 Financing
a remodeled kitchen
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 Dear
Dr. Don,
My wife and I are looking into remodeling our
kitchen. We figure that it will cost around $10,000 to $15,000.
We have a combined annual income of about $100,000. We have $20,000
in liquid savings.
My question is; should we just pay for the remodel
outright, or take a home equity loan for all or part of the amount
needed. We are mostly debt free, just a $150,000 mortgage on a home
worth $450,000 with a monthly payment of $1,685, and a car payment
of $330 a month for the next 18 months. Our credit cards are paid
off each month to a zero balance. Thanks for your advice.
-- Jim Judicious
 Dear
Jim,
If having only $5,000 in liquidity doesn't bother you because you
have enough other investments in your portfolio that can be sold,
if needed to raise cash, then the easy recommendation is to pay
for the remodel out of your liquid funds. You can rebuild your liquidity
over time versus making monthly payments on a home equity loan or
home equity line of credit (HELOC).
As I write this reply, the national
average for home equity loans is 7.53 percent and the national average
for a HELOC is 7.66 percent. Assuming you can use the mortgage interest
deduction on your taxes, closing costs of $750, and a 15-year amortized
loan, that puts your effective rate, ignoring state and local taxes,
somewhere between 5.5 percent and 6.375 percent. Use the CCH
calculator to come up with the effective rate using your marginal
federal tax rate and applicable state and local taxes.
The point is, you'll be hard pressed to have your
liquidity invested at an after-tax rate higher than the effective
rate on a mortgage, so borrowing to finance the kitchen remodeling
doesn't make sense if you have other assets that you can use in
a financial emergency.
A HELOC is a nice backstop that will provide liquidity
in a financial emergency if it's in place prior to when it's needed.
Taking out a HELOC and paying it down over time would free up the
credit line to use for emergencies or a car loan, or both later
on. My assumption here is that you don't need a credit line for
liquidity or a car loan any time soon, so there's no real need to
finance the remodeling job.
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