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Should I pay cash or get a loan for home renovation?

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  • Should I pay cash or get a loan for home renovation?

    My spouse and I are planning to do extensive home renovation including extension of house and kitchen/bathroom renovation.
    We purchased the house for roughly $750,000 and have $80,000 10-year mortgage at 2.875% that will be paid off in 2 years.
    We have a net worth north of $5 million, and probably can pay a large portion in cash, but I don't want to mess with my asset allocation as I will need to sell significant portion of my municipal bond fund. With interest rates at all time lows, what is the best way to finance this? HELOC, cash out home mortgage refinancing? Our current FICO scores are > 800.

  • #2
    Cash flow it. You’ll scrutinize the bids, bills of materials, and potential cost overruns far more if you’re paying as you go from current income.

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    • #3
      I would do mix of both. Scrutinize the h3ll out of the bids like Hank said, then pay for the majority of it with a loan provided you can get a good rate. Then cash flow all the extras. It’s the marginal stuff (oh we found X or oh we can do Y) that’ll piss you off and where the pain of cash flowing it will gave the same effect as what Hank is getting at. Again, only if the loan rate is low - specifically lower than the expected return on your marginal investment otherwise.

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      • #4
        A HELOC helped us just write the check, and minimize the paperwork, then move money around later, etc. Basically still cashflowed things, but it was nice not to even think about if there was enough in the main checking account.

        Secondly, it was before the TJCA bill, which removed the interest refund on HELOC's... previously we could write off interest IF it was for improvement to the home (and not for other things).

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        • #5
          can't go wrong.
          w/ rates as low as they are a heloc would be attractive.

          side note on renovations:
          1) don't allow contractor to start until all materials are on site
          2) make contractor agree to a timeline

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          • #6
            With a net worth of 5 million dollars, I see no reason to take out a loan for this. You don't need to sell any investments to pay for this. Just stop paying down your mortgage so hard for a little bit, save up the cash from your income and pay for it that way. It makes no sense to pay off a mortage early, while at the same time going into more mortgage debt to pay for home renovations. It will probably take 6 months or more to get bids and actually see any work started anyway (have you talked to contractors yet?). Typically it's a very slow process. Then, you don't agree to pay for any of the work upfront anyway. So, you've probably got at least 6-9 months before you'd need any cash anyway. If it's major renovations like you say, it could be a year or more from now before the work is complete and you need to pay them...unless you've already got a signed bid/contract in hand with a start date soon?

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            • #7
              Originally posted by MPMD View Post
              can't go wrong.
              w/ rates as low as they are a heloc would be attractive.

              side note on renovations:
              1) don't allow contractor to start until all materials are on site
              2) make contractor agree to a timeline
              I’ve never heard advice numbered 1. Care to elaborate?

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              • #8
                I would cash flow in your shoes but if you really want to take out debt a cash out refinance probably will get you a lower interest rate than a heloc.

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                • #9
                  Sounds like you could save and set aside the necessary renovation cost as you go. Generally don't pay upfront except the necessary state required minimal deposit. When the supplies arrive, make sure to have the contractor and any supply and subcontractor sign interval mechanics lien releases; this is best done at time of payment. No lien release, no payment. Take pictures of the progress. Invariably, there would be change orders for big job and be patient. Withhold a certain percentage of payment after completion to be paid at later date, and have it in writing in the contract, so defects in workmanship can be corrected promptly. Make sure to have all parties sign lien releases on final payment.

                  You could also get security based lending if construction starts before you set aside sufficient fund, since you have $5 mil in asset. This does not require much fees and you don't have to sell your bonds or stocks. This week when I checked, the security based lending interest rate is lower than HELOC. Many lenders are not doing HELOC's currently due to COVDI19.

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