Comments on: Three Questions To Ask Yourself Before Getting A Home Equity Loan

By: rsquared

rsquared — Sat, 14 Jul 2007 13:43:57 +0000

My husband sells sunrooms. We are also looking into finishing our basement which we have yet to save a dime for. I showed him this article and he immediately said, “That guy is dead wrong”. He said in 5 years the construction will cost much more then it will today probably to the point where you’re saving money by having an equity loan and paying over 5 years. The sunrooms he sells have gone up about $5000 in 2 1/2 years on an average room because of rising gas prices and rising material costs. I personally like the idea of doing it yourself paycheck by paycheck.

By: Ted Valentine

Ted Valentine — Fri, 06 Jul 2007 15:04:07 +0000

I agree with your perspective, but the room will cost $30-$35,000 in 5 years.

By: ShootDawg

ShootDawg — Fri, 06 Jul 2007 13:52:35 +0000

If someone does decide to get a home equity loan, they should get an actual loan, instead of the line of credit.
The line of credit is bad, in that it would allow the person to continue to draw money from the loan, as they pay it back. Borrow $10k, pay back $5k over two years, draw another $3k out of the line of credit, etc.
The straight-up loan would give you all the money up front, have a set payment each month, and not allow you to continue to draw money from the account.

By: Doug

Doug — Fri, 06 Jul 2007 13:28:30 +0000

I agree with Marcus Murphy. I recently completed a DIY basement conversion for less than $6000.00 including hiring out the concrete floor and most of the wall construction. I now have a nice office for myself, a computer desk/play area for my daughter and a tv watching area with a couch and several chairs. Right now we are using an old 27″ TV from upstairs but soon I’ll have the cash for a 42″ LCD flat panel.

None of this type work is difficult at all and from a contractors point of view none of the work is structural so you can only mess up so badly.
I might even be willing to bet that if he had the cash for the materials, to start immediately, he could be finished with this project working nights and weekends before the average remodeling contractor would be finished.

By: Brian (Shadowfoot)

Brian (Shadowfoot) — Fri, 06 Jul 2007 05:54:28 +0000

Will he be in the same house in 4 years?

By: 60 in 3

60 in 3 — Thu, 05 Jul 2007 22:23:47 +0000

I made the mistake of opening a line of equity when I remodeled my house. Initially, I just used it for things like contractors and such. That would have been fine since the work I was doing to the house increased its value beyond the cost. However, I soon started using it for things like electronics and entertainment. At that point, it became nothing more than another source of unneeded debt.

I learned my lesson. Lines of Equity should be used wisely. They are a great source of potential cash, but they shouldn’t be treated as free money. You are quite literally spending the equity you worked long and hard for.

Gal

By: Erin

Erin — Thu, 05 Jul 2007 21:18:54 +0000

You make an excellent point Trent. Recently Money Magazine pointed out that finished basements, meaning drywalled, painted, and maybe carpeted if I remember correctly, boost the resale value because buyers can better visualize the use of space. But this guy is going way overboard!

If he’s married, you might also suggest that he consider how his wife is going to feel about all his male friends coming to the house to hang out all weekend. She may have some thoughts on the issue. If he doesn’t have a wife, why can’t the guys just hang out in the living room?

By: Debbie

Debbie — Thu, 05 Jul 2007 21:11:57 +0000

I have to point out that after your friend puts his $483.32 into an HSBC Direct savings account, although he might have his $25,000 in less than four years (depending on how interest rates fluctuate), costs are likely to have increased by then due to inflation, so he won’t be done saving. (Although the TV will probably be cheaper, better, or both.)

That said, I’m saving for the remodeling I want. (I want a screened-in back porch, a laundry room, and a dishwasher, and will also look into other upgrades to bring the house into the 21st century.)

I like Boomie’s paycheck remodeling idea. (In my case I would first hire an architect to make a long-term plan. Then I’d build the laundry room and/or porch, moving the washer out of the kitchen into the laundry room, and putting some shelves or a baker’s rack in its place. Then yank out the cabinet next to the sink, put in a dishwasher, put in a cabinet where the clothes washer used to be, and put in a new countertop of the appropriate dimensions. Any re-wiring, flood-proofing, storm-proofing, etc., would be done at the most efficient phase of the process.)

