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Hi Taylor
- Is it worth taking out a loan for some home renovations? I don't
want to take on more debt but I've been thinking I could go with a
home equity loan and get the work done without paying too much interest.
- Kylie
Hi Kylie - Those loans can look pretty tempting, can't they? I
always advise against taking on debt to buy a non-asset, so my short
answer is no, it's not worth borrowing. My longer answer will hopefully
make my reasoning clear.
A lot of importance gets placed on resale value, but it really shouldn't
matter unless you're about to sell your home. To justify taking on
debt and making interest payments by citing the resale value of your
home is disingenuous if you intend to keep living in that house after
the remodel is done.
If you were planning to flip the home, all those lending options become
much more acceptable. Since the debt you incur will be wiped out by
the sale, a good loan can actually be used to make money. Unfortunately,
homeowners twist this logic to pay for a fancy new bathroom that only
they will use.
And, of course, lenders make it very appealing to get money for your
remodel. I just put a piece up on GoFarWithKovar.com
about five ways you can finance your home renovations if you really
need to make some changes. From cash-out refinancing to borrowing
from your 401(k), you have plenty of ways to pay a contractor. In
each case, however, you're stealing from Peter to pay Paul; in this
analogy, Peter is your retirement.
When you finance home improvements, you put future dollars toward
interest payments instead of investments. Invested money will grow,
compound and continue to deliver returns, whereas a refurbished kitchen
will only make a significant financial difference if you sell immediately.
Otherwise, it's just a cooking space that you use and devalues through
wear and tear.
If possible, try to pay for any renovations with cash. If you can
wait and save, you'll be much better off than if you take out a second
mortgage and increase your monthly repayments. I understand that circumstances
will dictate how long you can put off the work, and if you have no
choice but to borrow to fix a leaky roof, sometimes those are just
the breaks.
The goal should always be to cover your expenses with money you already
have. No matter how good the rate is on your loan, you're decreasing
your investment potential when you have to make payments to the bank.
Hope this helps! |
| Disclaimer:
Information presented is for educational purposes only and is not
an offer or solicitation for the sale or purchase of any specific
securities, investments, or investment strategies. Investments involve
risk and, unless otherwise stated, are not guaranteed. Be sure to
first consult with a qualified financial adviser and/or tax professional
before implementing any strategy discussed herein. To submit a question
to be answered in this column, please send it via email to Question@GoFarWithKovar.com,
or via USPS to Taylor Kovar, 415 S 1st St, Suite 300, Lufkin, TX 75901.
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