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Dave, what is the best way to finance a $180k remodel??

Posted by lisapico (My Page) on
Fri, Apr 11, 08 at 23:05

First I appreciate all of the generous time and energy you spend on this forum answering questions like mine. Thank you.

We just received bid from contractor. Amount stated above. We have no credit card debt and have 8 years left on a 15 year home loan (we owe $160k). Our mortgate runs about $1800/month. We have a car payment of $600; normal utility bills; and money taken out for our retirement and childrens' college funds.

We are wondering what would be the best way to pay for our extensive remodel? My husband has stock that we're planning to sell when it gets to $50 and will be worth about $70,000 take home. Until that happens, we can't sell and must assume we'll need to finance the entire amount.

SO, should we go with a home equity line of credit our refinance? I hate to put our hopes on the stock but feel it will eventually get to the amount we need in order to sell. Also, we cannot rely on end of the year bonuses in this present economy. Last year my husband received his entire year's salary as a bonus but we're pretty much guaranteed that won't happen this year. He's hoping that might change year from now but, again, that's not a sure thing.

So, thanks for any advice you can offer.


Follow-Up Postings:

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RE: Dave, what is the best way to finance a $180k remodel??

I'm not Dave, but I really gotta question a $180K remodel!

When your stocks get to @50, you're gonna have to pay capital gains.

Back to the original question, are you in a neighborhood that you would get your $180K back if you were to sell soon? Are you planning on living in that house forever?

Overall, only 8 years left on a 15 year mortgage sounds good, but answer the above question!

Gina


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RE: Dave, what is the best way to finance a $180k remodel??

thanks Gina. The 70k includes tax from capital gains. So, we bought the house for $275,000 and had an offer on it this past summer for $435,000 from a couple that had heard we were looking to move (we were but decided not to). So, if we put in $180 that puts out home at $455,000 which is slightly above what we were offered. Does that help? We live in a very desireable neighborhood, well-established with lots of trees and on a cul-de-sac. We don't live in a cookie cutter neighborhood which a lot of folks opt for but rather in one that has been here for many years so there is a wide variety of homes.


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RE: Dave, what is the best way to finance a $180k remodel??

The best way to finance it is probably the one that gets you the lowest fixed interest rate. I believe that home equity lines of credit tend to be variable rate, in which case I'd argue against it for that reason. It's hard to imagine that rates are going to go anywhere but up.

So, I'd either get a fixed-rate home equity loan or refinance the existing loan to include the remodel. I wouldn't worry about increasing the term of the loan because it's always possible to prepay it to shorten the effective term.

Now about those stocks. Are you talking about stocks in a single company? If so, I'd suggest you think seriously about selling them and buying a diversified mutual fund. By owning a single stock (or a small number of stocks) for the long term, you are probably increasing your risk (because you're betting on a single or small number of companies) without increasing your expected return.

Even large, well-established companies such as Lucent can go from riches to rags.


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RE: Dave, what is the best way to finance a $180k remodel??

So, we bought the house for $275,000 and had an offer on it this past summer for $435,000 from a couple that had heard we were looking to move (we were but decided not to).
That offer was contigent upon you doing extensive remodeling first I assume. I am sorry to sound skeptical, but I sure would not count on that buyer, or any other buyer being there pronto to buy once the remodel is complete. If you have no buyer, will you be happy, and comfortable paying both the mortgage and the remodel if you can't sell for maybe a very long time?
Would letting them buy it as is be an option, and then them sinking the $180K into it?
$275K + $180K=$455K
sell for $435K and take a $20K loss?
Why not just sell now (or later) at $250K if you don't mind a $20K loss and not have to go through the headaches of a remodel. The buyer could then remodel according to preferences in style, tastes, colors, etc. Am I missing something here?

Just food for thought.

Sue...who looks out for the unexpected to happen


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RE: Dave, what is the best way to finance a $180k remodel??

No, the offer was for as is. Long story short - we put house on the market last summer. Agent priced it $30k above what we thought we'd get (which was $409k) to give us time to find another home. Turns out we received our first offer in four days! We were in a pickle because we couldn't find something we liked or that wasn't exhorbinantly priced. Getting a rental proved difficult as we have two animals so we couldn't accept the offer. A couple of weeks after that, and having looked at homes extensively, we decided to stay put.

Our house is not in a shambles - the price simply speaks to the amount homes have appreciated in our area. They've doubled in price.


