401k loan for Kitchen Remodel

[bobandsherry]

It was a Chase Citicard.

That would be a very unique card.

 

[jazz4cash]

The 0% offers I've seen are good for whatever your credit limit is. The Gotcha is the upfront fee if any. NFCU usually has 12 mo @0% around March of every year. Good to see others see value in prudent use of 401k loan provision.

 

[Gumby]

I would use a 0% for 18 month credit card. 0 is less than 4.1%. Just saying. 25K/18 months is $1388/month. Can you afford that? If not then pay less and transfer to another 0% card at the 17 month mark.

Most of the credit card offers I have seen now require a 3% fee for balance transfers. I used to stooze credit cards, but this requirement has eliminated that game.

 

[zinger1457]

From what the OP described since the employer isn't removing funds from the 401K to cover the loan the employer is using money in the 401K as collateral for a loan that they are funding. Using a 401K as collateral for a loan is not allowed by IRS rules so something doesn't sound right.

 

[Good_Life]

One thought, how much would you really pay in taxes if you sold $20-25K in funds? If you've made 20% on them, that would be 4-5K of income. 15% on that is $600-$750. One time. 4% loan interest on that would be $800-$1000. Of course the numbers change if your LTCG is greater, but don't fall into the trap of thinking the entire fund sales proceeds is taxed--it's just the gains.

That is an excellent point on how much I would actually be paying on the taxes on gains. To be honest I hadn't fully thought through that actually calculation and if the gains were small enough it still might make sense. But after looking at the funds I would be drawing from I have had them for long enough that they all have pretty much doubled.

 

[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....

 

[Texas Proud]

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....

What I think that some are saying is that the funds remain invested but that investment is your loan... so you have to move money to some account that is considered a loan.... which means it is not invested in stocks or whatever else you have now...


I think that is what you need to check out... and again, with the company that is holding your investments as they will know for sure...

 

[Scuba]

We did a massive remodel pre-ER and I highly recommend doing so while you are still working and earning income. Had we delayed until post-ER, we might have made some different decisions and not have been as happy with the end result. As it was, we could equate certain options that came up with how long it would take us to make the $$ to pay for them. It was a no-brainer to go for what we really wanted.

We financed our remodel through a combination of a HELOC at prime minus 0.26% and a few zero % accounts. We could have paid cash for all of it but chose to stay invested. In fact, we’ve kept some of the HELOC outstanding, but now that our rate is above 4%, we’re likely to pay the rest of it off this year. Staying invested and using OPM (other people’s money) at a very low cost turned out very well for us, as our portfolio increased double digits during this time.

I’ve never borrowed against a 401K or any other investment accounts but don’t understand why that would be preferable to a HELOC and/or zero percent credit.

 

[stephenson]

Tidbit comments ....

Several friends have SubZero refrigerators and freezers ...silly expensive and may be worth it - except they all had maintenance issues ...

It’s your money,, but $800 for a faucet is a couple of standard deviations out of the norm ....unless it is the Italian through the wall kind!

Re the remodel - no way would I borrow money to do a kitchen remodel - rebuild a house that I bought distressed, sure, but not a kitchen remodel.

 

[pb4uski]

That is an excellent point on how much I would actually be paying on the taxes on gains. To be honest I hadn't fully thought through that actually calculation and if the gains were small enough it still might make sense. But after looking at the funds I would be drawing from I have had them for long enough that they all have pretty much doubled.

Think of it this way... if your gain is 50% because those funds have doubled and you pay 15% LTCG tax, then your net cost is 7.5% or $1,875 ($25k/2*15%). If you do the 401k loan your cost is about 4.1%/year, so if you make payments over 5 years it averages out to ~10% or $2,563 ($25k/2*4.1%*5).

 

[pb4uski]

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....

I wonder if there is a miscommunication where you are thinking that staying invested is in equities and paying the 4.1% interest and the HR folks are thinking that staying invested is the 401k loan that you earn the 4.1% that you are paying yourself. It may be useful to go through and example with them where you have $25k in the account in equities earning 8% and then take out a $25k loan to see if you are all on the same page.

On the last part, our contractor suggested going with melamine for all cabinets other than the sink base cabinet... and going with plywood for the sink base cabinet since that is the one that has the highest risk of exposure to water... plywood is nice and if the cabinets were going to be moved then I can see the upgrade perhaps being worthwhile but since they just sit there for theie whole life the upgrade didn't seem worthwhile to me. Our cabinets at our summer home are melamine and have actually been moved twice and are still very servicable.

 

[target2019]

What I think that some are saying is that the funds remain invested but that investment is your loan... so you have to move money to some account that is considered a loan.... which means it is not invested in stocks or whatever else you have now...

I think that is what you need to check out... and again, with the company that is holding your investments as they will know for sure...

This is good advice.
Sometimes HR misinterprets what a financial company is saying, or has written. It may have happened once or twice, I think!

 

[PoorOldCountryBoy]

Have you compared a HELOC vs 401K including the tax deduction for the HELOC? It's probably nickels and dimes either way.


I'm with others and suggest a gradual remodel for you. Or get creative and sign up with a local tech high school, Habitat for Humanity ReStore, etc. Many ways to save thousands, especially on cabinetry. My project manager side always worries about contingency costs - usually 20 to 30% more than expected. Another good reason to go slow if possible.

 

[RunningBum]

I haven't been through a kitchen remodel myself, but do you really want it to drag on any longer than it has to?

 

[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.

 

[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]

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]

+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]

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]

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.