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Paying for Home Improvement Project

Home Personal Finance and Budgeting Paying for Home Improvement Project

  •  John Q MD 
    Participant
    Status: Physician
    Posts: 7
    Joined: 01/09/2019

    Would like the forum’s thoughts on how I should I pay for some home improvements. First to give some baseline features about my financial situation to help for context:

    • 7 years out of training
    • Annual income is now ~ $800,000 per year (was less first 3 years of practice).
    • Save $159,000 per year toward retirement accounts (27k 401k with employee plus safe harbor, 11-12 k backdoor Roth IRAs, 120k Vanguard brokerage)
    • Save $20,000 per year towards kids college funds.
    • Have 0 student loan debt (paid off 200,000 within 3 years of starting practice).
    • Emergency Fund 50,000
    • Savings for Home Improvements in high yield savings 110,000

    My current mortgage has 23 years left on 30 year fixed loan (3.9%, balance is 570,000). Monthly payment including taxes and insurance is 3600 (although I currently pay an extra 800 every month). The project will cost $250,000 (so likely ends up at least 300,000+ based on my experience). Homes on our street of our size and fixed up/modernized go for at least 900k (with some of exact same square footage having also sold for 1.2-1.5 million in last couple years too).

    Project will take 3 months so can use some cash flow but prefer to keep making my monthly retirement contributions including the Brokerage account. I have already set aside 110,000 over the last 18 mo for the project in an Ally account.I will likely have that up to 125,000 before we start project in a few months.

    My options to cover the other 125,000-175,000 are the following:

    1. HELOC, rate will be right around prime and floating. Likely prime – 1 for 1 year and then prime for remainder. IN all likelihood Pay off over 1-3 years just like I did my student loans.

    2. HE Loan 10 years, APR fixed around 6. Would likely pay off sooner than 10 years anyway but lock in low fixed payments just in case.

    3. Cash out Refinance mortgage (take 125,000) and switch to 15 year fixed loan on what would be 700k mortgage. 15 yr APR will be 3.85 (similar to my current 30 year). Monthly payment would be 5500 (up 1900 per month from my current 30 year fixed, but I already pay an extra 800 every month now electively). CLosing costs for this option around 4,000 (one of biggest down sides in my mind).

    I don’t think any of them are “wrong” decision given my current financial situation. But any thoughts on pros and cons of each. I like the certainty of fixed payment I know I can afford easily with cash flow (either 15 yr refinance or HE Loan). I am reluctant to re-finance mortgage in some ways but I do end up with 15 year term (instead of remaining 23 yrs on current) and essentially same APR even though rates have risen over last few years). Down side is 4,000 of closing costs, hassle, and my required monthly mortgage payment goes up 1900 per month (versus keeping same lower monthly payment and flexibility of paying off HELOC at whatever exact pace works). HELOC seems to make most sense but doesn’t have that Fixed payment psychological effect on me.

    Thanks for any guidance.

     

     

     

    #179891 Reply
     bean1970 
    Participant
    Status: Physician
    Posts: 386
    Joined: 07/12/2017

    you have a high income.

    i think you just just pay cash.

    #179916 Reply
    Liked by Anne, hatton1
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6660
    Joined: 01/09/2016

    The HE loan is the only one of the 3 options with deductible mortgage interest (up to total debt of $750k used to buy, build or improve your main home and second home). The loan must be secured by your main home or a second home and must not exceed the cost of the home to be eligible for the interest deduction.

    Bankrate has a neat little calculator to help you compare options between the HELOC and the Cash-Out, neither of which has deductible interest.

    (CORRECTION: IRS has clarified that interest on HELOCs is also tax deductible. See helpful link posted later in this thread.)

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #179919 Reply
    Liked by portlandia
     fatlittlepig 
    Participant
    Status: Physician
    Posts: 458
    Joined: 01/26/2017
    Earnest refinancing bonus

    LOL, you make 800k and need to borrow money for home improvements.

    #179925 Reply
     fatlittlepig 
    Participant
    Status: Physician
    Posts: 458
    Joined: 01/26/2017

    LOL again, making 800K, saving (only) 160, still owe 570, now wants to borrow more debt for house. Save more buddy.

    #179929 Reply
    hatton1 hatton1 
    Participant
    Status: Physician
    Posts: 2746
    Joined: 01/11/2016

    I would cash flow the project.  Save another year or do not fund the taxable for a while.  If you need to borrow you cannot afford it.  Sounds like you are doing great.  In my experience home renovating is expensive and frustrating.  As soon as you redo a room something new will come out.  I used to subscribe to Architectural Digest but no more.

    #179948 Reply
     JBME 
    Participant
    Status: Spouse
    Posts: 257
    Joined: 03/26/2018

    LOL again, making 800K, saving (only) 160, still owe 570, now wants to borrow more debt for house. Save more buddy.

