Home Equity loans

[The Bad Guy]

I'm researching the pros and cons of a home equity loan. We built our house in 2011 and put off finishing the basement and some other small projects because we had several bumps in the road that ended up costing more to finish the house.

We have built up some solid equity in the home and using that line seems to be the best way to go to finishing the basement and paying off a student loan.

I'm seeing around 4.15% at the bank I have my mortgage through.

What are some of the drawbacks that I have no idea about with these types of loans?

Thanks in advance for any guidance.

[The Bad Guy]

Originally Posted by MahiMike

dont put the $ into your own home. buy a rental.

Don't really have that option. I need the basement finished for my kids now that they are bigger and this seems to be the best option without saddling and burying myself.

I like the line of credit option. If interest rates go up, that means the housing market will too and my house will be worth even more if I elected to sell. I live in a nice area with a great school district so the values should be there.

[The Bad Guy]

Originally Posted by lewdog

You come out way behind doing this and it should be considered the last option. You end of having to pay it back, plus lose the compounding interest of your money gaining value that you remove from the account.

OP, based on things I'm seeing, you should be able to secure something below 5% with decent credit.

Yeah, not touching my 401k. My credit score is around 790 last time I saw it so I'm not concerned with getting a great rate. The bank that has my mortgage has their rates as 1.9% for the first year, and 3.9 after. It is a variable rate after that.

[MahiMike]

Well as far as borrowed money goes, it doesn't get cheaper than a HELOC. Just be careful in how you use it. The bank will try to loan up to 80-85% of what your home is worth so you could end up with access to $80K overnight. Hard to resist the temptations that come with that.

As far as spending $ on your home for "improvements", to me that's just a bad idea. Repairs is another issue but improvements tend to just improve the bottom line for your bank. The only time you should improve your home is when you are selling it.

Many folks think their home is an asset but it's really a liability until you rent it out...

Good luck.

[The Bad Guy]

Originally Posted by MahiMike

Well as far as borrowed money goes, it doesn't get cheaper than a HELOC. Just be careful in how you use it. The bank will try to loan up to 80-85% of what your home is worth so you could end up with access to $80K overnight. Hard to resist the temptations that come with that.

As far as spending $ on your home for "improvements", to me that's just a bad idea. Repairs is another issue but improvements tend to just improve the bottom line for your bank. The only time you should improve your home is when you are selling it.

Many folks think their home is an asset but it's really a liability until you rent it out...

Good luck.

I don't agree at all with that. I had this house built this house 6 years ago and because unexpected issues with drainage and the digging for the foundation, I had to make decisions about what could wait.

The improvement of having a finished basement gives more livable space as my kids get older.

I just don't think I'll have a 20-25k surplus anytime soon and they aren't getting any younger to do this.

[Bugeater]

He's a ****ing idiot. If you wait until you sell to improve your home you're only helping the next owner and your realtor (higher price=higher commission). I'll do the improvements now and enjoy them myself thank you.

[Demonpenz]

Is everyone here a bottom line guy? Like I am straight Cash Homey, but I also would trade some bottom life shit if it gives 1.peace of mind 2. Easy as ****

[lewdog]

Originally Posted by Bugeater

He's a ****ing idiot. If you wait until you sell to improve your home you're only helping the next owner and your realtor (higher price=higher commission). I'll do the improvements now and enjoy them myself thank you.

Agreed. There's more to home improvements than just caring if it helps resale value. We spent $10k when we moved in to renovate the backyard. Why? Because we wanted a nice play we can enjoy.

I think the OP is making a good decision and not just something he wants but sounds like something he needs with the kids.

[Hog's Gone Fishin]

There's nothing wrong with investing in your own home. Just keep in mind that its best to make sure that investment increases the value of your property the same. But if it doesn't and it makes your life more comfortable that's a good thing too.

[kccrow]

Originally Posted by MahiMike

Well as far as borrowed money goes, it doesn't get cheaper than a HELOC. Just be careful in how you use it. The bank will try to loan up to 80-85% of what your home is worth so you could end up with access to $80K overnight. Hard to resist the temptations that come with that.

As far as spending $ on your home for "improvements", to me that's just a bad idea. Repairs is another issue but improvements tend to just improve the bottom line for your bank. The only time you should improve your home is when you are selling it.

