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In this highlight, we discuss the smartest way to pay for a home extension.
Making the decision to add an extension to your home is a big one. Whether you should liquidate your after-tax account or take out a home equity loan to finance the construction is not an easy question to answer. There are several things you need to think about before making this decision.
One factor to consider is how easy it is to access your after-tax money. If the extension is going to cost $100,000 and you have an after-tax account worth $150,000, it might be more cost-effective to use that money instead of taking out a home equity loan, which would come with a higher interest rate. However, you also need to factor in any taxes you would need to pay to access that money.
Another factor to consider is the cost of taking on debt. While debt can be your friend in certain circumstances, such as when you have a good cash reserve and a high income, it can also be nerve-wracking. If you have a good cash reserve, it may make sense to use debt as a bridge to get you through the renovation until you have more money coming in, such as from a bonus or a land sale.
It’s also important to consider the opportunity cost of liquidating your assets. If you take $100,000 out of the market to pay for the renovation, that’s $100,000 that’s not working for you. You need to weigh the benefits of the renovation against the costs of paying for it.
Finally, consider the purpose of the renovation. If it’s necessary to accommodate a growing family, then it may be worth taking the leap. But if it’s just for a patio you want to enjoy more, you may want to save up for it instead of taking on debt.
In conclusion, the decision of whether to liquidate your after-tax account or take out a home equity loan to finance a home extension is a complex one that requires careful consideration of several factors, including access to your after-tax money, the cost of taking on debt, the opportunity cost of liquidating your assets, and the purpose of the renovation.
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