Financing a home renovation

[Nebeneezer]

I'm buying a home that I'd like to add onto eventually. I haven't talked to an architect yet, but let's just say for the sake of conversation that we're talking about a $100,000 remodel. My question is how do I finance this? Would it be better to save up the cash (I can do that in about 5 years) or would it be best to pay down the principal and take out a home equity line of credit? Because I'm only putting $15k down, I think I'll only have about $40k in equity in 5 years.

Or are there other options I am not aware of?

[TBH]

I think saving up the cash is by far your best bet. Putting down a small down payment and financing a big renovation sounds like a good way to get yourself in too much debt. It's possible that the renovation will add some value to the house, but probably not the whole $100,000, and you won't be able to realize that added value unless you sell.

Many people on this board will tell you you shouldn't be buying at all until you've saved up a 20% down payment AND still have an emergency fund on top of that. I think there are circumstances where it makes sense to buy without the full down payment, but I would really advise against borrowing even more for the renovation.

If you must buy now, buy and then save save save until you can renovate without getting into more debt, and without compromising other important financial goals like retirement savings and having a healthy emergency fund.

That's my two cents.

[snafu]

I wouldn't buy a house that was too small to meet our needs because the potential for serious problems during and after construction is huge. Have you talked to your city Councillor/Alderman about the permit process? Am I correct in assuming this is your first house purchase?

I wonder if you'd be ok explaining specifics like percentage of downpayment, cost of mortgage insurance, interest rate being offered, urban/rural, year originally built, square footage, schools & services nearby , what makes this specific property so desirable, your net & gross income, whether you'd live in the house while construction was underway, what percentage of 'cushion' you'd borrow incase something goes awry/needs to be changed mid construction etc.

We want you to fully understand that home ownership is a challenge on many levels. Please understand that a mortgage is different than most consumer loans since interest is heaped on at the start so the buyer is mostly paying interest and a tiny sum of principal until midway through the process. Most of your monthly payment only covers interest, taxes, mortgage insurance and whatever else you add on like closing costs, regular insurance, appliances etc. Besides your regular costs like cell, car payments, food, transportation, you pay all utilities [heat, electric, water/sewer, trash], pay to fix anything that breaks/get damaged/clogged, roof, drainage, sidewalks, major appliances, AC, regular homeowner insurance, decorating, painting, furnishings, yard equipment & maintenance and endless small issues that creep up monthly.

It's worrying when you add major construction with borrowed money to that mix.

[Nebeneezer]

Okay, Thanks for the feedback. I won't take out a huge renovation loan.

The reason I'm okay with putting 5% down is because of the following:

1.) The neighborhood is highly desirable. Walking distance to fantastic schools, shops and restaurants.
2.) I'm in my mid-30s now. I don't really want to take out a 30 year mortgage when I'm 40.
3.) Interest rates are insanely low. I'm locked into a 4.18% and I might be able to get lower.
4.) I want to enjoy where I live.
5.) Still have a solid emergency fund (40k)

[RudolfLesko]

I think saving and then financing by giving down payment is a good option.

[WillieGearhart]

I think wait for sometime because your interest rate is looking quiet high. The cost of renovation will go high. So if you will save some money then you will feel less pressure when you start to repay your loan with interest.