florida room

[ripper1]

Hello everybody. I am having somewhat of a brain freeze as to how to pay for a room addition which is going to cost us 40k. Even though we have the cash it would amount to about 10% of our investments. A home equity loan for 5 years through PenFed has a fixed rate of 4% and no closing costs. Our cash part of our investments are in PenFed CD's earning 3.06% and our mortgage has a rate of 3.375% so I don't want to do a cash out refi and mess with that rate besides there would be closing costs involved. I'm just thinking with rates so low right now that maybe we should use other peoples money. Thoughts. Thanks.

 

[Ready]

I don't think there is any obvious right or wrong answer here. Assuming you can deduct the interest on your home equity loan, the net interest rate is probably about the same or slightly lower than your PenFed CD. But the 3% CD rate is no longer available, so if you take out the money from it, you won't be able to reinvest it into a CD at the same rate in current market conditions.

If you think there is a good likelihood that you can repay the home equity loan in less than five years, I'd probably lean that way just to protect the CD rates you have.

 

[Big_Hitter]

that's a lot of scratch for a room addition - I'd see if you could work in some sort of trailer without breaking any deed restrictions

 

[harley]

that's a lot of scratch for a room addition - I'd see if you could work in some sort of trailer without breaking any deed restrictions

The OP is in Chicago, so I don't think $40K for an addition is very high at all. It all depends on where you are. When we were in the DC area estimates for a relatively small addition were coming in at $75 - $100K (we didn't do it). Out here in the boonies of the Eastern Shore, it would be closer to the $40K mentioned.

I'd go with the loan. No way I'd refi the mortgage. Cash out refi's have much higher rates and costs. Either pay cash or take the loan.

 

[W2R]

that's a lot of scratch for a room addition - I'd see if you could work in some sort of trailer without breaking any deed restrictions

I agree, especially given that this is 10% of your entire portfolio. Even buying my Dream Home didn't drain my portfolio by a net 10%.

 

[ripper1]

I agree, especially given that this is 10% of your entire portfolio. Even buying my Dream Home didn't drain my portfolio by a net 10%.

Thanks, W2R it is a lot but our living expenses are taken care of with my pension and DW social security.

 

[Newventurer]

Hello everybody. I am having somewhat of a brain freeze as to how to pay for a room addition which is going to cost us 40k. Even though we have the cash it would amount to about 10% of our investments. A home equity loan for 5 years through PenFed has a fixed rate of 4% and no closing costs. Our cash part of our investments are in PenFed CD's earning 3.06% and our mortgage has a rate of 3.375% so I don't want to do a cash out refi and mess with that rate besides there would be closing costs involved. I'm just thinking with rates so low right now that maybe we should use other peoples money. Thoughts. Thanks.

Don't know if this would apply to you or not but one thing to consider is the tax treatment of the improvements. Around here you lose your over 65 fixed tax rate if you do improvements on your home. They ramp it up to the current mil levy, of course on an increased value.

 

[RunningBum]

I don't think there is any obvious right or wrong answer here. Assuming you can deduct the interest on your home equity loan, the net interest rate is probably about the same or slightly lower than your PenFed CD. But the 3% CD rate is no longer available, so if you take out the money from it, you won't be able to reinvest it into a CD at the same rate in current market conditions.

If you think there is a good likelihood that you can repay the home equity loan in less than five years, I'd probably lean that way just to protect the CD rates you have.

CD interest is fully taxable, so there's no way a higher loan interest rate is going to work out to be the same or lower than the CD even if it is deductible.

But if you have any investments at a loss or very little gain I might sell those to pay for it. Otherwise I'd probably do the home equity loan and pay it off with the CDs when they mature.

 

[Sunset]

Does your existing mortgage count as an itemization tax thing, or do you currently take the standard deduction, if you itemize, then taking a loan will be less than the full interest rate.

I have relatives in the area, they did a FL room, it's not used as much as they thought/dreamed so it became a storage room. Now they are talking downsizing.
Hopefully you will use it a lot, and not move for 10 years...

 

[ripper1]

Does your existing mortgage count as an itemization tax thing, or do you currently take the standard deduction, if you itemize, then taking a loan will be less than the full interest rate.

I have relatives in the area, they did a FL room, it's not used as much as they thought/dreamed so it became a storage room. Now they are talking downsizing.
Hopefully you will use it a lot, and not move for 10 years...

Yes, we do have itemize and we are in our early 60's and consider this to be where we can hopefully live out the rest of our days. We have a small but growing family and this place (ranch) definitely had to get a little bigger. Besides we have been kicking ourselves for not doing it at construction five years ago.