    Click to expand…

    He says he saves $160k per year, which is 20% of $800k. So OP is actually saving the recommended amount. Plus, he destroyed those student loans in a few years. He’s financially savy and sound. He can do this because he has the means too. Isn’t the rule save at least 20% for retirement and spend the rest however you want? The OP choose to spend on this house. That’s allowed.

    Personally I wouldn’t do this and with such high income I’d cash flow the whole thing, but again, the OP has a history of destroying debt quickly (also pays more than has to on mortgage)

    #179961 Reply
    Liked by Tim, Firefly
     fatlittlepig 
    Participant
    Status: Physician
    Posts: 458
    Joined: 01/26/2017

    LOL again, making 800K, saving (only) 160, still owe 570, now wants to borrow more debt for house. Save more buddy.

    Click to expand…

    He says he saves $160k per year, which is 20% of $800k. So OP is actually saving the recommended amount. Plus, he destroyed those student loans in a few years. He’s financially savy and sound. He can do this because he has the means too. Isn’t the rule save at least 20% for retirement and spend the rest however you want? The OP choose to spend on this house. That’s allowed.

    Personally I wouldn’t do this and with such high income I’d cash flow the whole thing, but again, the OP has a history of destroying debt quickly (also pays more than has to on mortgage)

    Click to expand…

    Nah FLP disagrees. When u make 800 and still owe 570 and need to borrow 300 for your house improvements, kind of sad.

    (saving 20% is different when u making 150K, 800 is a different thing)

    #179963 Reply
     wesed1 
    Participant
    Status: Physician
    Posts: 1
    Joined: 07/31/2018

    According to this clarification from the IRS back in Feb 2018, the interest from a HELOC (or HE loan, or second mortgage) is all tax deductible as long as the money was used to build or substantially improve the home that secures the loan.

     

    https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

     

    #179946 Reply
     wideopenspaces 
    Participant
    Status: Physician
    Posts: 855
    Joined: 01/12/2016

    Is there a reason you must do the project now? Honestly you can afford to do whatever you want but why not just save the rest over the next year?

    #180007 Reply
    Liked by hatton1, Tim
     Anne 
    Participant
    Status: Physician
    Posts: 703
    Joined: 11/07/2017

    I would also just pay cash and be done with it.  If you can’t cash flow it today, wait until you can.  The more time spent planning your reno the greater clarity you get for what you want to do IMO

    We recently completed a home reno that costs about what you are projecting.  We make less than you but save/invest more. We continued to max out our tax deferred space but decreased how much we sent to the taxable account while we were in the planning and execution phase and cash flowed the whole thing.  A 250k renovation will take longer than 3 months btw.  Whatever the contractor quotes you time wise, double it at least.  Our initial quote was 3-4 months which I laughed at.  It ended up taking at least 7 for the bulk and then another 5-6 months of tying up loose ends.  Make sure your contract is written so that you don’t submit final payment until the work is completely done.  Once that final payment is in good luck getting any owed work done.  I am really happy with the end result and really really happy it is paid in full.  If you don’t want to give up the opportunity cost of investing in taxable for a short period of time (or decreasing other spending for a short period in your case given your high income) then you can’t yet afford a luxury item like a home reno IMO.

    #180011 Reply
     hightower 
    Participant
    Status: Physician
    Posts: 1251
    Joined: 12/07/2016

    Yes, definitely cash flow this.  It makes zero sense to go into debt when you have that kind of income.  Sure, the mortgage interest is tax deductible, but you’ll still be wasting some money on a minimal interest rate after the deduction.  Why do that?  Especially when you could crush this project with just a couple of months pay.

    On the other hand, as WCI has said, with an income like that you can afford to make a lot of expensive mistakes and still come out on top.  So, if you want to go into debt to do a home improvement project (which I think is a mistake personally), go ahead and do it.  Who cares if it’s a mistake or not?  You’ll still be fine with that kind of income.

    It does seem like your savings rate is rather low for such a high income.  If you’re spending the other 80% that means you’re going to need to have a very, very long career to maintain that level of spending in retirement (if it’s even possible to save enough in your life time, which obviously depends on age and how well your investments do).  I think a lot of people on this site would agree that at 800k/yr, you should be able to save a lot more than just 20%.  Perhaps it’s only because you’ve been paying off debt and saving up your efund and your home improvement fund.  If that’s the case, you’re not doing too bad.  But, I would still cash flow this if I were you.  Debt is stupid.

    #180012 Reply
     John Q MD 
    Participant
    Status: Physician
    Posts: 7
    Joined: 01/09/2019

    Thanks for all the input. I am basically going to cash flow the project and pay off HELOC over 1 year at most. I am not borrowing for the whole project. Again I have already set aside cash for ~50% of it and will have even more by the time we start in 6 months. I may Just need to use HELOC for the purpose of the in and out and timing issues of payment for the other 100k of the project over the 4 months that it lasts. My income is variable month to month. I could just pay every month but wanted to keep putting 10,000 in my brokerage account every month, continue my backdoor Roths, my 529 contributions, my charitable contributions, and not deplete my other true separate emergency fund that is 50,000.  I just didn’t like the idea of the variable rate debt from HELOC in case something happened.

