401k loan for Kitchen Remodel

[OldShooter]

I just looked at this thread for the first time but did not see that anyone has mentioned Remodeling Rule #1.

Remodeling Rule #1: The project always costs far more and takes far longer than you expect, even when you remember Remodeling Rule #1.

How does your funding strategy work when the kitchen ends up costing $35K (or more)?

[pb4uski]

That is not my personal experience.... our building and remodeling projects have been pretty close to budget... certainly never a 40% overrun. Also, where we have had modest overruns it has been because we made conscious decisions to do upgrades during construction. Besides, for all we know the OP's $25k budget includes some contingencies.

[Aerides]

Quote:

Originally Posted by pb4uski That is not my personal experience.... our building and remodeling projects have been pretty close to budget... certainly never a 40% overrun. Also, where we have had modest overruns it has been because we made conscious decisions to do upgrades during construction. Besides, for all we know the OP's $25k budget includes some contingencies.

It really depends on your GC, and your contract. We had 10% contingency written in, but didn't use it. We also started and finished on time. But I've seen and read enough horror stories to know that we were lucky. Home Remodeling is full of fly-by-nights, or scams that come in and do the tear down and leave town. Definitely not a project to give to the lowest bidder, or without references and testimonials.

[pb4uski]

My GC was incredible (it was me )... and I have heard of horror stories most of our projects have been with locals who have been in the area for a while, are known commodities and that we heard about through word of mouth and have done good projects for friends.

One key is to never let the money get too far ahead of the work... in fact, preferable slightly behind the work.... if a builder wants a whole bunch of money up-front I tell them that I am not their bank and am willing to pay for the work as it is done promptly but if that is unacceptable then I move on.

[OldShooter]

YMMV, of course, but I think overruns are much more common than hitting the budget. I am taking the "somewhat dated" comment on the kitchen to mean that this is an older house, which increases the chance of surprises.

Also, overruns because of post-commitment upgrades are common. In project management jargon, this is called "creeping elegance" or "scope creep" and it has led to many cost and schedule overruns.

[Scuba]

Quote:

Originally Posted by pb4uski +1 The reality is that you are eventually going to spend $25k.... whether it is $10/$10/$5 or $25/$0/$0 doesn't matter...... in fact, I think the latter is preferable to living in a perpetual construction zone.

Not to mention that the costs go up every year so it will ultimately cost more to do it in phases. I would only consider phases if I couldn’t afford not to.

[CRLLS]

IMO, The cost of overruns are either a)due to feature creep (aka upgrades) requested by the homeowner and not accounted for in the original budget, or b)a poor idea of how much things really cost in the first place. Maybe c) they chose a conniving GC. Most of these are the responsibility of the homeowner.

13 yrs ago, we spent about $17K on our kitchen remodel. At that time we had no budget, just a bit of common sense. Like pb4uski, I was the GC. We took the kitchen down to the drywall. We replaced all the cabinets with middle-grade from the box stores, and replaced all appliances with stainless. We also had installed granite countertops and a new engineered hardwood floor. I think if I were to do it today, I couldn't come close to being able to do that. Maybe figure at least 2x that if you include a GC and had to pay for labor.

I've seldom been completely happy with the quality of work when hiring out. Only a few times that I can think of off the top of my head. Sometimes I just have to hire out. Either I don't have the knowledge or the time to do it myself. I'm know going to have a tough time as I get too old to do these things myself.

There is a lot to say (financially) about re-doing the kitchen in stages. The downside is that you'll never have a "new" kitchen, and the multiple, smaller disruption's will be, well, simply a major pain. If you can swing a small loan, the extra you pay in interest will be well worth it IMO. We are still at historically low interest rates. I'd stay away from borrowing from the 401K. That money is there for a reason and it not as a personal bank.

[Mulligan]

Quote:

Originally Posted by Good_Life Let me just say I really appreciate all these comments. I am definitely going to look more into opening a 0% credit card for doing at least a portion of it. I could definitely use that for the appliances I'm purchasing and perhaps the countertops as they may take credit cards. I did a little digging already and liked the Chase Freedom, although it was only 15 months it also gave me $150 as a a signing bonus. I am not surprised by all the skepticism regarding the 401k loan. I was pretty surprised by the terms of it as well. When I first found out about it from our HR director probably around 2 years ago, he confirmed that your investments stay invested if you take out a loan with no prepayment penalties. And when I talked to HR 2nd in command last week she repeated the same thing. Now the other big decision we have going is if we want to make the cabinet boxes melamine or wood....

