home equity loan or take from portfolio?

15 years ago

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!

Len

Comments (4)

jakkom
15 years ago
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.
Chemocurl zn5b/6a Indiana
15 years ago
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.
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Your situation is special because it sounds as if you're going to be paying off whatever loan(s) you have soon, when you sell the house. So, looking at your overall costs, the fees and expenses associated with a loan may be more significant in the overall cost of the money than the interest rate. So, whatever option you choose, be very careful to inquire about fees. Your payment will be lower if you combine all your debt into a new first mortgage, and your interest rate on a new first mortgage will also be lower than on a second. The issue of taking out savings versus borrowing to do these repairs is somewhat personal and somewhat hard numbers. Obviously if you're getting a better return on your investments than you'll pay in interest on borrowed money, leave your savings alone and borrow. Most people are in more of a gray area, with investments that pay about the same, or a little less, than they'll pay out for borrowed money. In this case I would still lean toward suggesting that you borrow rather than deplete savings. There is a lot of freedom and flexibility to having cash available when/if you really need it. One other question I would ask is, are you sure you need to spend this kind of money to ready your home for sale? If you have not done so, I'd suggest checking with a realtor. Sometimes you spend money to renovate, and then the buyer wants something different and rips it all out to do something else. It might make more sense to discount the price of the home and let the buyer make his/her own upgrades. That would save you a lot of hassle and possibly result in netting more money in your pocket on the home.
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Any closing costs or fees whether to the bank or title company? This would be a big deciding factor mor than anything else probably. You should not be paying any fees Make sure there are no prepayment penalties either 5% is an amazing rate. What bank did you get this at? Prime +5 is about 8.75% so huge difference. Run the numbers. If you are taking 100,000 over a year. Assuming no fees in either case, would be 8750 v 5000 so loan is better. However, if it takes you longer to do the renovations, then you might only be taking out 50k over the first 3 months, saving several 1000 dollars. Also, with a line as you start paying it back your rate effectively reduces however, assuming you do this for 6 months and pay back interest only , it would be 4375. However if you only borrow half the amount for the first 3 months until the work is complete, then it would be 2187 + 1093 = 3280 over 6 months interest only with the line. This assumes interest rates stay the same, they could go up which would cost even more With the loan it would be 100k over 6 months, interest only would be 2500 so this is the better deal in my scenario. so assuming there are no closing costs or fees, you are doing interest only and there are no prepayment penalties I would do the loan
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I don't think you need to do anything right now. If the house sells at a satisfactory price, then both the first mortgage and the equity loan balance will be paid off at the closing, and the balance (minus agent's commission, if your using one) will go to you. You definitely should NOT pay off the loan with your savings. That cash provides you with financial flexbility that you will lose if you pay off the loan. A recent widow should hang on to her cash reserves until life settles down and her financial situation becomes more certain. If the equity loan is a HELOC with a floating interest rate and the house doesn't sell by the end of the summer season, you probably should do a refinance and combine both loans into one so that you don't have to worry about the possibility of rising interest rates inflating the size of the HELOC payments.
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Yes, a home equity loan and a second mortgage are practically the same thing. You will see lenders using both terms. Technically, a home equity loan would not have to be a second mortgage. For example, if you owned your house free and clear (no mortgage), a loan against it wouldn't be a second mortgage, but would be a first mortgage. But the key point to remember is that whichever term they use, they are placing a lien against your home which is securing the loan. The best place to shop for this type of loan is at financial institutions where you currently do business or that are known to you. The first place to check is the mortgage company that holds your first mortgage. They often offer good deal to current customers. That's not to say that some of the lenders who advertise for customers aren't offering good deals -- some are -- but you have to look especially carefully at the closing costs and other fees with lenders who do a lot of mass market advertising. (Of course, you need to check these fees with any lender.) Often lenders will roll the closing costs back into your loan, so that you may get a check for the $10,000 you are seeking, but you may actually be borrowing more than that. In some cases, quite a bit more. Often a good time to get a home equity loan is when you refinance your home. If you are currently paying above market interest rates, consider refinancing and obtaining a home equity loan at the same time from the same lender you refinance with. Often in this case they'll give you a home equity loan with no additional closing costs. As far as the rates you've been quoted, the 4.75 percent seems closer to what I see being offered around where I live. The rates should apply to any amount of loan, not just to large amounts. In fact, many lenders will offer you a home equity line of credit instead of a straight home equity loan. Instead of giving you a check for the amount of your loan, you'll get a check book which allows you to write checks against your line of credit. This is preferable because you don't start paying interest on the money until you actually need it, and if you never need the whole $10,000 available in your credit line, you never actually borrow it. The balance on your home equity line of credit can go up and down just like a credit card balance, and you pay interest on just what you owe. With any loan, just be sure to understand all the fees and costs associated with it. Some lenders, especially those who advertise in the mass media, try to downplay or even hide the fees, and this can mean that what looks on the surface like a good deal isn't such a good deal once you dig down and see what you're really paying.
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joyfulguy
15 years ago
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
green-zeus
15 years ago
Don't rob a retirement fund for something like this. Take the loan.

home equity loan or take from portfolio?

Comments (4)

jakkom

Chemocurl zn5b/6a Indiana

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joyfulguy

green-zeus

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