Another idea is to put some or all the money in the stock market, since the timing is not important–good returns may allow for an earlier remodel, though bad returns will require putting it off even longer.

By: Marcus Murphy

Marcus Murphy — Thu, 05 Jul 2007 21:05:03 +0000

Depending on how interested he is in DIY his expenses should be as follows: Electronics Sony 70" 1080p HDTV $4,500 Sony Full HD 900W Surround Sound $400 Toshiba A2 HD-DVD Player $300 Mini Fridge $200 Wine Cooler $150 Furniture Sofa Set: 2 Sofas, Loveseat, Chair, Ottoman $2,300 Tools Hammer drill/Angle Grinder with accessories $250 Makita 10" Miter Saw with Laser Guides $600 Misc. Materials Costs $6,000 Total Aprox. Cost ~$15,000 In about 2 years and with the help from a new 0% card (for when you need to buy more than $482/mo. to continue the project) and having a fun project on your hands, he can save ~$15,000 out of pocket. He can save another $2,000 by going with a screen 10 inches smaller. If it were me I would start out by applying for a new 0% card, spend $3,000 on the electronics and pick up a bargain rug somewhere and some used furniture and start the den that way. Any money left on the card would go towards buying first the tools and then the materials to start building up the floor and then the walls. Then just sock away the money in a savings account and pay the minimum payment on the card. When the intro period ends, use the saved up money to pay it all off. Cut up card, rinse, repeat, until the project is finished.

By: j dawg

j dawg — Thu, 05 Jul 2007 20:23:21 +0000

You should remove the Debt reduction part of the qualification from the equation. You can not borrow your way out of debt. I know you qualified that there has to be a commitment to not run up the cards, but it is such an important point. You can not borrow, trick, or magically get your self out of debt. I am a firm believer in that you have to go through the pain so it forever imprints on you not to do it again.

By: shawn

shawn — Thu, 05 Jul 2007 20:11:23 +0000

trent, i blafsred you the other day, but this kind of post iis when you are at your best. the only quibble i have is that you neglected taxes including your calculations. he will save his marginal tax-rate on the home equity interest and pay it on the savings income. otoh that doesn’t make this a wise decision and i agree with your conclusions and reasoning.

By: George

George — Thu, 05 Jul 2007 20:00:55 +0000

What are the other two questions? I only see three…

By: Wendy

Wendy — Thu, 05 Jul 2007 18:48:15 +0000

After reading this entry’s first paragraph, I continued somewhat warily. We are at the tail end of completing a kitchen remodel that ended up costing 2-3 times our initial guess (we knew this remodel was a must when we bought the house last year). Luckily, we bought a less expensive house than we could have afforded so we could do this sort of ‘upgrading’ to our own taste. We also paid for half of the remodel in cash. In the end, I was happy to see that we meet at least one of Trent’s qualifications =).

I think he should do more ‘can I afford it?’ segments- it is my favorite part of the suze orman show.

By: boomie

boomie — Thu, 05 Jul 2007 18:43:24 +0000

When the basement room is done he still will have to go out and buy that big screen plus furniture. How will he pay for that? More loans?
Suppose something happens to him and/or he can’t pay the additional loan/loans? He runs the risk of losing his home all because he wants a man room and a big screen TV N O W!!!
He doesn’t have to wait or save for 4-5 years to do the room. He can do what I call ‘paycheck remodeling’. A little bit each week or month and get the job done slowly. It could be finished in a year or two. Also, construction costs are always 3X more than planned. He may borrow $25,000, costs may equal $35,000, he may not have the money anyway and the man room may not get done.
My comment is this: people shouldn’t get equity lines of credit in the first place. That’s your savings/retirement account. Your home is NOT your bank.
Sounds like this guy is going to do whatever he wants anyway. Let him do and then just sit and wait till you can say “I told you so”.