Pay cash, HELOC or 2nd mortgage?

Submitted by onedollarshrimp t3_11dtpxu in personalfinance

My wife and I are in the process of kicking off a fairly large home renovation.

We’re debating paying cash or taking out some sort of loan. With rates being so high we’re not sure what to do.

Paying cash is a big-ish chunk of our savings but won’t wipe us out. I know no one has a crystal ball - but wondering if that money will be better in the long term sitting in the market and we should take the loan out even with the high interest. Maybe there are tax benefits or implications (ie writing off interest) that we’re not considering?

Thanks for any help you can provide.

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inthe801 t1_jaar8ge wrote

The safe thing to do would pay cash and only do it if you still have 6 months to a year of living expenses reserved after you pay for the renovation. If you don't mind exposing yourself to the additional risk a HELOC and then refi might be the best option. Just look at the possibilities here with the economy unstable, jobs in some industries shrinking, and housing market unstable.

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IHkumicho t1_jaavlhe wrote

This. Would you borrow however much money at 7% to put in the market? Because if you borrow money for renovations while leaving your investments in the market, that's exacy what you're doing.

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onedollarshrimp OP t1_jaavwwt wrote

Not sure that I follow.

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IHkumicho t1_jaawys9 wrote

You're talking about taking out (let's say) a $50k loan so you can keep your $50k investments. How is that not the same as taking out a $50k loan to buy those investments instead?

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onedollarshrimp OP t1_jaayygd wrote

I guess I’m more assuming the market will return more than real estate. Especially considering we’re finishing basement and 3rd floor.

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IHkumicho t1_jab0sgk wrote

What you're spending the money on doesn't matter. The question is whether the investments you have will outpace the loan amount. It was one thing when interest rates were 2.5%, but completely different when you're looking at a 7% (or whatever).

The only way you should be asking whether the real estate returns will be bigger than the investments is whether you should do it at all.

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dad_husband_selfi t1_jaas0vb wrote

Cash. HELOC rates can be like 8 or 9%... or even higher.

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scmillion t1_jaarhzv wrote

I would absolutely be paying cash right now if you can. As you mentioned, with the interest rates being as high as they are, it makes no sense to take a loan if you don’t have to. Also consider that HELOC’s are variable interest and could potentially go higher. The fact that you have enough in savings to cover it (assuming you’re not eliminating an emergency fund) shows you’re able to responsibly afford it…so do the responsible thing. I know it’s hard depleting savings, but that’s why you save to begin with.

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TheRealJim57 t1_jabf45u wrote

If you take out a 2nd mortgage, the interest *should* be tax deductible provided the money is actually used for improvements to the home and not diverted to other uses. You would need to check with your tax advisor/CPA regarding the specifics of your situation. That being said, you'd be paying those higher interest rates just to get a likely small amount of taxes deducted. It will end up costing you more than paying cash, regardless.

Paying cash = no interest charges, so you know the total cost immediately. Unless you can invest that cash and get a higher % return than what you'd be paying in loan interest, paying cash is the most cost effective option.

That being said, it sounds like you would be cashing out stock investments in order to get the funds, not just withdraw cash, so you also need to look at any tax consequences from liquidating those investments to pay for the renovation. If you're selling investments held in a taxable account for a gain, then you'll be incurring tax liabilities and need to account for those in your planning.

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