home equity loan or take from portfolio?

18 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

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Comments (4)

jakkom
18 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
18 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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Hi gammyt, Unless you have a fairly high-ratio mortgage or are seeking a substantial loan, quite likely the lender may not be too worried about a precise evaluation. That said, though, with the recent mortgage problems, and general reduction in prices of homes in quite a few areas, perhaps they will be quite concerned, more so than they would have been a year or so ago. In any case, as part of the procedure related to setting up the loan, they may very well come out to make an evaluation on their own. Quite likely charging for doing so. If you have a connection with a realtor, quite likely that person would give you an estimate, even if only a rough one made after hearing a full description of the various aspects of the home, without coming out to look at it. Knowing nothing of your circumstances, other debts, including student, auto or of other kinds, I cannot speak with any knowledge of your situation. That said, I hope that you will make an attempt to get this loan that you are contemplating, paid off over a short term, if possible, especially if the reasons behind it have provided only a short-term benefit. When I see folks making a loan that they plan to pay off over, say, a five year period ... ... to finance a vacation which will take place this year only, it troubles me some. For the cost of that vacation is not only the money laid out now, but includes also the total amount of interest paid on that loan over the full term that one carries it. And repayment of the principal and interest is effectively a reduction in effective income over all of the period that you carry it. I am especially troubled, having been a personal financial advisor for a numbr of years, to see folks add such expenses to their e.g. 25 year mortgage ... ... which means that they'll be paying it off, plus interest, for 25 years. And, if they arrange to make no increase in the amount of their regular payment, it means that they don't really start paying off the principal of that loan until all of the earlier part of the mortgage is fully paid off - what, 15 years (oe more) down the road? What sense does it make to take a vacation, even buy a car, now ... and not start paying off the loan for 15 years? If you'd made a serious effort to have paid off the loan over a short period ... ... think of all of the other interesting/useful/enjoyable things that you could have done with all of that interest plus principal expense! Enough preaching ... about an issue that's none of my business! Good wishes for increasing skill at management of both your income and assets - nobody cares as much about your money as you (except someone that'd like to shift some of it from your pocket into his/hers). ole joyful
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If the amount of your loan remains the same, and interest rates go up, if your rate goes up (and usually rates on Home Equity Loans are at variable rate) ... ... if the amount of your regular payment remains the same ... ... the duration of time during which you'll be paying it will be extended for a substantial number of years! As someone suggested, can you arrange for your mortgage amount to be available in portions, at various times, as needed? ole joyful
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A couple of thoughts: - the bank probably is not counting that third rental income because you don't have it. Renting is speculative. I don't know what the rental market is like on LI anymore, but around here it is not uncommon to see "For rent" signs on apartment buildings for months on end. There also are the expenses incurred as a landlord -- it's not all an income stream and that's why the bank discounts the income. - another bank (a smaller, hungrier one) or even a credit union (if you can belong to one) might be a better bet for your business. - a bridge loan might work for you; it would go on the equity you now have in your properties and carry you until the rental income is a reality.
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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
18 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
18 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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green-zeus

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