One of my friends has been thinking about the idea of converting and conditioning his storage room into a kind of game room.
Put a big screen TV, a couple of chairs, a game table. Basically, he wants to have a place of recreation to be with his friends during the weekends and watch sports.
He has applied for a mortgage loan at an interest rate of 6% and, when he asked me what he thought, he hoped he was going to say “Uncle, do it now! What a good idea! ” However, my answer was not exactly that.
I told him to save the money every month necessary to do the work in a few years without getting a loan and thus have a new payment every month. Needless to say, he did not like the advice and still thinks what to do.
Before Requesting a Mortgage Loan
My advice to him, and also to you, if you find yourself in a similar situation, before asking for a home equity loan, ask yourself 3 questions. If you can’t answer ‘YES’ to all of them then you should not apply for the loan
Is it a really necessary expense? Asking for a loan to make a game room is clearly not necessary from any point of view. If you need the loan to condition your house because it is in poor condition and you need to live there, then it is necessary.
Does the value of your home increase at least as much as the value of the loan? With a kitchen remodel you can do it, even improving the bathrooms but putting a games room in the storage room?
I don’t have an interested market
But it probably won’t increase the value of the house
Does it reduce the total burden of your debts? For example, if you have many credit card debts it may be interesting to ask for a home equity loan, which is, to join all your debts into one, which although the number of years to be paid increases and therefore the interest in exchange allows you Go baggy every month.
It is not a perfect solution, but it can be very helpful in certain cases. Of course it would only work if you had a strong commitment not to get into more debt.
This leaves one last question, what should you do if you have a large expense that does not meet these conditions? If it is not necessary, it does not increase the value of your home or reduce your debt burden, so you must save to make the expense and not ask for a loan.
Establish a savings plan
Where you determine the amount you need, when you want or you can have the money saved and start saving that amount every month.
Do we see an example? My friend estimates that conditioning the storage room will cost about 25,000 euros. If you take out the 6% mortgage guarantee loan in 5 years, you would have to make a monthly payment of 483.32 euros, which would be a total expense of 28,999.20 euros.
On the other hand, if he starts saving 483.32 euros a month and saves the money in a savings account at 3.00% APR, he would have his 25,000 euros in less than 4 years. The disbursement that would make the work would be about 22,500 euros. By showing moderation, my friend would save more than 6,000 euros.
You could also save only 362 euros per month and thus have 25,000 euros in 5 years. This means that he would pay 120 euros less per month for the simple fact of being patient.
However, an argument That many people would use the extra That is 6,000 Euros are paid in excess That When applying for the loan is the ” penalty ” “That is paid to enjoy the game room before 4 years.
Basically, you are agreeing to pay the bank 133.68 euros more in the form of “ rent ” during the first 48 months just to have the room now.
That, as you can see, is very unhealthy financially since you are adding another monthly expense to those you already have.
Remember that every monthly bill you have means less money to save and invest and therefore slower progress towards financial freedom.