Should I get a HELOC?

[Lodell]

I need advice on how to pay for some home improvements. Should I get a HELOC, stop funding my Roth IRA, or use my emergency fund? I am single and I will be eligible to retire in just under 7 years. I live in the Chicago area, and I have not decided if I am going to sell the house and relocate after retiring. Even though I can retire in 7 years, I may hang in there for 10 years.

I need new pet friendly flooring for my entire home. I have a two story home and a finished basement. The cat has ruined the carpet in the entire house. I haven’t invited anyone to my home in months. I get depressed whenever I look at my floors. By the way, the carpet in the entire house is white. (Yes, eight years ago I bought a house with wall to wall white carpet. My mom and I purchase the home together. She just loved the house, and I wanted her to have it. She passed away a few years ago and now it's just me and Slim Kat.)

The master bath needs work too. I need a new shower, and if I get the new shower, I might as well update the entire bath and paint the master bedroom. The major appliances in the kitchen have just about had it, and I can't stand the window treatments in the kitchen and family room. I also need to get my roof and plumbing inspected.

I have the cash in my emergency fund, but I don't consider the work that needs to be done an emergency. I work for the Gov. and I no longer believe that I have job security. My position has not been threatened, but you never know. Since I’m single, I am not comfortable touching my emergency fund.

I'm maxing out my TSP (401K), and I'm funding a Roth IRA from extra cash ($25,000) that’s sitting in a credit union money market account.

I've checked a couple of banks and the interest rate is about 4.49% (variable) for a HELOC below $50,000.

 

[old woman]

I am in the same situation for a house but don't recommend new flooring as long as you have that cat.

My two cats are getting elderly and I am waiting to replace carpet. I have ripped up my old carpet and have hardwood under it that is stained. I have a piece of scrap carpet in the den but left bare floors everywhere else. I did put real tile in both bathrooms but just because I needed to remodel anyhow.

When I am catless I will sand all the hardwoods and seal them with something that blocks oder then carpet. I will paint everything before the new carpet is laid.

I had all new appliances delivered yesterday and washed the kitchen walls, ceiling and cupboards and donated half the stuff from my cupboards to declutter.

I will pay for the appliances from cash flow and not save for retirement for a month.

If I was you I would rip out carpet then start with the cheapest things or most urgent first maybe start in just one room doing a little at a time as you can afford it.

 

[chinaco]

The cost of owning an indoor pet.

I don't have a direct answer.... and these ideas are just some things to think about.

But.... assuming you are in good financial shape and can afford the related risks.... The answer lies somewhere between the interest rate of the loan, the tax differential of the two options (near term and long term) and the return you could get on an security with a low risk profile (high grade bond of equal duration to the loan), and the transactions costs (net to net)... and the future of tax laws in the US.


IMO - a comparison of using the levered money to invest in something riskier just obscures your personal risk (downside) and can make the upside look better than it would be unless you somehow were able to discount the potential gain using a risk related adjustment. If I were going to do that type of comparison... I would first compare it to holding the money in something that would deliver an equivalent cash flow and have similar risk... for example a treasury ladder... or strips. That way, I would understand if there was really a way to exploit it in a risk neutral manner. Plus, if I intend to invest the borrowed money in riskier assets, I would at least have some sense of the difference between the more risk neutral approach (both streams of interest money and principle guaranteed) and a more risky investment approach. One thing about stocks... they do not mature.... but they essentially do if you need to get the money and have to sell (planned or not) and the value is unknown at time (planned or not). So playing the devils advocate would also need to be done... IOW what if you lost your job in 3 years? Will you be able to service the debt and live? What if the market was up and what if it was down. Will you be outside of the IRA/401k penalty zone? etc.

One risk to consider. The tax situation is likely to change for many of us.... and it is unclear what will happen.

Home mortgage deductions may be eliminated (but maybe not) and it is likely that income tax and cap gains may be higher.

One final comment. There is rarely a free lunch. When it comes to risk and the future... the outcome is non-determinant (and could be outside of your control... depending on things that happen). You could win and you could lose. If you cannot afford to lose... don't take the risk!!

One other options you did not mention to fund the flooring... pay it out of pocket over the next couple of years. Don't do it all at once. This is what I would do! Prioritize where you change the flooring if you are embarrassed.... for example: do the living room or great room first.

 

[Coach]

Perhaps get the HELOC, but fund the improvements with cash. The HELOC can be your emergency fund while you rebuild your cash reserve.

Coach

 

[Lodell]

Perhaps get the HELOC, but fund the improvements with cash. The HELOC can be your emergency fund while you rebuild your cash reserve.

Coach

Coach,

This may work. I thouhgt the HELOC was only for home improvements. Do you get the tax deduction for personal use as well?

 

[REWahoo]

I thouhgt the HELOC was only for home improvements. Do you get the tax deduction for personal use as well?

I'm not coach but I [-]did stay in a Holiday Inn[/-] do have a HELOC...

If your HELOC was used to improve your home, you may deduct interest on lines up to $1 million ($500,000 married filing separately). If your HELOC was used for other purposes, you may deduct interest on lines up to $100,000 ($50,000 married filing separately).

HelocBasics*|* HELOC Tax Deductions