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RE: Dave, what is the best way to finance a $180k remodel??

The other day on the radio they interviewed a real estate guy in FL who has painted one of those buses about the size that they use for handicapped transport - 14 or so, I think - a bright green colour, and has painted something like, "Foreclosure Express" on the side.

I'm not sure what kind of advertising that he's doing ...

... but he travels the Fort Myers area every Saturday and Sunday.

And has it filled to capacity on every trip.

Reports that he's doing quite well.

My daughter's in the process of buying a house in Phoenix right now.

Maybe she's right ... that the market is near bottom.

Maybe she's not.

I think that there are some really troublesome days ahead for us North Americans.

I don't think that I'd want to be jacking my $175,000.00 debt up to $350,000. debt on a house currently evaluated at about $450,000.00.

Should get a good deal on a contractor, though ... quite a few of them twiddling their thumbs, these days.

Quite likely materials at a good price, as well.

ole joyful


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RE: Dave, what is the best way to finance a $180k remodel??

No matter how it's financed, my biggest concern would be making the monthly payments once the remodeling is done. If you are a one income family, I'd plan for the worst case - that you have to pay the first mortgage and remodeling cost on this one income without benefit of the stock proceeds or bonuses. Can you do that? Will it be a huge stretch? You mention that your husband earned a bonus equal to 1 year's salary last year. As you said, I'd assume 0 as a bonus for the next few years in my planning. If he gets a bonus, then that's gravy to be applied to outstanding debt. Same thing for if and when the stock gets to $50. He doesn't work in the investment industry, does he? If he does, I wouldn't say that job security is a given in this environment, either (I work in the industry)

If you use a home equity line or refinance into your first mortgage, you can deduct the interest on your taxes so that's a plus. However, that won't help with your monthly cash flow, particularly if interest rates go up and you have floating rate debt on the home equity line. And my bet is that rates start rising after the election/in 2009.

What's the likelihood that you wait 1 year, save your money and then have more cash up front to put toward this project?


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RE: Dave, what is the best way to finance a $180k remodel??

Hi Lisa,

First I appreciate all of the generous time and energy you spend on this forum answering questions like mine. Thank you.

YOu are welcome... and WOW, you are tossing up a DOOZY for me here....

We just received bid from contractor. Amount stated above.

Please detail out for us what exactly you are planning to remodel... how these improvements compare to the homes within a 2 block, and then 1/4 to 1/2 mile radius of your home... and why you are desiring to do these remodels at this particular point in time.

We have no credit card debt and have 8 years left on a 15 year home loan (we owe $160k).

This tells me that you are putting a quite large amount of your monthly investable growth funds into market-risk non-growth real estate equity (which simulates treasury bonds in your family balance sheet... except without any yield/income.) Are you sure this is the best choice of account at this stage of your financial life?

Our mortgate runs about $1800/month. We have a car payment of $600; normal utility bills; and money taken out for our retirement and childrens' college funds.

Are you completely tapping out your qualified allowances in tax-deferred and tax-free ivnestment accounts?

We are wondering what would be the best way to pay for our extensive remodel? My husband has stock that we're planning to sell when it gets to $50 and will be worth about $70,000 take home. Until that happens, we can't sell and must assume we'll need to finance the entire amount.

A) Why can you not sell now? Why would you not sell if the stock is not performing?
B) Why WOULD you sell if/when the stock begins upward momentum and proceeds through the $50 mark?

SO, should we go with a home equity line of credit our refinance?

So many more important questions to explore....

HOW to get the funds is much less important than WHETHER you are proceeding along the best and safest path.

In the current and foreseeable future environments, your cost of funds will be less (likely much less) with a HELOC tied to Prime... but again, that's the least of importance of all your considerations.

I hate to put our hopes on the stock but feel it will eventually get to the amount we need in order to sell.

Stock accounts are not a savings account... savings accounts pay interest that you can accumulate, and have a planned exit when they reach the accumulation levels you desire.

Stock accounts are shares in business ownership, and you are tossing your hopes in along with the waves & tides of not just the particular business, but its industry segments, as well as the overall economy.

If you want a stable, reliable, safe accumulation account... stocks ain't where to do that.

Also, we cannot rely on end of the year bonuses in this present economy. Last year my husband received his entire year's salary as a bonus but we're pretty much guaranteed that won't happen this year. He's hoping that might change year from now but, again, that's not a sure thing.
So, thanks for any advice you can offer.