Good life, you can usually request “access checks” sign it to yourself and then use the cash directly to pay appropriate people. Just be wary of “access fees”. The good ones are 2%-3%...But many are 4%-5%...Check the fine print. Of course your strategy of getting an offer of 0% of all purchases (no cash allowed) for 12-18 months for part of the payment is sound also.
I have played the access check game myself for many years. Though this time I just recently opened up a home equity loan that is usable for 10 years and amortized for 30. I am currently renovating/gutting my bathroom...I never use my investment money to buy things, but I doubt I ever use any of it period ever because I dont even spend my monthly pension.

[Dash man]

Cabinets and countertops pretty much need to be done simultaneously unless you are keeping the exact same footprint. We just did a remodel of our Florida condo that included raising ceilings, rerouting HVAC ducts, two completely remodeled bathrooms, wood flooring throughout, new recessed lighting, and included custom cabinets to the ceiling, quartzite countertops, and opening up the ocean view. We started doing just the kitchen, but found to get the look we wanted, it wasn’t practical to piecemeal the work. Now we have the condo we wanted. We paid for it in stages and recently made the final payment.
Permits were a pain to get, and dragged out the process. A hurricane caused more delays. Some condo building work caused more delays. We’re glad it’s [emoji736]

[pb4uski]

Quote:

Originally Posted by OldShooter YMMV, of course, but I think overruns are much more common than hitting the budget. I am taking the "somewhat dated" comment on the kitchen to mean that this is an older house, which increases the chance of surprises. Also, overruns because of post-commitment upgrades are common. In project management jargon, this is called "creeping elegance" or "scope creep" and it has led to many cost and schedule overruns.

It also depends on the work... if the project includes moving walls and such, then the risk of unanticipated problems resulting in an overrun is a lot higher than your more run-of-the-mill renovation where the same layout is retained and one is just replacing flooring, cabinets and countertops or perhaps even making slight changes to layout.

Overruns because of post-commitment upgrades are common and in a lot of cases make a lot of sense, but I view those more as scope creep than an overrun in that the owner makes a decision to make the upgrade and presumably at the time they make that decision they consider if they can afford the upgrade.... very different from discovering rotted subfloor and floor joists that need to be replaced and there is no discretion to not do them.

[rayvt]

Quote:

Originally Posted by Good_Life I am not surprised by all the skepticism regarding the 401k loan. I was pretty surprised by the terms of it as well. When I first found out about it from our HR director probably around 2 years ago, he confirmed that your investments stay invested if you take out a loan with no prepayment penalties. And when I talked to HR 2nd in command last week she repeated the same thing.

I don't believe it. Oh, I believe they told you that. Just don't believe your 401K works like that. I'm actually rather surprised that you think HR knows about the internal financial details of your 401K. Why would HR even know that? Try posing detailed questions to the 401K administrator.

[OldShooter]

Quote:

Originally Posted by pb4uski ... Overruns because of post-commitment upgrades are common and in a lot of cases make a lot of sense, but I view those more as scope creep than an overrun in that the owner makes a decision to make the upgrade and presumably at the time they make that decision they consider if they can afford the upgrade.... very different from discovering rotted subfloor and floor joists that need to be replaced and there is no discretion to not do them.

I think I am not as fussy about the language. To an old project manager and project manager instructor like me any time the project costs more than planned that is an overrun. I'll agree that in many cases a remodel project overruns because the project manager deliberately permits added cost that was unplanned rather than being forced to do it because of unanticipated circumstances, but either results in an overrun.

"Creeping elegance" is particularly pernicious because it tends to come in small steps that individually look acceptable. We once had a creeping elegance scenario where when shopping for flooring we found and snapped on a spectacular deal on some beautiful dark green marble. Well, come to find out it was on sale because it could not be set with normal thinset, only with epoxy. So the small elegance increase ballooned into a multi-hundred dollar overrun in tile-setting materials.

My point to the OP is that he/she should not fine tune his financing strategy to exactly cover the going-in estimate. The strategy should anticipate an overrun. If it does not occur, good on him. If it does occur, he should be financially ready for it.

[Dash man]

Quote:

Originally Posted by rayvt I don't believe it. Oh, I believe they told you that. Just don't believe your 401K works like that. I'm actually rather surprised that you think HR knows about the internal financial details of your 401K. Why would HR even know that? Try posing detailed questions to the 401K administrator.

DW was is a retired HR VP and was an expert on her company’s benefits and 401k plan. She agrees this kind of loan sounds suspicious. But let’s not put all HR people into the same bucket. There are good ones out there.

[Texas Proud]

Quote:

Originally Posted by Dash man DW was is a retired HR VP and was an expert on her company’s benefits and 401k plan. She agrees this kind of loan sounds suspicious. But let’s not put all HR people into the same bucket. There are good ones out there.

I do not disagree... but from what I say and others is that what the OP thinks as being invested and what the HR person means might be very different...


OP needs to get it correct or he has a big surprise coming....

