House renov/addition: pay cash? Refi? HELOC?

[Anonymous]

Before I even ask, yes, we are incredibly lucky to be in this position, we know that.

We are about to do a reno/expansion on our N. Arlington house, currently 3BR/2BA ~1700 sf finished (2100 total). We're adding a 1st floor universal access BR/BA; Family room, dining room, turning current tiny kitchen into mud room and current small DR to be enlarged to new EIK w/ small island. Upstairs, adding a MBR/bath suite, renovating current MBR as a 2nd MBR and complete re-do of one existing bathroom. Basically not touching 2d bath & 2 other BRs. When done we'll have about 3,100 sf finished.

Est. cost incl. construction estimates, architectural fees, temporary housing (have to move out 4-6 mo. w 2 skittish cats), ~$580k (figure 600k). Current house value ~$775-800. We love the lot & location so with transaction costs it doesn't make sense to move to us.

Thanks to careful planning & saving over many yrs. we have the funds available to pay for the work in cash and still have ~$2M in savings & retirement funds.

Current mortgage balance ~$280k, 30 yr fixed 4.875% w/ 26+ yrs to go. Have been paying off as if a 15-20 yr. (added principal each month).

Part of the idea of the reno. including the 1st floor laundry/handicap acces. BR/BA &c. is to make the house liveable for us for as long we can live independently (57 & 52 now), so we plan to stay for 15-20 yrs. we hope, maybe/we hope more.

Thoughts on these questions?

1. Should we consider using our existing $150k HELOC (zero balance) on part of the work? Current rate = 2.5%, we can lock in the rate at any time and turn the HELOC into basically a 10 yr. loan (10 yrs. $100k@2.5% = ~$1k/month).

2. Should we refinance? I tend to think not because of transaction costs and the huge PITA that a refin has become at this point.

I plan to retire in 3-5 yrs. and the idea of paying cash was to not add more debt to pay off after, even if we are spending some capital now to do that. Our investment advisor/setup is aiming for 4-5%/yr. and hitting that, though who knows in the future, right?

I'm still thinking "no" on a refi, but thinking more of putting, say, $100k or so on the HELOC and locking it in at a sub 3% rate.

?thoughts? .... Thanks.

[Anonymous]

OP here ... should have said current setup is 3BR/ 2.5Bath ...

[Anonymous]

Honestly, OP, I think money is cheap and you should leverage the investment, especially since you could keep your cash on the sideline and pay it off anytime you wanted.

[Anonymous]

We are in a similar financial position and did a similarly expensive renovation a few years ago. We did all three. We used $150k of a HELOC, about $100k from a cash out refi (which we recently took down to 15 years) on a loan that was at about 30% of the value of the house, and about $300k in cash. We should have the HELOC paid down in another year or so. We could have paid cash but I didn't want to lose that much of a cushion and our mortgage is so low it made sense to add to the mortgage. Originally planned to roll the HELOC into the mortgage but decided to pay it off instead.

[Anonymous]

OP here ... part of me says it's right to leverage, otoh given that prop taxes will increase significantly as value goes up, I hesitate to add to the monthly overhead at the time when I'll be giving up my salary shortly and then also waiting 4-6 yrs to start pulling Social Security ... the greater need for monthly outflow makes me more nervous than having less in the bank when -- relatively --- we'll still have a very healthy balance.

we'd be going from approx. $2400/mo. to over $4k/mo....

but that's just subjective/thinking out loud ...

[Anonymous]

oops ... pp/op, hit the "reply" button too soon ... a secondary part of the strategy in keeping the mortgage balance low is to pay it off entirely within 5-7 yrs., which we can do if we don't add the construction costs to the debt column.... fwiw

[Anonymous]

Depends on how you feel about the stock market and interest rates. Once you retire, how will you be paying bills? Off of draws from your savings/equities?

One thing you could do is get a straight construction loan to pay for it all. - rates are a tad higher than average rates right now, but you wouldn't have to spend to refinance that, your loan % would be fixed for life, so you also wouldn't have to worry about interest rates and your HELOC going crazy.

Of course, you could just get a HELOC and pay it off with your savings if it ever got out of hand. I guess the real question is how you intend to live once you retire. In the end, it's all a shell game.

Last thought about getting a loan vs. paying it off is that IF you ever do need to move or IF something unexpected ever happens to you, you will not have all your $$ tied up in home equity - something that can be hard to tap - at least harder than a savings account or equities.

[Anonymous]

OP again.

I don't expect the stock market to reliably do anything much for the next 10 or so yrs., if not more... I think things are structurally broken badly for a prolonged period. We're about 40% equities/60% bonds/other and may not get more invested than that, maybe less.

downside protection is more important than growth now as long as we can keep pace w/ inflation. I assume/target only 4-5% yr. from here on out, more would be nice but I won't plan & live off of overly rosy projections.

retirement will include a retirement annuity plus SocSec eventually, and a 4% draw on savings/investment should more than cover our needs.

The HELOC won't go crazy, it has a lock feature so we can lock in at favorable rates, e.g. if we lock in at 2.5% (current) or 3 or whatever, it won't go up from there. If we leave it as a HELOC balance it floats, but you can lock in any portion at any time at the fixed rate/term.

The last point is one I do consider, though even if we pay all cash we'll have less than half of our net worth in home equity (though less would be even better).

thanks for the thoughts.

[Anonymous]

Use the HELOC, since it is cheap and deductible. When they rates rise pay it off.

[Anonymous]

Anonymous wrote:Use the HELOC, since it is cheap and deductible. When they rates rise pay it off.

OP again ... ---> the rates are not an issue, the minute we draw down the line we can lock it in at that rate (now 2.5%) as a fixed rate loan. Which makes me agree even more with your suggestion. 8)

[Anonymous]

OP updating ... our HELOC lender (Chase) proved to be clueless and incompetent. I wanted to simply raise the limit on the line by $100K (easily supported by valuation and our income & assets) and they could not figure out how to do that. Insisted I'd just have to refin the whole HELOC at ~3.84%.

Riiiiiiggght .... like I would throw away our current 2.5% HELOC with an instant lock feature for a new HELOC with higher interest, less flexibility and closing costs to boot. I spoke with 2-3 different people there and finally said never mind, I'll do business elsewhere.

In the end though it's not worth the hassle to me of going through a refin w/ subordination of the HELOC so we'll just max that out, convert to a fixed rate low rate loan (2.5% or so), pay cash for the rest, and then maybe after the work is done refin the entire package or just the primary mortgage (since the Fed says rates may stay low for 2 more yrs.).