How to pay for Home Project

[engineerjourney]

Hoping the collective wisdom here can talk me through the best ways to pay for a big home project on the horizon (fall or early next year).  Part of it is maintenance related and must be done and part is a “want” but doing them at the same time would infinitely improve the quality of the overall project and should save some money overall.  I am getting quotes from relatable contractors but don’t know the potential damage yet.  Let’s say it’s in the $60k-$80k range.  You aren’t going to talk me out of it, part of it has to be done and part would be a huge improvement to a home we expect to stay in for at least 20 years.  Due to a recent health issue with a family member it’s been even more clear to me that putting off things is stupid so I want to do this now to enjoy it for as long as possible. 

We won’t be able to pay for it from cash/taxable as we stuffed everything we could into tax advantaged accounts (See below for current assets).  We have plenty of money and can easily afford this, it’s just determining the best way to pay for it and I’d love some input.  It’s going to be more than our cash reserve. 

Options (in no particular order):
1)   I’ve reduced our 401k contributions down to 10% (match on 6%), down from maxing it out, unsure if I should go ahead down to the 6% level for both of us too but I keep thinking that this is costing me more money than other options because of the tax hit (might push some of our income into the 24% bracket, usually high in the 22% bracket after all deductions)?? This helps our cash reserve for sure but we cannot save enough in the next couple months to cover the full expected costs.

2)   I do have an offer for a 0% credit card until August 2025 that I could open but I am unsure how much the limit would be (probably about $10k?).   That could be paid off through cash flow over the next year but would not be enough to do the whole project.   

3)   Home equity loan – we have plenty of equity and our local credit union seems to have not terrible rates with low upfront fees (6.1% APR for 5 yr, 6.3% APR for 10yr).  These are tax deductible if you itemize correct?  Might be a decent option once they revert to previous tax laws where we itemize but not familiar with the pros/cons.

4)   401k Loan – I know usually a big no-no but it’s definitely our biggest bucket of money and the interest payback is high (which is a good thing since its going back in the account?).  We did a 401k loan as a bridge loan when we owned two houses for 3 weeks a couple years ago and it was so easy but that was also a quick and immediate payback period.  We could take up to $50k from each 401k as a loan with terms from 12 to 60 months at 9.5% interest.  If the market tanks after we take out the loan then this would actually be a fantastic option but my crystal ball is broken, ha.  I know you get double taxed on the interest and it’s a high interest rate which sucks from a cash flow perspective but is great from a “getting money back into the account” perspective. 

5)   Roth contributions – not a fan of this but we have plenty of contributions that would fully cover the cost if it comes down to it.  I can’t see any reason that this wouldn’t be a last resort option though. 

Current Assets (on an “Up” day)
Cash (mostly emergency/slush fund): $20k (does not include checking and approx. $5k I would want to retain for real emergencies)
Pre-tax 401ks: $906k
Roth IRAs: $313k
HSAs: $72k
529s: $15k
Home equity:  approx. $345k (30 yr mortgage @2.7% with 28 yrs/$405k to go)
Net worth: $1.65M

Appreciate any thoughts on our options or any options I may have missed.  Besides the mortgage the only debt we currently have is a car loan with less than a year left at 0% interest (riding that to the bitter end).  At our current income/expenses when we max family HSA, two 401ks, and two Roth IRAs we are pretty much breaking even.  We are hitting the coast stage where we have saved enough to hit our goals in a couple years without needing to save more but I love to save so we have kept it going (been contemplating more Roth instead of traditional though). 

[sonofsven]

I would do as much as I could on 0% cards and defer the no interest payback as long as possible to give you a chance to pay off the balances without paying any interest.
Doctor Of Credit is the resource I use to find card deals. There's usually some 18 month 0% deals, too.

Yes, heloc interest is tax deductible if you itemize as long as the borrowed money was used for home improvements. It still may not be more than the standard deduction, though.

You could open a heloc as a backstop for whatever you couldn't cover with a 0% card.

I would continue to build up your cash reserves so you can pay off the cards in 12 to 18 months, and/or the heloc. The 0% rate will turn to probably 25-30% after the promo rate, so be careful there. Pay off with the heloc if needed.

If you have paid out of pocket for medical expenses you could sneak out a little HSA money, if needed. I would consider that a last resort like your Roth contributions idea, that would be for emergencies only.
.
I don't have any personal experience with a 401k loan.

