Take a Home Equity Loan for Home Improvement?
At least 3 times a week I hear a commercial on the TV, radio or internet selling a home equity loan or home equity line of credit (HELOC). “You deserve it!” the ad tells me, encouraging me to take that vacation the family has always dreamed of, or buy that car we’ve always wanted, or put on that addition we’ve been putting off for so long. Of course, this is no surprise. Even with the subprime (and now prime) lending markets in the tank, lenders still need to make a buck. After all, someone has to cover all that bad debt.
Well, I rarely dream of vacations, and I’m quite happy with my gas efficient Toyota Corolla. But even I’ll admit that taking a loan for a home improvement project does entice me. Sure, we’d be paying down the loan for years… but imagine how much we’d love that kitchen, or hot tub, or master bathroom upgrade! Well, despite my temptations, we’ve never taken the leap on getting a loan for an improvement project. We haven’t completely ruled out the idea, but I would say odds are slim. I decided to put together a list of the considerations that run through my head and see if anyone in the community wants to weigh in with their own ideas. So, here goes:
Is the Project About Keeping Up with the Jones’
Several years ago I heard a familiar question and an interesting answer on the radio. The question was: “How much money is enough money?” And the answer the host (or guest, I can’t remember) gave was “More than your friends have.” You can replace “money” with “house” and this question and answer become apropos to the conversation.
What a revealing statement about how we humans behave! Most of us are willing to accept that Hollywood types get to be rich and famous and we don’t. But it is much harder for us to accept that our close friends have 3 times as much house as we do. For Kim and I, this is perhaps the most important question to ponder… it gets to the root of the issue. Would we take this home equity loan to improve our house just to keep up with someone else? If the answer is yes, we shouldn’t pursue it further.
Affordability
Can we really afford the payments? Most of us know that banks will loan far more money than anyone should ever borrow. The bank doesn’t care if you’re house poor. If the payments on a loan will cut into something more important in life (like saving for college, planning for retirement, or supporting charities), the loan is off limits.
Quality of Life
Assuming we can afford the payments, we must question whether we want to afford them. Will this home improvement project really bring us joy? Will we get a lot of use out of it? Will it benefit our friends, family and community to have it? For some people, installing a pool is a great move for their community – they’ll share it with everyone. For others, a pool might represent just another cleaning obligation. We must weigh each dollar spent on improvement with what it really gains us.
Added Value to the Property / House?
This is a tough one. Some people are willing to put a lot of money into an improvement even if that improvement doesn’t net back value in the house. Many home additions simply don’t add as much value as they’ll cost to put on. Now, that doesn’t necessarily mean it shouldn’t be pursued – particularly if you’re planning on living in the house forever. But for me, I want to know that we can get the money back out if we have to leave. If we’re not getting the money back, we really need to address how much we’ll like it even more.
Better Alternatives for the Money
This is very similar to my quality of life consideration above, except that it is focused on examining the alternatives. A new kitchen might cost $30,000. What else could be purchased with $30,000? In Guatemala, $30,000 will pay for 80 children to eat for an entire year. It will also pay for a very nice mid-level luxury sedan in the US, or 10 nice family vacations in the US.Peace of Mind
There’s a Biblical Proverb that comes to mind here: “…the borrower is the servant to the lender” (22:7b). I believe this concept is true. Our family eventually wants to be debt free. (Our current debts include mortgages on this house and a rental property). Taking out another loan means a longer horizon before we get there, and I don’t like being a servant to Wells Fargo.
What do you think? Is there something missing from my list? Do you have any thoughts on loans for home improvement projects?
Photo by SqueakyMarmot.
March 10th, 2008 at 4:52 pm
I’ve been thinking about this for awhile. You’ve posted a terrific discussion of this. I can’t say I need anything for my house except a much more cost effective way to heat it, but the temptation to take on a monthly payment to prettify the house is big.
Lucky for me I enjoy making and working on things so I can get my ego stoked doing that.
It would be nice to have a finished looking house in the shorter amount of time it would take a paid contractor to do it.
March 10th, 2008 at 8:33 pm
Good discussion…
My husband and I are VERY against debt of any sort… in fact, we regularly pay down our mortgage with extra money we have (after our emergency savings, retirement accounts, and such have been paid). I know it’s supposidly better to invest the money instead of paying down a mortgage, but I can’t wait to be done with it!
I have no interest in getting a home equity loan to help with the fix up… I’d be too afraid I wouldn’t get it back! (Especially with the way the market is right now).
I’ve always paid cash for my cars… (and kept them running for 250,000+ miles)… here’s to Corollas!
And vacations… what are those?
I would love to travel… we are hoping later in life… save the money NOW so we can spend it later.
Having said all that…
I think I’m abnormal.
March 10th, 2008 at 10:50 pm
Hey Fred,
I think there’s one thing you left off, but kind of hinted at with your pool reference. And that is cost of repair/maintenance.
