Reader Question: Pay Off Debt or Pay Cash for Home Improvements?

Paying Off Debt / Monday, January 14th, 2013

Reader Question

I recently got a question from a reader named Jennifer. Here’s what she wrote:

We have a lump sum of money that we are trying to decide what to do with. We have credit card debt and also some home improvements and repairs that we want to do. Is it better to pay pay cash for the home improvements or pay off the credit card debt and then get a home equity loan for the improvements and repairs?

Here was my reply:

If I were faced with this choice today, I would pay off the credit card debt because the interest rate is probably a lot higher than the rate on a home equity loan would be. Also, the interest you pay on a home equity loan is generally tax deductible, while credit card interest is not.

However, here are a couple of things to think about:

1. A home equity loan will be secured by your house, so if anything were to happen, your house is potentially at risk. Credit card debt is unsecured, so if you have to stop paying for any reason, what is at risk is your credit score/worthiness.

2. It is very, very, very easy to pay off credit card debt, take out new debt (i.e. the home equity loan) and then run the credit cards back up. That leaves you in a worse place than where you started. I know that because, despite our best intentions, we’ve done that several times over the years. If you think you’ll be tempted to do that, and if debt reduction is your goal, you might want to consider paying cash for the wall/pool and then being really aggressive about paying cards down.

I reminded Jennifer, and I’ll say it here too, that I am not an expert. I’m just a Family CEO who has done a lot of researching and had a lot of life experience in debt reduction.

Have you ever had to decide to place a sum of money one place or another? How did you decide?

7 Replies to “Reader Question: Pay Off Debt or Pay Cash for Home Improvements?”

  1. I’d definitely pay off the debt first and foremost. Unless the house repairs are DIRE, they can wait. I’d save cash while paying off debt and work on the housing repairs/projects slowly as funds allowed.

  2. When we had enough cash to pay for the home improvement we NEEDED to do (flood remediation in the basement), and were paying down debt, we got the work done on the house but did not use our cash to pay for the work or to pay down debt. We were able to secure 1 year same as cash financing on the work, so we opted to increase our debt, and keep the cash in our account in order to increase our flexibility. We knew that if something happened and we had to pay off the basement work NOW, we could, but it made us feel better to keep a very nice emergency fund and to keep making our standard payments on debt (adding in the payments for the work on the house).

    1. We have also successfully used “same as cash” financing to replace our (extremely) old and inefficient stove, water heater and other needs. The key is to ignore the “minimum” payment on the statements you get, since that will cause you to exceed the promotional period. Divide out the total amount due, and consistently pay 1/x (x = promo months) of the total each month, and make sure the last payment is sent in before the promo period expires.

      For example, if you have bought a $1,200 fridge on “9 months, same as cash,” then you must plan to pay at least $133.33 each month, regardless of the “minimum” payment on the statement in order to pay it off on time.

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