[Blackeagle]

You mention you're in the coast phase of retirement savings, what are your long-term plans for accessing the money in your 401k/Roth?  It might be worth considering this in that context rather than just viewing this expense as a one-off.

[Laura33]

Save up.  Pay cash.  Do the work when you can write a check for it.

Avoid the 401(k) loan -- the double-taxation just makes it a bad deal where you have any other option.

[engineerjourney]

Thanks for the input so far!

@Blackeagle The plan was always to use the Roth 5 year Pipeline and we are on track to have the right amount of contributions in place before we pull the plug but I have been mulling over our lack of flexibility recently and running numbers on continuing to stuff money into tax advantaged accounts vs easily accessible.  I think I made a post about roth vs trad a couple months ago even.

@Laura33 I mean yeah the goal is to not take out loans as much as possible but I don't believe paying in cash is the end all be all so wanted to explore other options.  For example I took a 4 year 0% car loan instead of paying cash because it was the financially better choice even though I had the cash. I also don't pay ahead on my 2.7% mortgage. I should at least utilize the 0% credit card offers right?  So you would recommend I put our 401k contributions down to the match (6%) to get more cash?

[Kathryn K.]

Posting to follow with interest. Have what sounds like roughly similar income and retirement savings and not a ton of easily accessible cash and also have some large home improvement projects looming.

(Sure I could keep using my poorly laid out kitchen with homemade cabinets that are probably easily 30 years old at this point and slowly disintegrating but I've also reached the point where I've realized life is short and it's okay to spend money, including smartly leveraging debt in the short term, if it's carefully considered and fits with one's overall goals.)

[Morning Glory]

I vote HELOC . The origination fees usually aren't high and you can always pay it off early by using one of the other methods if the rate isn't favorable. Instead of a 0% card you could think about getting one (or several) with a big bonus then pay it off with the heloc funds.

[Catbert]

You may be surprised how large the credit limit will be on a new credit card.  Fidelity recently sent me a 0% interest for 18 months offer with a 35K limit.   (I grabbed it and immediately charged an expensive new roof.)  Two of those (you and spouse) and you're pretty much there.  Before you go this route make sure that your contractors will take a credit card and how much, if anything, they will charge you to use a card.  Even if they charge you 3% it would be worth it if you get a good 0% card.

I would not do a 401(k) loan.  If you leave the job you may have to pay it all back immediately or the loan will become a withdrawal subject to taxation and penalties.

[engineerjourney]

Good luck with your decisions @Kathryn K. !

@Morning Glory a HELOC is the first thing Google talks about for home improvement loans so it's definitely something I'm researching.

@Catbert holy cow that's a huge limit!  Hmm maybe the 0% credit card(s) is better than I thought.

I think I am struggling with my reduction of our 401k contributions and I must be missing something. Why wouldn't it make sense to continue to put lots into the 401k and then take a loan from it vs putting in way less and not getting a loan? The tax difference and actual amount of money being saved seems large (for example could save $1k into the 401k vs savings $750 in cash?). I am still trying to wrap my head around it! Our jobs are ridiculously secure so the pay it back immediately doesn't phase me (could pull from roths for that if it really happened but the chances are 0.001% based on how this company has worked through real financial crisis).

[Laura33]

@Laura33 I mean yeah the goal is to not take out loans as much as possible but I don't believe paying in cash is the end all be all so wanted to explore other options.  For example I took a 4 year 0% car loan instead of paying cash because it was the financially better choice even though I had the cash. I also don't pay ahead on my 2.7% mortgage. I should at least utilize the 0% credit card offers right?  So you would recommend I put our 401k contributions down to the match (6%) to get more cash?

Cash is not always the be-all, end-all.  My mortgage is 2.875%, and you can bet I'm not giving them a penny before I have to.  0% CC is fine, as long as you are 100% sure you can pay it down.  But 6%+ rates are a long way from 0% or 2%.

I am also responding this way because it sounds like a significant chunk of the project is "fun" stuff vs. necessary stuff.  To me, if you have to jump through a lot of hoops to figure out how to pay for a fun thing, that's a sign that you can't afford it.  It's been a useful, simple test for me when I considered big purchases, and certainly most people who are looking at CCs and 401(k) loans are doing so because they don't have the money. 

