buying a house at 22

Is Going into Debt for Home Improvement a Good Choice?

Erik Financial Education, Thoughts of a Mastermind 11 Comments

THIS POST MAY CONTAIN PAID AND/OR AFFILIATE LINKS.

Not all debt is bad. There, I said it.

Usually, I advocate for people to destroy their debt. Usually, I’d say to avoid getting into debt if you can, because debt is restricting, constricting, and not fun.

But, there are times when it is okay to go into debt. The circumstances are rare, but sometimes it is okay. One of those circumstances to borrow money is when that money is practically free.

In this post, I’m going to share with you why I’m going into debt for home improvements and how this action will improve my home value.

Why is Debt Bad?

First, let’s start this section off by talking about mortgages: The word mortgage is derived from a “Law French” term used by English lawyers in the Middle Ages meaning “death pledge“, and refers to the pledge ending when either the obligation is fulfilled or the property is taken through foreclosure.

Literally, mortgage = death pledge. If you aren’t debting, you are dying… wait, that’s not the quote.

“A man in debt is so far a slave.” – Ralph Waldo Emerson

All jokes aside, debt is horrible: it is mentally draining, financially draining, and affects your entire life if you are weighed down by the large barbell of debt.

The main problem with debt is you are obligated to the bank or creditor to pay a certain amount each month. You signed a contract to pay them a certain amount and there are consequences if you don’t pay. These loans and lines of credit can be seriously troublesome if a person is not careful. I pay $1700 a month towards my mortgage – if I lost my job, I’d be in serious trouble paying my mortgage and avoiding delinquency or default.

As the title states, I’m going into debt. That prompts the question, is all debt bad?

Not All Debt is Bad

In actuality, not all debt is bad. Debt’s role in society actually makes sense. If there was no one lending money, it would be difficult to build wealth over time as a society. To buy a house, you would need all of the cash on hand. While no debt would solve many issues that people have today, it would be restricting on our lifestyles. That being said, debt can certainly get out of hand, and I’m mostly speaking in general about the concept of debt. (I’m not going to get into how government and central banks use debt and the money supply in this post. This post and video is amazing for that: How the Economic Machine Works by Ray Dalio)

For example, financing rental properties are usually a decent deal. A person puts 20-25% down on the house, and is able to own a house to rent out to others. In this case, if the renters cover the mortgage and the maintenance and upkeep is relatively low, that person can build wealth very effectively. Without debt, that person may not be able to buy the rental property and as a result, would have to continue to save their cash until being able to buy in full.

Another example where debt may not be all that bad is when an interest rate is below the risk free rate. Typically, investors and bankers will use the Treasury Curve as the risk free rate curve. Right now, the 10 year Treasury rate is between 2% and 3%. Since the probability of the U.S. Treasury defaulting is near 0, we consider Treasury bonds to be risk free and the interest rates associated with them to be the risk free rates.

In recent years, many people have bought cars and other property where the interest rate they received was less than 2%. Mathematically, you should never pay more than the minimum on these debts and instead invest the difference. If you invest at 7-8% returns and pay 2% on your debt, you are essentially getting a 5-6% risk free gain.

0% Interest Rate Loans are a Steal

In the previous section, I mentioned loans where the interest rate is below the risk free rate. In particular, 0% interest rate loans and 0% debt is an absolute steal. The lending companies are giving you free money – they are saying here, have $10,000 and you can pay it back evenly over X amount of years and pay $0 in interest.

Wait, what? $0 in interest?

Yep.

And I’m a Sucker for Advertising

My house is old. My house was built in 1900. The windows are original, the wood floors and wood trim are beautiful, and while the layout isn’t optimal, the place is a great place to live.

Since I’m now an online influencer and trying to build my marketing skills, every time I see an ad or promotion, I stop and look and see how the company is using different elements of copywriting, text, and color to appeal to the viewer.

I received a post card in the mail a few weeks back that said: “Upgrade your windows with 0% financing!” Now, granted, only great companies can offer these kind of promotions: Pella Windows is one of the highest reputation window makers and installers in the industry. So let’s just say I was interested and intrigued:

  1. I had been thinking about updating my windows for quite some time.
    • Right now, there is 3M Plastic Wrap on the majority of the ones on the first floor.
    • 5 of the 8 windows on the first floor don’t even open because of their old age.
  2. Whenever I see 0% financing, my personal finance light bulbs start going on.

I called the next day and the company said they would send out a sales representative to give me a quote.

My Decision to Use Debt to Improve my Home Value

When the sales rep arrived, I wasn’t sure how many windows I wanted to replace. I didn’t know if I wanted to replace any doors either. Honestly, I just wanted to learn more about how much windows would cost, how much it would be to install, and what I could expect going forward.

We walked throughout the first floor. The windows sales rep explained to me how my windows were single pane and were most likely the original windows. They were not energy efficient, and potentially were letting in UV rays into my house.

He showed me the catalog and noticed that we could have an extra match of color and keep many of the same nice elements by replacing the windows.

I was interested, but ultimately, I’d want to see the price tag on these puppies.

How Much Does a Window Cost?

We went through the house and identified 8 windows which I was interested to replace. There are two windows like the one on the right, and 3 windows like the one on the left.

For the window on the left, these would cost $750 for the materials and installation. For the window on the right, it would run me $1,300 for the materials and installation. I was actually a little bit drawn back.

In my head, I was going to pay at least $1,000 per opening, and thought it would be more like $1,500 an opening.

For 8 windows, I was quoted a little over $8,500.

What About a Door?

My front door has a little bit of a gap between the floor and door. In addition, the window is a single pane window. All together, the front door is very energy inefficient and makes the house quite cold when it’s below 0 in January and February!