[Good_Life]

Just wanted to thank everyone again for their comments and advise on this. We started doing the kitchen remodel at end of July and it is almost done. It will be a little more than I expected $27k vs my hope before of $20-$25k but really happy with how it is turning out. Biggest issue is my refrigerator was delivered with a huge dent on the front door so dealing with that but should get it resolved soon.
Everyone was right about something not being quite right with how my HR Dept describe d the 401k loan. I ended up getting the number from HR of the 401k administrator and talked to them myself. What they do is reinvest the loan amount you want from your 401k out of your existing investments and into a money market style investment in your 401k (so my 401k balance doesn't actually go down). I get paid the interest on that money market account, but pay the variable 4% interest on the loan so net it is about a 1.6% to me. It increased slightly your fixed income allocations, but you can just reallocate with your other investments. I ended up also getting a Chase no interest card for 14 months (they gave me a $20k limit) and used that also. Only took 8k with the 401k loan.

My wife and I are on board with being extra frugal going forward so we can save the money to payoff the Chase card at the end of 14 months. Our July expenses were about 1300 less than they usually are, so that was a good sign. I am still not quite sure how we did that and need to look at it more.
That was even with lots of takeout due to working with only a partial kitchen for a few weeks😀. It is funny, we always thought of takeout as a real treat because we usually cook the vast majority of our meals, but I got real sick of it at the end. So did the kids.

[jazz4cash]

Glad you are happy with the results. Thanks for the update, but something still seems odd with the 401k loan description. If you get proceeds from the loan and it’s still invested you can have your cake and eat it too.

[gauss]

Quote:

Originally Posted by Good_Life What they do is reinvest the loan amount you want from your 401k out of your existing investments and into a money market style investment in your 401k (so my 401k balance doesn't actually go down). I get paid the interest on that money market account, but pay the variable 4% interest on the loan so net it is about a 1.6% to me. It increased slightly your fixed income allocations, but you can just reallocate with your other investments. I ended up also getting a Chase no interest card for 14 months (they gave me a $20k limit) and used that also. Only took 8k with the 401k loan.

Thanks for the further details on the loan.

It sounds to me that they are accounting for the loan to you as a "money market style investment". Instead of the investment going to a loan to a large corporation, the loan is going to you.

You pay 4% return on the loan, but they keep some of this as expenses so you net something in between as a return on your 401k money.


FWIW - This appears to be what Texas Proud was suggesting back in post #32.

On the other hand, if the return to your 401k was greater than the 4% that you are paying, then I would say it cannot make sense.


Glad it worked out for you and thanks again for the update.

-gauss

[Spock]

Quote:

Originally Posted by bobandsherry Just be aware that most plans require repayment should you terminate employment. If you plan to retire before loan is repaid you will need to find the funds to pay for the loan.

I would not say "most". I've left twice, both with open 401K loans and was able to keep payments both times. The last time the only requirement is that the loan payments HAD to be auto-pay vs. mailing check payments.

[Texas Proud]

Quote:

Originally Posted by Spock I would not say "most". I've left twice, both with open 401K loans and was able to keep payments both times. The last time the only requirement is that the loan payments HAD to be auto-pay vs. mailing check payments.

Two examples does not make a trend... most companies still require it to be paid off... below from a 401(k) helper website...


BTW, I have worked at 4 companies that allowed these loans and all 4 required you to pay it back upon termination... I never had a loan though..

How long do I have to pay off my loan if I quit my job?
Typically, if you quit working or change employers, it is not uncommon for plans to require full repayment of a loan. Prior to the passage of the Tax Cuts and Jobs Act of 2017, participants who had left employment with an outstanding loan were expected to pay off the balance within 60 days of separation or face a 10% withdrawal penalty and have the distribution be considered taxable income. The Tax Cuts and Jobs Act of 2017 provides a greater repayment window, as individuals now have until the filing deadline of their individual tax return to avoid the tax consequences of a deemed distribution of an outstanding plan loan.

[Good_Life]

Quote:

Originally Posted by gauss Thanks for the further details on the loan. It sounds to me that they are accounting for the loan to you as a "money market style investment". Instead of the investment going to a loan to a large corporation, the loan is going to you. You pay 4% return on the loan, but they keep some of this as expenses so you net something in between as a return on your 401k money. FWIW - This appears to be what Texas Proud was suggesting back in post #32. On the other hand, if the return to your 401k was greater than the 4% that you are paying, then I would say it cannot make sense. Glad it worked out for you and thanks again for the update. -gauss

Yes what Texas Proud described before was accurate. And yes the return to the 401k investment that I am receiving interest on is not greater than 4% (it is somewhere around 2.5%) so the 401k plan administrator still makes a small spread. Overall though I think it is a pretty good deal if you aren't in danger or planning on leaving your employment (where I work it is very stable and my job is very well protected).