 pm

Re: Best option to finance major home improvement

Post by van_sun_38 »

sailaway wrote: Fri May 13, 2022 11:09 am Can the project be broken into a number of smaller projects without greatly increasing the price? So maybe you get rolling with a $75k project now and only start the next project once that is complete. Obviously, that doesn't work well if you are changing the whole floorplan, but if it a kitchen renovation and some work in another part of the house it can be beneficial.
Yes that is the plan. However, it all depends on the availability of contractors and timing of the material/appliances.
Topic Author
van_sun_38
Posts: 92
Joined: Tue Apr 07, 2020 12:56 pm

Re: Best option to finance major home improvement

Post by van_sun_38 »

exodusNH wrote: Fri May 13, 2022 10:48 am
van_sun_38 wrote: Fri May 13, 2022 9:58 am Needing some feedback on the best way to finance a major home improvement. We recently bought a house in HCLA. We got the house under our budget, however, it is an older house that needs some updates. Spouse really wants to do it sooner than later. Rough estimate is around 250k. Some options to finance:

1. Open a HELOC against the first house (the rate will be higher since it is not primary residence). We are currently renting it out and not planning on selling soon. We have about 340k equity in this house.

2. Withdraw money from the taxable investment (currently have ~250k). The market is obviously not doing great right now but tax will be lower. We have saved decent amount in 401k (400k at age 35), have a 6 month emergency fund, stable jobs and not planning to retire anytime soon. We don't have any other debt outside of mortgages.

3. Cash out refinance: not a great option since we refinanced our 1st house at 2.5% and got a very good rate for the current one.

What else do I miss? I think HELOC makes the most sense but wanted to double check if any other options available? Also, what should be taken into consideration when taking a HELOC?
With the HELOC, be aware that the rate can be a teaser. You might get a year or two of a good rate, then it resets to prime +/- premium.

The HELOC is really a second mortgage. If you ever want to refi the primary mortgage, you'll need to get the HELOC company to agree to be subordinated. That's not usually a problem, but it can delay.

Also, watch out for early termination fees. The no upfront cost HELOCs often require that you keep the line open for 1-3 years. When you have a HELOC (even at a $0 balance), you probably won't be able to get a new HELOC or a home equity loan, since then they'd be third in line.

As some else noted, costs are going to be much more than expected. You may have to settle for 3rd+ choices on materials.

As an example, I had to reroof in October 2021. Only half of the roofing companies called me back. What would have been a $8000-$10000 job 3 years ago cost $17,000. Only three colors of shingles (GAF) were available nationwide, including jet black, which I absolutely didn't want.
Thanks for the info regarding HELOC. And good point on the costs. That's why we want to do that sooner than later since cost will just go up overtime.
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