Sounds like you also need to build sufficient reserves and proper income insurance to protect for the variability of your husband's career income. Higher-end executives, financial and legal professionals often face these issues, and you can't afford to ignore it & simply "hope for the best."

MUCH to cover here... and not enough details to responsibly serve you generically.

Hope the above helps, at least in bringing for the gravitas of the situation, and the greater depth of exploration it all deserves.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Dave, what is the best way to finance a $180k remodel??

We currently max our 401k, max our company stock purchase program, save for 2 kids college, and after tax save another 5% of our income. Not eligible for some things due to AMT limits. This remodel isn't so much an investment as it is getting the house we want for the next ten years.

Yes we are completely tapping out qualified allowances in tax-deferred investments.

As far as not selling now, the deal is that these aren't stock but company stock options (say granted at $30) so we're looking at a difference between the current stock and the grant.

We have a bunch of options. We set the price each year they are due and sell if they go above or sell right before they mature. In the last 5 years, we've always sold before that point. This year, we set the price at $49.

Currently on track to retire at 52. Those funds are separate from the house funds to avoid the issue you point out.


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RE: Dave, what is the best way to finance a $180k remodel??

Lisa,

Currently on track to retire at 52.

Please define what you mean by this.

Are you saying that at age 52 you will have accumulated enough safe reserves that they'll pay passive income sufficient to fund your future lifestyle costs from that point forward, including the factoring of inflation?

Or are you saying something else?

Regarding the remodel;
This remodel isn't so much an investment as it is getting the house we want for the next ten years.

OK, so this is a "home/nesting expense" which is fine, if it fits into your plan.

As I stated earlier, the best financing for that over the near & foreseeable future would be in a revolving HELOC. Clearly you appear to have the cashflow to pay the HELOC back down (if that's the determined best-strategy) and the costs of funds will be lower that way than a fixed 2nd.

Alternatively, a replacement 1st lien may reduce the overall costs of leverage further... and that 15 FRM is pushing you the opposite direction from your goals of retirement (but that may be an emotional rather than a financially logical preference... which again, is OK when seen with eyes open.)

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Dave, what is the best way to finance a $180k remodel??

After you spend the $180k to remodel will the house be worth $615k? Will the neighborhood support that, or is this a $500k and under neighborhood?


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RE: Dave, what is the best way to finance a $180k remodel??

Dave - my husband actually wrote that last portion to you. I think what he meant is that we will have enough in savings, 401k, etc., to maintain the lifestyle we have now. I'll ask him what he means but he has charts and grafts that determine minimum age of retirement based on several factors. So, 52 was the youngest age he could retire altho knowing him, he'll keep going past that age.

You know we had an eipiphanany last night after reading thse posts. If we refinance to a 30 year loan and get a knew loan for a total of $380k (which is the amount we ow $160 plus the $180 to renovate), our house payment would be roughly only $100 more than we're currently paying. And, when we have large sums of money as we sell stock, we can directly apply to the loan.

To Terri's question, when we spend $180 on this home, having purchased for $275 we'll have put a total of $455,000. Homes in our area selling between $300 and $700k (believe it or not). And this is in just a mile radius.

Hope that answers all the questions.

Thanks.


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RE: Dave, what is the best way to finance a $180k remodel??

Hi Lisa,

You know we had an eipiphanany last night after reading thse posts.

THAT SENTENCE ALONE... made my entire weekend!

If we refinance to a 30 year loan and get a knew loan for a total of $380k (which is the amount we ow $160 plus the $180 to renovate), our house payment would be roughly only $100 more than we're currently paying.

Indeed... you've spent so long hurriedly entrapping you money into the illiquid real estate, only to discover you need to re-access it for improvement purposes.

If you use an interest-only program you can further eliminate the problem of amortization, eliminate the inefficient pre-capture of your cash, and regain control over your investment budget.

And, when we have large sums of money as we sell stock, we can directly apply to the loan.

I would certainly suggest STOPPING that downward cycle... the epiphany is still not complete. You have better, safer, more liquid, better growing options for your discretionary retirement-development funds.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Dave, what is the best way to finance a $180k remodel??

Man, I should have edited my last comments. Sorry for the misspellings (my mother was an english teacher and she'd be gasping!).

Thank you all for your feedback.


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