But I don't think that's true for you -- you have plenty of $$ and are just optimizing the best way to pay for it.  So in this situation, it's probably just my innate bias showing up.

[engineerjourney]

@Laura33  I definitely appreciate your input! I'd say half of the cost will be the required part and half the "fun" part. We aren't big travel people, or car people, we love being home. So yeah I will work a bit longer or sacrifice other "wants" for this want. It was on the list to do in the future but now the "need" part is speeding up the timeline so I'm trying to catch up on what's the best way to do it. We have so much tax advantaged space (we have done mega backdoor Roth in the past) so I've been "locking up" our money for years and years.. with a good plan to get it out when no longer working but didn't really have bigger purchases on my mind with the plan, if that makes sense! We used to have a taxable account and one year I spent it down to zero to put an extra $30k in our Roths, haha. But now I see some advantages to having a taxable account!

[Taran Wanderer]

PTF - we’re in the middle of a similar situation, though with a bit more on the resource front, and more heavily weighted toward fun. It would all be cash except that we spent some big chunks of cash recently on an investment property and some other longer term investments. So now we’re low on our cash balance and in the middle of construction. It’s all good, just need to bridge a few months’ gap. Appreciate everyone’s advice.

[nereo]

Much of your situation sounds similar to our own, as we are planning a large (for us) renovation to fix some structural problems and since we will be altering the roof and laying additional foundation we are adding on to realize some sizeable cost savings (eg we only have to rip up the roof once and dig up one set of fottings.

First, you’ve left out some important factors, like your income, monthly savings, age and retirement goals.

Second, I’m going to do something Irarely do and partially disagree with Laura33. Clearly you have assets and are on sound financial footing. I’m guessing you have a fairly high household income too. I don’t agree that you should only do the work when you can write a cheque from cash. IMO this is when loans make a lot of sense… clearly you aren’t stretching yourself beyond what you can afford (certainly not at ~$80k) and it appears like you have your retirement pretty well taken care of.

Here’s what I’d do: first figure out what it might actually cost. Then figure out how much you can contribute up front with cash and cash flow (reducing your spending wherever practical). Then there’s the amount you will need to finance. Here you must add the total cost including interest to the project cost, and use that to determine if the price tag is “worth it” to you. For example, if you need a $60k loan at 6% with a 5 year term it will cost you almost $10k in additional interest. Is this $90k total price tag “worth it” and affordable (mostly over 5 years?). Are there areas you can save and come back to in another few years (eg interior finishes).

Finally, you have already identified that you have more i retirement and less in taxable than you would like. So take the 401k down to the minimum to receive the match. Also: this is a good use for your 529 if you have accumulated any medical expenses. Money is fungible and there’s little sense in leaving a lot of accessible money untouched (your 529) while taking out more money with interest.


Oh, and you may realize this but typically you will need to put a substantial amount down long before construction starts (often 1/3 to 1/2 the total amount). You may need to write a $30k check to get this project underway.

[lhamo]

You may be surprised how large the credit limit will be on a new credit card.  Fidelity recently sent me a 0% interest for 18 months offer with a 35K limit.   (I grabbed it and immediately charged an expensive new roof.)  Two of those (you and spouse) and you're pretty much there.  Before you go this route make sure that your contractors will take a credit card and how much, if anything, they will charge you to use a card.  Even if they charge you 3% it would be worth it if you get a good 0% card.

I also got the Fidelity deal -- only 12 months at 0% interest (I applied for it the day before I saw @Catbert's post, damn!), but a 35k limit and I have no income from employment (but do have a sizable brokerage account with them).

I just got a Capital One offer good through next August.  I'm going to apply for that one later.

My designer wouldn't take cc payments, though I probably could have done a "convenience check" if I had had time to set it up -- those typically come with a 2-3% surcharge, though. My builder will take cc payments, but charges a 3% fee.  What I've been doing while I wait for plans/permits to finalize is just throwing all my day to day expenses on the 0% card, unless there is a 5% or better reward on another card.  I was able to put my property taxes on the card -- they charged a 2.5% fee, but I get 2% rewards back on the Fidelity card so it was worth it to me to defer payment on those. 

I thought I would have more IBL angst about seeing a CC balance go up monthly, but it hasn't been an issue.  I have the minimum payment coming out of my cash management account, and so far the monthly rewards has more than covered that.  I do have enough in liquid form to pay it off -- I just prefer to have a large cash buffer, and need to manage my capital gains carefully to keep taxes, health care, and DD's final year of college affordable. 