Many folks think their home is an asset but it's really a liability until you rent it out...

Good luck.

I agree with alot here. I'll just state it how I see it.

1. As a precursor, HELOCs should be used to make smaller, short-term "investments" rather than large "investments" into your home. If you are making a large "investment," take out a home equity loan/2nd mortgage.

2. Improvements aren't really an "investment" from the standpoint that ROI is always less than 100%, and usually 60-80% is the best you can hope for depending upon the area of upgrade.

However, the best time to make improvements is as close to the time you can realize the highest ROI and that is right at the time you intend to sell. That, of course, doesn't mean you should.

Using a HELOC or loan is a great way to differ costs, so that it impacts less of your bottom line. Either way, I wouldn't advocate improvements prior to selling, because you're usually losing money. If you owe $80,000 on your home and it's worth $200,000, you'd net $120,000 upon sale. You could also take out a $50,000 loan to remodel the kitchen and bathroom, realizing a 60% return. So you'd owe $130,000 and your house would sell for $230,000, netting $100,000 upon sale. What was the sense of borrowing money just to lose money?

3. I agree that necessary repairs are a different story than "improvements." Replacing a bad roof, bad siding, leaking pipes, or whatever it may be, generally yields above 90% ROI. While you might lose a bit of money, you could lose much more on your asking price if you don't make the repairs.

Qualifying for a HELOC is a nice way to make repairs along the way, rather than taking out a home equity loan and making a major dump into repairs all at once.

4. Improvements should be saved for and done to make your home more comfortable for you. If you're going to lose money to make your home "better," it is smarter to do so without paying interest to the bank on top of it.

5. If you're making an improvement to adjust living space to accommodate a growing family, you are throwing a lot of variables into the equation. At that point you have to consider the cost of the improvement versus the costs you'll incur in up-sizing, including closing costs, realtor fees, inspections, and potential repairs to the new home.

Let's say you have your home now, owe $80,000 and it's valued at $200,000. It's a little 2 bedroom 1 bath. You have a 2nd child on the way and are thinking you'd like to add a 360 square foot addition on to give you an additional 2 bedrooms and 1 bath. Let's say it costs $150/sq ft so your investment would be $54,000. Say, this nets you 75% ROI, you now owe $134,000 and your home is worth about $240,500. Your net equity is $106,500.

What are the comps in your area for a 4 bed 2 bath home? Maybe that answer is $230,000. You have to pay a realtor 6% to sell your home, so your net at sale is now $108,000. You have to pay about 4% closing costs to buy your new home and $800 for inspections, so that $230,000 becomes $240,000. You'd now have a situation where you owe $132,000 with a home value of $230,000 and net equity of $98,000. So, even though you might owe $2,000 less, your equity is $8,500 less. You may want to strongly consider building the addition.

Now, if your estimated ROI on building the addition is closer to the norm at 60%, then your projected net equity will significantly decrease. In fact, it'd be about $98,400. So, in this situation, you may want to consider the sell and buy larger option. However, you know what you have in your home in terms of future repairs and may not know so much about the true condition of the large home. If it's close, I tend to stick with what I know.

6. Other than all that, leave "improvements" that aren't for you to flippers who are buying ultra low and getting a positive return.

That's my 10 cents...

[Rain Man]

Originally Posted by Hog Farmer

There's nothing wrong with investing in your own home. Just keep in mind that its best to make sure that investment increases the value of your property the same. But if it doesn't and it makes your life more comfortable that's a good thing too.

That's where I stand. I realize that life circumstances may cause a quick move at some point, but if you think you're going to be in the house for a while, fix it up the way you want it. It's not just an investment, it's your home, so enjoy it.

I never actually realized that it was so easy to remodel a home. I'd never seen anyone do it growing up, so when we bought our first condo, it was an experiment. It was two apartments that were being converted into one condo, and since we bought it early in the process I got to see a lot of the construction and help make decisions. That made it much easier to buy our fixer-upper home a couple of years later, because I could envision the house's potential and see a path to get there. I'm very happy the decision to do that, and we were able to do it by using a HELOC to fund each project. We'd then pay it down and start on the next project.