Mortgage Re-finance or not?
January 21, 2019 7:40 AM   Subscribe

If you wanted to do a bathroom renovation how would you pay for it?

My mortgage is up for renewal. I am considering re-financing my mortgage so I have some money to do a bathroom reno.

However, I do have some savings in the bank that would pay for this renovation outright.

What would you do? Re-finance or use some savings?

There are pros and cons to both obviously... the thing that puts me off with the re-finance is that there is a lot of paperwork involved, house assessments and legal closing fees in order to re-finance. My mortgage rates would change and that's an additional $20k added to the mortgage that I don't really need.

On the other hand, I like having a little nest-egg that is just sitting there 'in case'. I have other savings elsewhere too - so I wonder, what is this money really doing for me anyway - surely better to use some of it for something I will enjoy?

What would you do? what option makes the most sense to you?
posted by JenThePro to Work & Money (7 answers total) 2 users marked this as a favorite
You need to work out the cost of the refinance versus the current interest and opportunity cost of having savings. When I've remortgaged in the past then it has been to a lower rate thus making the additional borrowing essentially free as my monthly payment has reduced.

I wouldn't do it if the rate would increase though as you're then paying more for the entire remaining balance not just additional borrowing. If you already have a safety net buffer of savings (6 months expenses in liquid / risk free is I think recommended) then probably better to use excess savings to pay for the bathroom.
posted by JonB at 8:28 AM on January 21, 2019

What about a home equity loan instead of a refinance? This uses your home as equity, but doesn't require a refinance.

I wouldn't do a refinance just to have money for a renovation, and I'm not quite sure that refinancing even works that way. But your wording about the mortgage being 'up for renewal' makes it sound to me that maybe you're not in the U.S., as I'm not familiar with mortgages needing to be renewed. So maybe your situation is different.

If it were me, I'd use maybe half my savings for the renovation, and pay for the other half on a low-interest installment loan (maybe a new credit card, or a home equity loan), depending on how long it would take to pay it off.

Or if the reno isn't needed right away, I'd start living super frugally and try to save more money up-front.
posted by hydra77 at 8:32 AM on January 21, 2019 [3 favorites]

If it raises your rate by 1% or more, it's going to cost you quite a bit. A HELOC is a much better idea. However, that's US centric. I'm guessing you're in Canada?

I would personally not do a bathroom renovation I couldn't pay cash for without flinching.
posted by Candleman at 8:51 AM on January 21, 2019 [2 favorites]

Assuming you would still have an adequate emergency fund, I would use the savings. No interest or paperwork.

I like to keep at least six months of living expenses available as an emergency fund, but your needs might be different depending on your health/ job security/ family resources/ etc.
posted by metasarah at 10:26 AM on January 21, 2019 [2 favorites]

I would start stashing money in a “bathroom” fund and then use the time to start researching what I’d like so I knew how much money I needed. Ask everyone you know what they like and dislike about the bathrooms that they have and any cool or innovative ideas or modifications they made.

Eventually your plans and cash will meet and then it’s go time.
posted by kabong the wiser at 11:39 AM on January 21, 2019 [2 favorites]

Personally, there's no way I'd finance this by refinancing the entire mortgage debt at a worse rate, to the tune of $20k + fees + hassle, unless I couldn't finance it directly. I mean, shoot, you could even look into putting it (or at least all the materials) on a credit card, getting 1 percent cash back. Then pay 3 percent to transfer it to a card charging 0 interest for 12-18 months. How long will it take to to pay back the cost? You'd be gambling that you could keep paying 3 percent for 12-18 months until you were done. But mortgage rates might fall, or worst case, you could use your cash at that point.

You might also consider the tax benefits of having the debt be part of your mortgage debt (does the interest become deductible then?) and the return you're getting on your savings.
posted by salvia at 3:29 PM on January 21, 2019 [2 favorites]

Savings every time. It would be much more expensive to borrow the money. I might consider borrowing if I was currently living without a bathroom and the cost would be close to my entire savings.
posted by plonkee at 11:42 PM on January 21, 2019 [3 favorites]

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