I have calculated my Roth contributions and segregated out most of that money into money market funds -- I don't intend to tap those outside an emergency, but with MM returning 5%ish these days it seemed like a reasonable move to ensure I do have some more liquid funds accessible to me while I bridge the next 4 years to 59.5 -- if the market tanks for some reason at least I have those funds to use as a backup.

[Raenia]

I think I am struggling with my reduction of our 401k contributions and I must be missing something. Why wouldn't it make sense to continue to put lots into the 401k and then take a loan from it vs putting in way less and not getting a loan? The tax difference and actual amount of money being saved seems large (for example could save $1k into the 401k vs savings $750 in cash?). I am still trying to wrap my head around it! Our jobs are ridiculously secure so the pay it back immediately doesn't phase me (could pull from roths for that if it really happened but the chances are 0.001% based on how this company has worked through real financial crisis).

I think maybe you are not accounting for the fact that when you repay the loan, you are paying with post-tax dollars. That effectively undoes the tax savings of putting it in the 401k in the first place. So while the loan itself is not a taxable event, you are replacing pre-tax dollars with post-tax dollars, which then get taxed again on withdrawal in retirement. This is the "double taxing" that people are referring to.

[FINate]

HELOC + 0% CC

Opening accounts can affect your credit, so get the HELOC first. Then get the 0% CC. Put whatever you can on the 0% CC, the rest on the HELOC. If you get near the end of the 0% promotion and still have a balance use the HELOC to pay it off.

[ChpBstrd]

1) Spend about $10k of your $20k savings.
2) Apply for a handful of 0% credit cards. There's a good chance you'll be approved for $40-50k in credit.
3) If that HELOC deal is real you should jump on it for the remainder. My quotes are in the 9-10% range. Tax deductability only applies if you itemize, which few middle class folks do anymore since the Trump tax law.

Cash Flow Concerns
This will put you in a position where you're making minimum CC payments and also HELOC payments at the same time. You don't mention anything about your savings rate or cash flow, so just make sure you can afford these loan payments. E.g. "Before this work I was able to save $25k per year, so I can afford to apply $20k per year toward these payments and kill the debts in 3.5 years."

Next Moves
In about 12-16 months, look for balance transfer offers that could buy you another year at 0%. Typically this will be from another card company. E.g. if you originally put all the debt on Visa cards, look for the next set of 0% balance transfer offers from MasterCard or Amex. Strategize accordingly. Do not close your old accounts even after you transfer them down to zero, because doing so will harm your credit. And you need good credit to balance transfer your way through a 3-year loan at 0%!

You may still end up needing to cut 401k or Roth contributions to make the payments. A 6-7% (probably after-tax) and 100% safe return on paying down the HELOC isn't a bad alternative use for 401k money. There is a risk of running out of 0% balance transfer offers, but I would still prioritize killing the smaller HELOC to free up funds. Worst case scenario: You have to take out another HELOC in the future to pay off the CC debt, but that will probably be after some rate cuts have occurred. So you win even if you can only hold the 0% rate for one year, and end up with another HELOC at a half-percent lower in 12 months.

[engineerjourney]

I really appreciate all the input!  So many smart people around here.  I reduced our 401k contributions to see what I can do with cash flow.  We usually do tons of savings through payroll and end up with just a small margin on our take home with a break even at tax return time.   I'm interested to see what the take home difference is with the 401k reduction.  I could still reduce it further (reduced to 10% when 6% is matched so 6% is the lowest I would go).   In April of next year my auto payment will disappear (its at 0% interest so not paying early) and that will give me an extra approx. $500 a month cash flow.

Capital one is bombarding me with a 0% cc offer for 18months and mails it like every 2 weeks.  I'll eventually open that but would like to wait until the time gets closer. (Thanks for the lead on Fidelity offering a high limit).  I actually sold some collector stuff I didn't love anymore and added $1k to my cash position.  I think I have some more I could sell but maybe not for as much.  I'm still waiting on the number to shoot for but I am very much a planner and want to be prepared with many options and plans (and backup plans).

[ChpBstrd]

Another possibility not mentioned here is to pick up a weekend job or side gig. Your local temp agency, restaurant, construction company, or retail store could probably hook you up with a way to earn an extra $500 per month working Saturdays.

