Is a Home Equity Loan a Good Idea?
Hey 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
Hey 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!