Help! Fund home remodel with cash out refi or not?

[Biker_on_FIRE]

Hi everyone, I need some advice/suggestions on whether or not to do a cash-out refi to finance a home remodel. Here are some of the particulars of our situation:

Wife and I are 51 years old and plan to retire in 2025 when have penalty-free withdrawals from our company 401ks
$4.5M in retirement accounts (Roth and Traditional 401ks and IRAs, 80% equities/20% bonds)
$180K in cash
$200K in Brokerage (equities)

$2M home value
$170K remaining on 15-year mortgage at 3%; term ends July 2027
Annual expenses approx $100K.

We are in dire need of a home remodel...kitchen and bathrooms are falling apart and are in need of an overhaul. Need new roof and want to add solar when we do that. We would like to do it within a year and are looking in the ballpark of $150-200K in remodel/roof/solar costs.

We had originally planned on waiting until we are 55 when we have access to our 401ks without penalty, but with our house falling apart and interest rates so low, we are considering doing a cash-out refi: 15-year at around 2.5% with a loan amount of around $400K. My thinking is that the refi would allow us to do the remodel earlier, smooth out our withdrawals, and not have to deplete our cash (emergency fund) and equities. It would also let us arbitrage the low interest rates and continue to aggressively invest. We are comfortable with extending the term of our mortgage since we have the money in the bank (once we have access at 55), so we could always pay off the loan early if it helps us sleep at night.

Although our jobs are very stable, we would like to keep our cash as an emergency reserve for the next 3.5 years and not rely on the equities in our brokerage account as an emergency fund as we are planning on using that for charitable donations to a donor advised fund. Btw, I have no doubt that overall, we will have plenty to support our retirement in the long term. We have lived frugally and have done well financially because of it, but we're trying to optimize squeezing in the remodel in the short term.

Does this sound like a good plan, or are there any other suggestions/options we should be considering? Should we go with a 4% HELOC? Or home equity loan? Spitball away! Thanks!

 

[Sniggle]

Seems to me the only thing holding you back is you.....you have plentiful assets and equity to fund it any number of ways without breaking a sweat.

With all that money saved, why would you not want to spend some of it now to make your home more enjoyable for the both of you?

(The Home equity loan would have the least impact on your assets, if you don't mind the paper work)

 

[pb4uski]

I think I would lean towards a cash-out refi for 15 years at 2.5%... $400k total.

A $200k withdrawal from your 401ks later on will cost you a lot in taxes. One thing you should check into is whether there are any restrictions on penalty-free withdrawals. For example, if withdrawals are penalty free but the plan only allows all-or-none withdrawals then the fact that they are penalty-free isn't very helpful and restrictions may prevent you from retiring when you want to.

 

[Aerides]

It looks like you have almost all your savings in tax-deferred with little that is available to you before 59.5, (or 55 if the rule applies in your case). So a heloc or other loan would make sense for you.

I hope you are prepared though, remodels are taking 2 to 3 to 4 times longer than they used to, and the products you want may not be available. It might make more sense to move to a newer home, depending on your area and market.

I'd start interviewing contractors immediately if you're in that bad shape at home.

 

[jazz4cash]

I would look very closely at the HELOC but 4% is way too high. 4% sounds more like a a Home equity loan rather than a line of credit. HELOCs typically have variable rates so check carefully how the rate is calculated (index, margin, caps, adjustment frequency). When you get access to your deferred savings accounts you may find it difficult to pay chunks of principal due to the impact on your taxable income. A large HELOC let’s you borrow as needed and only pay interest on the amount borrowed. The remainder of the credit line is available as needed….well suited to a series of home improvement projects. If you make additional principal payments it reduces your payment rather than reducing your term.

 

[Biker_on_FIRE]

Seems to me the only thing holding you back is you.....you have plentiful assets and equity to fund it any number of ways without breaking a sweat.

With all that money saved, why would you not want to spend some of it now to make your home more enjoyable for the both of you?

Thanks for the advice and kind words! Yes, we have come to the conclusion that we have saved well more than we will need and should spend on the things that will add enjoyment to our lives while still leaving enough for our heirs and organizations that we support.

 

[Biker_on_FIRE]

I think I would lean towards a cash-out refi for 15 years at 2.5%... $400k total.

A $200k withdrawal from your 401ks later on will cost you a lot in taxes. One thing you should check into is whether there are any restrictions on penalty-free withdrawals. For example, if withdrawals are penalty free but the plan only allows all-or-none withdrawals then the fact that they are penalty-free isn't very helpful and restrictions may prevent you from retiring when you want to.

Thanks, I think we will go with a 15 year at 2.5% with loan amount of around $500k as we are planning on pushing forward some of our other remodel plans (landscaping and patio area). Yes, one of the thoughts is that cash out will help smooth out some of our withdrawals from our 401ks later and we know the withdrawals are penalty free and we can withdraw as little or as much as we want from them when we turn 55.

 

[Biker_on_FIRE]

It looks like you have almost all your savings in tax-deferred with little that is available to you before 59.5, (or 55 if the rule applies in your case). So a heloc or other loan would make sense for you.

I hope you are prepared though, remodels are taking 2 to 3 to 4 times longer than they used to, and the products you want may not be available. It might make more sense to move to a newer home, depending on your area and market.

I'd start interviewing contractors immediately if you're in that bad shape at home.

Thanks! Yes, we definitely after-tax poor which is one of the reasons we will do the cash-out refi. Yes, we will utilize the rule of 55 to withdraw penalty free from our 401ks when we turn 55.


We have talked to several contractors already and all of them have told me not to expect starting work until around May '22.

 

[Biker_on_FIRE]

I would look very closely at the HELOC but 4% is way too high. 4% sounds more like a a Home equity loan rather than a line of credit. HELOCs typically have variable rates so check carefully how the rate is calculated (index, margin, caps, adjustment frequency). When you get access to your deferred savings accounts you may find it difficult to pay chunks of principal due to the impact on your taxable income. A large HELOC let’s you borrow as needed and only pay interest on the amount borrowed. The remainder of the credit line is available as needed….well suited to a series of home improvement projects. If you make additional principal payments it reduces your payment rather than reducing your term.

Thanks! I think we will go with a cash-out refi rather than a HELOC for the fixed interest rate as well as the lower rate.