[HPstache]

Can you tell us what the repair is instead of being vague about it?  $60-$80K seems too expensive for pretty much anything house maintenance related?

[nereo]

Can you tell us what the repair is instead of being vague about it?  $60-$80K seems too expensive for pretty much anything house related?

I’m confused why you assume this is all for a home repair. From the OP:

   Part of it is maintenance related and must be done and part is a “want”

Plenty of renovation projects can run well past $80k and still not be considered large by contractor standards.

[engineerjourney]

Please read this with laughing tone not angry tone:

I didn't include the details of the job because it doesn't really matter... I very much said no one will talk me out of pursuing it. We are freaking millionaires. If I can't spend money on my house where I spent a ton a freaking time (we prefer to stay home vs travel) then what I am I doing with my life???

As for a side gig, naw, I have 3 young kids, time is worth waaaaay more than money at this point! Good suggestion to include though! My side gig I guess will be selling some stuff instead. Couple $20s on Facebook adds up!

[engineerjourney]

Oh and don't get me wrong, I know part of MMM is questioning every use of money. I'm past that and looking for the best way to use the money I have, of which I've gotten some amazing insights from this thread and I'm very grateful for everyone's opinions!  I'm interested to see how this project will shift my mind frame from "save as much as possible" to accessing the amazing opportunity we have to use money to do something that has to be done and add something that we really want which will enrich our lives and the use of our outdoors. Life is short.

[travel2020]

Another vote for using funds from a combination of sources to meet the needs:
- tap portion of the emergency funds you feel comfortable with that you can replenish over a year or two
- 0% CC offers
- HELOC - our HELOC bank routinely sends us low interest offers (as low as 0% but last one was 2.99% if memory serves) to encourage use of HELOC. See if any banks are offering intro rates

Also keep in mind that the entire amount will not be needed in one go so you have some flexibility in negotiating a payment structure that lets you optimize your cashflow.

[Laura33]

I'm interested to see how this project will shift my mind frame from "save as much as possible" to accessing the amazing opportunity we have to use money to do something that has to be done and add something that we really want which will enrich our lives and the use of our outdoors. Life is short.

IMO this is a huge mental shift, and good job working on it in a logical way vs. just saying "woo-hoo, we're millionaires, let's buy everything we want!" 

It is absolutely true that you can solve some problems by throwing money at them; the key is to figure out when that makes sense and when it doesn't, and to focus your efforts on specific, discrete items that actually do make your life better vs. just defaulting to the easy solution. 

I'm going to give you one silly example, just because it amuses me.  Background:  my mom is cheap -- I mean, not frugal, absolutely miserly.  She's the Millionaire Next Door type, multi-millionaire who now runs her own consulting firm and still keeps her non-work-related expenses to $30K/yr.  She cannot spend money -- gives her anxiety.  Won't take a cab or pay for parking, ever.  She's now in her 70s, and while she refuses to quit, she is getting more anxiety about travel logistics and things going wrong, particularly when she has to do things like deal with phone trees and all that.

A week or so ago she was flying to visit my DD (on DD's birthday, so arrival date/time mattered to my mom very much).  Through a long series of airline-related fubars, she ended up in a different city than originally planned having missed the connecting flight by like 2 minutes.  She is high-status on this airline because of all of her travel, so she went to the gate agent, who she describes as nasty and who just pointed her to the big long line and told her to go wait her turn to rebook.  She said (to herself) fuck that and went to the airline's lounge and asked to buy a day pass.  They were overbooked and said they weren't selling day passes any more.  So she said, fine, give me a year's membership.  She bought it, and the people at the desk in the lounge then rebooked her in 5 minutes.  And she got to sit in comfortable quiet for the hours until her flight.

I was extremely proud of her for loosening her ample purse strings on a specific choice that was not necessary but nevertheless improved her life in some small way. 

Of course, then she tells me she bought the membership with miles instead of $$.  Because of course she did.  ;-)

[engineerjourney]

@Laura33 hahah I love that story!! I remember when I felt rich enough to spend an extra $100 to do a direct flight instead of a cheaper one with a layover. I don't think I'd ever spend with abandon. I always have to research and make sure I am getting value for my money, haha. But I hope to not be miserly, just spending conscious!