What Should I Do with This Loan?

[dualstow]

So, we have secured a home equity loan to help finance a massive renovation. Without the loan, I believe I already have enough cash to cover the entire project cost, including crazy contingencies, although if worse came to worst I would potentially have to dip into the t-bills in my permanent portfolio (pp), the core of my investments. I've been trimming stocks in my vp for a long time now.

Part of the incentive for getting this loan is simply low interest rates. Even Mark Zuckerberg took out a mortgage on his new home less than a year ago. That got my attention.

I don't have a mortgage and have never taken on debt of this magnitude before. Since I am now waiting indefinitely for my architect to wrangle contractors, and I have done everything I can do to get things started except swing the hammer myself, and since I have at least another month before anything happens, I don't know what to do with this cash. Should I just hold onto it and not mess around?

I'll post some more loan details soon, but for now: the amount is about US$100K.

[Bean]

I think Mark's mortgage rate was 1%, which I would take all day long.

Being debt free is, well, freeing.  So if I were in your shoes:

Step 1) I would think really hard how bad you need a 100k renovation and the equivalent trade off in passive income.

Step 2) If I still wanted the renovation, then I would just set up a Ally account or something similar to transfer the cash into, for mental separation from my investments. 

Step 3) If my level of cheap/frugal mindset can handle that, use it as a sinking fund and begin the renovation.

Also, have you considered a 401k loan if you really want to do this? Wouldn't you rather pay your self interest if you are dead set at borrowing money?

[dualstow]

Thank you both. Yes, Mark Z's was a low, low rate of 1.05%. Mine is a tad over 3.5% This is fixed; it will not rise. However, I have to pay principal along with interest each month. The penalty for paying off the loan early is negligible.

I have 3 days to get out of this if I really don't want it. The loan, I mean. Bean: We definitely want the renovation.

[dualstow]

4%? In checking? Wow, I miss that.

I can find ways to earn more than 3.5% before tax, but it doesn't feel safe. All the same, i'm feeling a bit gambly.

[Pointedstick]

2% in checking today is still pretty nuts, even with those restrictions. I have a checking account with USAA that yields 0.25%. Heck, my ING "high-yield" savings account is less than 1%! What bank is giving you 2% for checking?

[Ad Orientem]

I am almost neurotic in my hostility to debt, so I'm probably the wrong person to ask for advice on this subject.

[dualstow]

I hear you, A.O. I've always been that way, too, because it seems to get a lot of people into trouble, and not just the ones trying to keep their houses from being bulldozed by Bank of America circa 2008. A relative of mine wants me to explore muni bonds with his bond guy, but in the same breath he told me that he'd been hit by AMT last tax season. Well, I asked him, don't you think those munis were the single biggest factor in your getting hit with AMT? Yes.
Hmm.

[Libertarian666]

If you have a big unrealized tax liability that you could realize and pay off with that loan, that would be a possible use for the money. I don't think tax rates are going down, and I'm pretty sure that these are very low interest rates.

Of course, do your own due diligence, consult your tax advisor, etc.

[dualstow]

An excellent point. I haven't had any large tax bills or even potential, unrealized ones for some time.
Maybe I can take some of the principal and create one. ; - )
Well, I guess one possibility is vp stocks, but I have already trimmed them a great deal.

[dualstow]

Yeah, I think Vanguard is pretty good about AMT-free holdings. I have some of their products.

But now you guys have me thinking about Puerto Rican bonds!
Just kidding.