Reduce 401k cont. or reduce mortgage principal?

[Pitts011]

This could really be titled "should I finish out my basement?"

Okay, I'm thinking about finishing out my basement adding about 800 more square feet on my 1800 sf house. I've gotten several quotes and the cheapest came out to about 23,000. Addition would add large family room, full bath and small office. Bonus of 12,000 going towards basement so need to come up with 11,000. Here is my info:

Age: both 28 (no kids)
Combined income: 114,000 p/yr
Home loan: 142,000 @ 30 yr 3.625%
Additional principal: 400/month
Home value: 190,000
401: 58,000 @ 16%
Wife 401: 38,000 @ 13%
EF: 41,000
Roth: 12,000 (maxed out)
Bonus: 12,000 (going towards basement)

I know I'm saving a lot for retirement so it would be easy to lower my contribution but we are trying to have kids so I hate to get out of the routine of my current savings. My current retirement savings rate does not allow me to save in my EF anymore. I'm also on the 15 yr mortgage payoff plan so I hate to reduce that extra principal amount. I have the money so I really don't want to take out a loan. I'm thinking just pay out of the EF and repay with the extra money set aside from the 401 contribution or principal payment.
What do ya'll think?
Also I'm timid about the basement project since the neighborhood developer went bankrupt and never put the final topcoat on our road. It is cracking and coming up in some places which could hurt the value if we stay a long time. Most homes in our subdivision don't have finished basements so I think it will be a good investment on that end.

Sorry, I know this was long winded. Thanks for the advice.

[kork13]

I'd say take a look at your minimums, and as necessary, reduce your savings rate to that point.

The first place I'd go to save up for the basement remodeling is the mortgage principle payments. Rather than putting that money toward your home's mortgage, put it toward your home's value. Second, you can reduce your 401k contributions to fund the basement, but definitely keep contributing enough at least to capture the full match your employers offer (if any), and continue to max your Roth IRAs. Lastly (and this should be the very last resort), what is the minimum EF you're comfortable with having? Obviously 6+ months is preferred, but are you comfortable with dipping down to perhaps 4 or 5 months until you can build it back up?

The thing you should consider is that there's no race to getting your basement done. It would be far better to save up the necessary funds over time than to pillage your emergency fund to pay for home remodeling. If you were willing to wait 6-12 months, you could probably save up the full amount and leave your EF intact. Once you've saved up enough for the basement, you can return to your current savings rate. Remember, an emergency fund is there for (gasp!) emergencies, not for upgrading your home. But with that said, if you're insistent on doing it immediately, it is still better to use on-hand savings than going into debt with a HELOC or similar.

[parafly]

What are your monthly expenses?

Based on the info you provided (large EF, aggressive retirement contributions, low mortgage), it appears you may be able to take $11K out of your EF and still have 6+ months worth of savings left over. In this case, you should feel confident in taking the money out of your EF for the remodel, but remember to plan on going over budget to some degree.

In terms of your decision to remodel, what are your ultimate goals with the home? If you plan to move in the relatively near future, you should take the financial factors (resale value, neighborhood comps, etc.) into deeper consideration. If you plan on staying in the home for the long term, your own needs, desires, and goals should dictate the decision.

[grumpter]

30 yr 3.625%

Pay minimum payments on your motgage for the next 30 years.

[dunnrobert700]

Normally I think paying down debt aggressively is smart, but 3.625% is really low, I'm not sure I'd be making extra payments.

Right now you can't beat 3.625% with something low risk like a CD, but in the course of the next 30 years I bet you will and it's pretty easy to beat with a stock/bond portfolio. This could end up feeling like free money 10 years down the road.