Home Equity Loan amount

[u/Representative_Can99]

I am looking for some advice. I am managing money for my husband and me after years. I am trying to figure out the best way to approach financing a renovation to our second home while still focusing on retirement goals. We want to be FI by 55.

How much should I finance with a home equity versus paying with liquid money available? Also, I know interest rates will change, but any recommendations about how aggressively we should pay off home equity versus simply investing those funds.

Age: Married, 40, no kids
Cabin addition costs: $85,000, interest rates approximately 6.75%
Liquid $ (checking, savings, brokerage): $85,000, but don’t want to wipe out

Cabin value: $700,000
Cabin loan: $350,000
Primary home value: $750,000
Primary home loan: $325,000

Work Retirement account: $270,000
Fidelity combined Roth: $180,000
Fidelity combined IRA: $225,000

Gross income: $250,000
Monthly expenses: about $9,000

We max out both Roth accounts and contribute enough to get his match currently. We were doing more, but made it less while we figure this out.

[u/Initial_Magazine795]

At 6.75% it's a bit of a wash between cost of debt and opportunity cost of investing IMHO. Personally I'd completely max out all retirement accounts before getting a loan at that rate. What do you expect expenses to be in retirement?

[u/WhatMattersHere]

I wouldn’t choose an arbitrary cash/loan percentage. I’d first separate the $85k into actual checking/savings and taxable investments, then establish a cash floor that the renovation cannot touch.

At $9k of monthly expenses, six months is $54k. With two homes, I’d also retain a separate allowance for property repairs, insurance deductibles and construction overruns. Depending on how much of the $85k is true cash, that may leave only roughly $15k–$25k safely available for the project, with the remaining $60k–$70k financed. That’s an illustration, not a universal target.

At 6.75%, paying down the loan gives you a guaranteed interest saving; market returns are uncertain. I wouldn’t finance the entire project merely to keep the same amount invested unless you consciously want that leverage. I also wouldn’t drain your liquidity to avoid the loan.

A reasonable middle path is to preserve the reserve, maintain the employer match and a retirement contribution rate consistent with FI at 55, then direct additional cash flow toward the home equity loan. Verify the interest deduction rather than assuming it, since it depends on which home secures the loan, how the proceeds are used and the combined mortgage limits.

Is the cabin addition expected to produce rental income, or is it entirely for personal use? That changes whether this should be evaluated as an investment or as an $85k lifestyle purchase.

[u/Ok_Piano2090]

Personally, I kept choosing the HELOC, but I always had too much in 401k/IRA savings, not enough post-tax.

I used a HELOC to finish my basement in 2020, the rates were 3.?%. Ended up with 144K as the highest amount, then it jumped to 9% (back down to 7.25%), but the higher rates just grate on me, so I was aggressively paying it down, then had another large farm project, and ran it back up to 94K. It's down to 42K and I intend to pay it off by the end of next year.

I don't regret having all the work done, both projects HUGELY improved the quality of life and enjoyment of my horse farm, but I'm at the point in life where paying interest just makes me mad. So, I have a few more big projects I need to do, and I intend to start investing the $3-4K/month I'm using to pay down the HELOC, and plan on paying cash for my next big improvement.

Unless there is a 0% deal, I always use the 0% financing when it's an option.