Should I Do a Home Equity Loan OR Not?

Since we’ve decided to stay in our home semi-permanently (whatever that means – we decided to forgo new construction, put an anchor in our backyard and not move), I’ve been thinking more about enacting some longer-term, higher cost projects around the house like new windows, replacing the front door, etc. These are things we know we’re going to need someday anyway, so why wait? There are two schools of thought here:

• If You Don’t Have the Funds, You can’t Afford It – It annoys me to no end to see people using their homes as piggybanks to fund trips to Disneyworld, cars they couldn’t otherwise afford and all kinds of other lavish lifestyle upgrades and then when the housing market crashes, they’re playing the victim and walking away from mortgages because they’re underwater. That’s self-imposed. The old school of thought is to abhor borrowing and if you don’t have the cash on hand now, then you can’t afford it. That type of thinking will surely prevent you from getting in trouble in life. But what about when there’s a gray area? Say you have the funds, but you’d prefer not to use THOSE funds. In my case, I have plenty of cash, but I’d prefer to reserve that as an emergency fund rather than shell it out on $10-$15K in home improvements and then need to tap my emergency fund someday. Likewise, I have 5 figures in a traditional trading account, but I’d trigger thousands of dollars in capital gains by selling off my Apples, Googles, Baidus and other stocks that have appreciated over the years. (Why pay capital gains taxes today when I can pay them tomorrow!). So, that leads to the next point…
• Better Use of Cash/Other People’s Money – There’s a big difference between the way average people think and the wealthy. Average people think about making a salary, saving, spending and budgets. Wealthy people look to put other people’s money to work for them and optimize the use of funds available to them. Average people view debt and leverage as a risk, whereas the wealthy try to use it as an opportunity. The smart ones don’t get burned. So, a key distinction here is that the use of leverage and debt usually applies to “investments” when you’re thinking about successful wealthy Americans, but the same could apply to spending as well, right? I wrote recently about all the great stuff we’ve done in our lives by eschewing the ridiculous common advice on keeping a massive emergency fund. While I’d like to maintain an emergency fund of say, $15K, what if I want to spend that much on home improvements? I’d argue that rather than building up another $15K which may take over a year if I’m only able to save an additional $1K/month given all my other goals for 529, IRA, 401(k), etc., why not just do it now?
• Begging People to Borrow Money – So, if I can get a home equity loan for 3-3.5% and use it as a tax deduction, I’m effectively borrowing money at less than 3%.  The same goes for cash-our refis and new home purchases with incredibly low interest rates (see today’s rates). Meanwhile, I have investments that yield north of 5% even when the market dips. It’s not a total wash since it’s not like I’m borrowing those funds and diverting it right to investments, but money is fungible. It’s my discount rate. If I think money is worth, conservatively, 5% to me and I can borrow it at 3%, I might as well borrow!

What Are Your Thoughts?

Would You Make the Home Improvements with a Home Equity Loan Now?  Or Wait Another Year or Two?