When people look into a home renovation project, they generally think they’ll have to choose one of three financing options: a loan from the bank, use cash on hand, or that good old standby, the credit card. However, limiting yourself to just these options could mean you miss out on the best option for you. There are several more financing routes you can take, and the best way to decide is to weigh your other financial obligations, figure out how much you need above what you have, and make a plan for how you’ll pay any loaned money back.
One Parade Magazine reader asked Dear Carrie (Carrie Schwab-Pomerantz) for advice on this very topic. In response, Carrie mentions 3 different ways the reader might go, analyzing the pros and cons of each method.
Borrowing From Your 401(k)
First is the 409(k) loan which Carrie does not recommend. It seems like it would make sense, borrowing money from your own 401(k). It’s your own money after all and you’ll be paying yourself interest. However, you must also take into account taxes, which you’ll end up paying twice: once when you pay it back with your after-tax dollars, then a second time when you withdraw it upon retirement when ordinary income taxes will be levied. Another financial risk is that if you lose or change your job, instead of having 5 years to pay it back, the bank may call for its repayment within 90 days or you face a 10% penalty and income taxes.
Using A HELOC
Carrie espoused using a home equity line of credit (HELOC) much more highly than your 401(k). She explained, “While [HELOC] interest rates vary . . . you can deduct the interest expense on up to $100,000 ($50,000 for married filing separately) of home equity debt secured by your home, whether it’s a regular loan or a revolving line of credit.” In addition, a HELOC has a longer repayment schedule, giving you more flexibility in when and how you pay it back.
This could be a good option as long as you’re selective in the stock you sell. Selling stock you’ve owned for less than a year will have a higher taxable rate, so it’s better to sell stock you’ve owned for longer. Also look at where you’ve invested most heavily. If there’s one company that has the lion’s share of investments, sell off a little of that stock to bring it more into balance with the rest.
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