For the front door, I was quote for $3,500 for the door and install. The door and window will be energy efficient and give a little bit more privacy into the main entrance. In addition, the trim will be matching and I’ll have a fancy door handle.

And All of this at 0% Financing?

So, after we went through the numbers, I could get 8 windows and a door for roughly $12,000, and the at 0% financing for 3 years?

Sign. Me. Up. (I confess, I’m getting a little silly with this line, but I was ready to get these windows in – this is me trying to find my writing style 🙂 )

I think I’m getting a good deal here, and it would be short sighted of me to be blind to any shortcomings of my plan.

Here how I believe I’m improving my situation:

  • I’m replacing 8 windows, 5 of which don’t open
    • Great for Spring and Fall days where I can open up the windows for a breeze
  • A new stylish door which will increase curb appeal
  • Increasing the energy efficiency of my house.
    • A value add for my energy bills and my comfort living in the house
  • Get free money and upgrade the value of my house
    • This is a great selling point and a great value add for renting the place out if I ever do that
  • Increase in home value through a big upgrade
    • Less headache for future owner

The downsides are obviously getting into debt and losing out on some market investment opportunities, but I feel this is relatively safe.

Is This Wise or Foolish?

Anytime I take on debt, I don’t know if it’s wise or foolish. I recently got a HELOC and have used some of the funds to max out my Roth IRA. I’m still not convinced getting the HELOC was the best move, but unlocking equity will give me options for the future.

With these windows, there’s not too much risk in terms of the payment. My house value continues to go up with updates and the general appreciation of Minneapolis, and if I plan to move, I know I could find a solid seller.

Overall, I think this will be a great purchase. 35 months from now, I’ll get rid of the remaining balance, because consumer debt isn’t good to carry. But with these windows, I certainly will be enjoying them for the time being!

If you are someone in debt, I’d highly recommend you checking out my Debt Destruction tool. It’s an automated spreadsheet where you can see $1,000s in savings from just 15 minutes of time.

Readers: Do you think all debt is bad? Have you ever taken out a 0% loan or line of credit? are you doing any home updating this winter?

Erik

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Comments 11

  1. For consumer debt, the only time it would make sense to get a loan to pay for something is if the opportunity cost of the upfront cash was greater than the interest rate. That doesn’t happen very often, since most personal loans are stupid high (aside from cars, which are depcreciating assets). I’m more on board with using debt for an income-producing asset like a rental property. For this use, it’s more like a “business” loan than a personal loan – you are borrowing money to make more money.

    I agree that the 3 year 0% interest loan sounds like a good deal since you can delay paying it off and instead invest that extra cash. I would watch it pretty closely though just to make sure they don’t hit you with interest all of a sudden, and set some sort of reminder to definitely pay it off before the (presumably very high) interest is activated after 3 years.

    That being said, the 0% interest loan doesn’t necessarily make the purchase itself a good deal. Have you gotten quotes from other companies?

    1. Post
      Author

      Yeah, like I mentioned above, once 30-35 months hits, then I’m going to pay it off in full.

      I didn’t ask around because the 0% financing was a good deal. I’m working with Pella (http://www.pella.com/) and they have been around for nearly 100 years in the Midwest. A great company, and now that I’ve seen their work, I can confirm that.

      Thanks for stopping by Dylan 🙂

  2. As Dylan mentioned above, I’d get additional quotes if you haven’t already before pulling the trigger. I’ve grown to dislike debt and plan to avoid it but I could see how this could make sense for you if the windows and door are a good value. Good luck!

    1. Post
      Author

      I already pulled the trigger. They came today and the work was very good. The company I’m working with is Pella Windows and doors, a highly reputable company in the space. I should have put that in the post above, since re-reading it, the post makes it seem like I’m getting scammed a little bit.

      The work they did was really nice. My new door is fancy and the energy efficiency I can tell is already better.

  3. So I might need to talk to you about window stuff sometime. We live in a similarly old house with the original windows – super not energy efficient, hence why our house is cold and the gas bill is super high in the winter. Would love to replace them, but the cost was way too much for a regular chump like me. We had 17 windows we were looking at and it was something like 30k to do all of them, which of course, we couldn’t possibly afford.

    Personally, if it was me and I had the cash for a window replacement, I’d want to open up a few credit cards with good signup bonuses and pay it all right away with the cards. $12k could hit the minimum spend for about 3-4 cards, which could probably be worth $3k or $4k of travel depending on which cards you get. That’s not a bad return on spend.

    1. Post
      Author

      Wow, yeah. Check out Pella, thats who I’m working with. They came today and I’m pleased with the job they did. I think for 17 windows, it should be around $20k. You could always do it in batches as well.

      I might do another 7 next year, because I’m so pleased with the work that was done today.

  4. I think others have said it, but I’ll also go on the ‘get other quotes’ as the only thing I would have done. You are getting 0% but if your costs are 10% higher than others that would provide equivalent windows, then you are simply paying the interest in another fashion.

    I guess, though, if you’re completely happy with your value, that’s honestly what matters in the end.

    That’s good to know about the costs of windows. We have a few in our house that are starting to fail. It’s probably a ways away, but something to at least throw in our mind for budget purposes.

    Thanks.

    1. Post
      Author

      That’s a great point, but I already got it done. If I paid 10% more, then oh well. The windows I got are really nice.

      I think that the comfort of living is worth spending money on. So it will work out.

      Thanks for the comment Money Beagle 🙂

  5. Haha. I never knew about that death debt quote. I can definitely see how some debts may feel that way. The new windows should also help with your energy bills over time along with the door. Investing in a home and using debt as a tool is fine with me especially since we generally use our homes in our daily lives. 🙂

    1. Post
      Author

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