Like a lot of people that are in this process, especially in the Silicon Valley Area, we were planning on using money from stock options and equity in our existing home to pay for this project. Unfortunately, Yahoo, my company, missed a quarterly number a couple of weeks ago which sent the stock price tumbling 25%. Goodbye granite, hello laminate.
The consistently rising interest rates haven’t helped either, so now we are at a fiscal cross roads. I strongly believe that YHOO is undervalued and that it will bounce back. Based on this belief, I don’t want to cash out the stock in order to pay for the majority of the construction (I don’t want to do that anyway due to the tax implications, but that is another issue). The equity in the house is still there and in good shape, but now, we are looking at the option of using a building loan versus an equity loan.
For those in the know, there are benefits to doing this either way. An equity loan is less expensive, however, the burden of making sure that the milestones (demolition complete, house framed, windows installed, etc.) outlined in the agreement are up to us. While we have a high level of confidence in our builders, we are still new at this and are sure to have enough screw-ups on our own without having to worry that our cabinents were hung correctly.
A building loan is slightly more expensive and would roll-up our insanely low current mortgage into a loan at today’s rates. However, we could get more money to do the project since the loan is based on the future value of the house. Also, the onus to be sure that things are being done correctly is up to the bank. When the builder claims to be finished, the bank sends someone out to confirm that it is done and then they cut a check.
Since I couldn’t tell home framing from picture framing, we are leaning towards the building loan, however, I’d love to get a consensus of how other people have paid for their projects and why. As I mentioned in my fiscal disclaimer, we aren’t rich, but we are ambitious and don’t mind a little extra leg work, for substantial savings over the long term. Any guidance would be appreciated.