home equity loan or take from portfolio?

lenvtApril 23, 2008

Hi all--

I've been lurking on this board for a while and I hope some of you will share your thoughts and help us decide the best option. We need a home improvement/repair to our house which we have owned for 6 years (almost 7!) It was in fairly good condition when we bought it so we've done no significant repairs or updates. The cost of the improvement would be about 30,500, roughly 10% of the value of the home.

We have no debt other than the mortgage, have been investing in my husband's 401K and we both Roth IRAs. We also have a portfolio that is about twice the value of the mortgage.

Should we dip into the portfolio --sell an investment to pay for the needed home improvement/repair-- or get a 15 year equity loan instead? We'd probably want to pay the loan off in five, and would work to pay it off in three because we hate debt.

I think we should take the loan at 4.25% because in theory the invested money could earn more than that over the life of the loan --however long that is-- and beyond. Even if our investments only make 3% we would still have the potential future earnings, correct? A few years ago we were able to take some profit from our investments and buy a car, but in this market we feel a bit uncomfortable doing that.

Which is the better choice?

Thanks for your thoughts!


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Just on a gut feeling level, I agree with you on taking the home equity loan (the fixed are usually a decent rate) rather than taking money from your portfolio. Stocks are setting themselves up for a decent gain the second half 2008/1Q09 and over the long term you'd risk missing a nice compounded gain.

Do figure out the portfolio withdrawal tax-wise, though - would you have a capital gain or capital loss? You'll want to be satisfied with all the "angles" before you decide.

Good luck, and don't forget, don't let the project "creep" by ballooning into something bigger! In this market, stick with the basics and don't over-improve.

    Bookmark   April 23, 2008 at 1:13PM
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Chemocurl zn5b/6a Indiana

I read your post and pondered it b4 reading the first reply....as I am just guessing here.

If it were me, I'd likely think it best to take out the loan, even as much as I too dislike debt. I think I would go with the loan though in this case. If the portfolio money would mean selling stock right now, I really would hate to sell, while so many things are down.

Sue...who has not even glanced at the market very recently.

    Bookmark   April 23, 2008 at 1:37PM
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Hi Len VT,

If you've been holding your stocks for an extended period, you'll likely have a substantial capital gain built up and if you liquidate investments you'll have capital gain tax to pay, which will mean that you'll have to liquidate a larger amount of pre-tax asset value in order to have the after-tax amount needed for your renovation.

Not only that, you'll have to pay commission to sell them and, after the house loan is paid off, commission again to re-purchase, supposing that you'd choose to buy the same stocks later.

Not only that, I think that the markets are down now, so I'd rather not liquidate some of my stock market-based assets, these days, lacking serious need.

In fact, I've been buying more, recently, and expect to buy more, later, as I expect an advance in the markets, though I think that it may be later than jkom51 thinks.

I hear some folks telling of set-up costs related to a home equity line of credit, which is understandable, as a lender wants to be sure that the property is as claimed, is properly evaluated, lacks large loans against it now, etc.

I have used stock certificates and mutual fund certificates as collateral for a line of credit, and had no set-up fees to pay. If you were to use stocks or mutual funds, you might qualify for a lower interest rate, in that liquidation would be much easier, in case of default.

Also, I've allowed my line to sit unused for substantial periods, and there have been no inactivity fees, either.

In fact, in that you have much larger assets than you'd need to liquidate to fund your upgrade, you might choose to take out a larger loan and make some increased equity investments currently.

I understand that the interest rate on your home improvement loan would be deductible, but not being a resident of your country I'm not sure. If it is not, you'd want to keep the two loans separate, as the line of credit for further equity investment would be deductible in your area, I'm almost positive.

While interest rates currently are low, I expect to see them rise, for when one considers the bad odour internationally that has developed in recent months over the U.S. sub-prime mortgage debacle, and the huge U.S. gov't. debt, much of it held abroad, it could well be that, in the light of the deficits developed recently, largely due to the Iraq war, it may be necessary for the U.S. gov't. to offer higher rates to foreign holders in order to entice them to make further loans, before long.

Good wishes as you consider your options further - I hope that you are happy with your choices, later.

ole joyful

    Bookmark   April 24, 2008 at 2:53AM
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Don't rob a retirement fund for something like this. Take the loan.

    Bookmark   April 24, 2008 at 10:00AM
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