    For those few who just wanted to insult me, I am not sure what the point of that was. It definitely won’t encourage other MDs to come on here with questions. I am also pretty sure you have a hard time understanding someone else’s circumstances enough to make such insults without knowing all the facts.

    1- I have only made this kind of money the last 24 months. I made less than half of that amount prior years. I am really a few years LESS (not 7) out of training but changed that fact around above to protect identity a little more (overly cautious but didn’t think it effected my specific question).

    2- I paid off 200k of student loans in 2.5 years while making 300-400k. I paid off another 35k of personal debt during that same time period.

    3- I now (the last 2 years) pay over 200k in taxes every year (W2 income so my effective tax rate is VERY high, close to 30%). Take home pay VERY different than gross pay at this level.

    4- I am saving 20% gross towards retirement now (it was even higher percentage before my pay went way up 2 years ago), also putting 20k in my kids college accounts, and saved another 110,000 dollars in the Ally account just in the last 12-18 months on top of that with plans for this home project. Once I get the home project done in next year, I will be putting another 50-100k per year in brokerage (the amount I have been setting aside for the home improvements the last 12-18 months).

    5- My current mortgage at this point is about 75% of my actual annual income (WCI talks about no more than 2X, I am 0.75X at this point so why would I be in a huge rush to pay off fixed interest debt at 3.9% that is tax deductible). My mortgage is tiny as far as debt to income ratio so that’s why I was at least asking question of cash out refinance and doing 15 year mortgage (pays off mortgage sooner than currently). But in all honesty, I really wasn’t leaning towards that option at all but those are the “3 options” I was at least throwing out there.

    6- You have no way of knowing about my charitable contributions.

    7- You have no idea what I do to help a family member because of someone else who died prematurely.

    Given I have paid off my debts other than 0.75X annual income mortgage on my house only 5 years out of training, am saving 20% of a large gross amount for retirement in addition to 529 contributions for my kids, I feel I can choose to spend some money on fixing up my home. I have set aside cash for first 50% and will cash flow as much as I can (with HELOC of up to 100k only around for 12-18 months unless something unexpected happens at work). I will just pay it off quickly. I do choose to send my children to private schools because it’s important to me. I do choose to spend money on travel because I think experiences are more important than things. I don’t make all perfect financial decisions. But when I met with a fee-only hourly planner, they felt we were on the right path.

    Sorry for feeling the need to respond. I initially tried to just ignore the remarks from the few who wanted to make this some personal issue. However, I do think those types of attitudes don’t serve this forum well. It only scares people off from asking questions.

    Again, thanks for those who posted genuinely helpful feedback. This is a great place for docs and other professionals to learn how to thrive financially.

     John Q MD 
    Participant
    Status: Physician
    Posts: 7
    Joined: 01/09/2019

    Thx for input. Agree debt sucks and that’s why I got down to only what is a relatively small mortgage for my income (0.75x). I agree I want to higher than 20% gross towards retirement soon. But I have saved for the home improvement project (110k over basically 12 months) and paid another 50k cash flow to renovate some other things on home.

    So really savings over last 12 months has been 160 retirement + 20 college funds + 110 for home improvement savings + actually another 5k into solo 401k from small Amt of 1099 income from wife = 295/800 = 37%. And the money I have saving or spending on house will stop in next 1-2 years and I should be able to put all that money towards actual investments rather than some being for house. I will just cash flow / HELOC (pay off over 12-18 months). We bought it knowing we would need to do some work. But I have NO desire for a second home and this will be our forever home.

    We are at 30% towards tax and 37% savings above so not as extreme as it seems. I am still spending 33% of a large sum (I get that). But I want to work as long as I am healthy. I have no desire to retire early. I also want to enjoy travel while I am young and healthy. I want my kids to go to private school bc the public ones here are questionable. It’s all a balance. Being here helps me remember some people do a better job than me and I can still improve.

    I appreciate your thoughts. Thx!

    #180052 Reply
     Kamban 
    Participant
    Status: Physician
    Posts: 1949
    Joined: 08/01/2016
    For those few who just wanted to insult me, I am not sure what the point of that was. It definitely won’t encourage other MDs to come on here with questions. I am also pretty sure you have a hard time understanding someone else’s circumstances enough to make such insults without knowing all the facts.

    Click to expand…

    Ignore some of the posters and let it go over your head. It is just the way some of the posting is done here.

    If you have to do it within a time frame borrow the money. Otherwise delay it a bit and have more cash on hand and then start it. The less you borrow, the better. Also, even though you save 20% try and improve it based on your high income. As you have said that income is variable, so save more when the going is good.

    Good luck.

    #180061 Reply

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