That factors into my calculations a lot as well, regardless of project. Sure, I could buy that top-of-the-line thing with all the bells and whistles, but first off, am I going to use all those bells and whistles, and secondly, when it breaks or malfunctions, what is it going to cost me in time, effort and dollars to fix it or have it replaced?
Personally, the thing that gets me most excited about home improvement is completing a project, blowing people away with how it looks and then having them mess their pants after I tell them how LITTLE I paid. I love to hear how much people pay to have/DIY their half-bathrooms remodeled, and then I show them pics of the half-bath I redid at the condo and told them it cost me $900 and a lot of hard work.
March 11th, 2008 at 6:32 am
I was planning to be in the camp of using home equity loans. Living in such an old home that needs so much work, I purchased it knowing that I wouldn’t have all the liquid assets needed to redo the house. Sure I could have bought a house all completed, but in the end I will pay less for my house even factoring in the loans since I’ve done so much work myself.
Now I may not need an additional loan due to some additional cashflow, but that wasn’t the plan from the beginning.
Also, some of the high end things I’m doing as it gives me the opportunity to learn. While I may not do things perfectly on this house, my skills will be honed for the next one.
March 11th, 2008 at 8:06 am
I tend to go with Larry Burkett on the debt thing (not so much on the alarmist stuff, but that’s something else): if the debt is balanced by an asset, it’s not usurious. So a reasonable amount of debt against the house is okay in my book, and we have loans against (a small part of) our (used) vehicle purchases. Never for something ephemeral.
The trap to watch out for is what’s happening these days (less so, so far, in our market): if you have loans for $X, and your house is worth $X+Y on paper, but the market is such that you can’t sell it for more than $X-Z, then it really isn’t worth $X+Y. The problem is, you can’t tell what Z is going to be until you (have to) sell, so wisdom dictates you have to be conservative.
We’re thinking a second mortgage (”home equity loan” sounds too innocent to me, but maybe that’s just me) for the kitchen remodel, but only if necessary. Never, never a HELOC. Open-ended=bad.
March 11th, 2008 at 2:12 pm
All-Welcome to those of you who are first time commenters (and repeats). Thanks much for stopping by OPC.
skymosher: ego is a powerful motivator to not take the loan. As Andy points out below, there is real satisfaction in telling others you did a fantastic work yourself, esp. if you do it on the cheap, and you didn’t have to finance it. (its akin to owning a nice sports car–it’s even better if the bank doesn’t own half of it).
jennifer: I agree with you on the cars … nothing like running an old model right into the ground. My Corolla just turned 135,000 and is running strong. I consider 250,000 the low-side of what this car is going to handle
Andy: maintenance cost is an EXCELLENT point that I really didn’t think about. Pools and hot tubs are a prime example of this - big holes in the ground you pour money into over and over again.
corey: While I am personally debt-averse, I can definitely see merit in buying a fixer-upper and doing the repairs with a loan. That’s what virtually all house-flippers do, because the cost of debt is lower than using their tying up their own assets… its a trade though - and peace of mind is very important to me. (As I said, I don’t like being wells fargo’s servant)
Also, glad you came into some additional cash flow. THAT is always a plus.
Karen: At some point I’m going to do a post on the devastating effects a HELOC (or any ARM mortgage) can have. Of course, these tools can be used for good (emergency fund supplement, e.g.). They are even more effective when they offer a conversion option to a fixed-rate loan. Our HELOC does offer this, and we did use it in the past once, for what I consider was a good cause (adoption of our children). We have since paid it off.
March 11th, 2008 at 9:04 pm
I don’t know if anyone has tried lately, but getting a decent equity loan for additions to my place was very painless and very quick.
However, I’m planning on 1) Using the money to update my place (nearly 50yrs old and never updated!!!) 2) Getting the finished project appraised at current market value, 3) Refinancing about 6 - 8 months from now to repay my 1st mortgage AND the equity line.
However, normally I’d never take out equity for anything else. Especially not in the current financial crisis. But I feel confident for every $1 that I put in renovating my house, I can expect a $2 return on my investment. So I’ll make an exception this time.
-Jon
March 13th, 2008 at 4:35 pm
I agree with Jennifer (and I went from my 1990 Geo Prizm to a 2005 Corolla and LOVE it)!
March 14th, 2008 at 5:30 am
jon: It is nice that they’ve reduced the paperwork, although lenders have now seen that make it easier to qualify from an income/assets perspective is very dangerous.
sandy: Corollas rock!
March 14th, 2008 at 2:27 pm
I’ll see all y’all’s Corollas and raise you a twenty-one-year-old Toyota 1-ton pickup (a/k/a Hilux, a/k/a The Indestructible Car [sic], see also Top Gear).
Sure, Corollas are nice and all, but if you need to mix up a couple dozen cubic feet of manure compost and stuff (as I do this week), you just can’t do it in a Corolla.
March 18th, 2008 at 3:23 am
Great ideas on Equity home loan.