Remodeling? GetSmart Has a Few Tips to Get You Started!
Summertime presents the perfect opportunity to renovate your home. Remodeling your house can add to your quality of life, so if you’ve always wanted to upgrade your bathroom, or turn your attic into a spare bedroom, go right ahead. But if you plan on selling soon, you may want to re-think your plans, because with most remodeling projects, even though they increase the value of your home, you’ll typically recoup less than the cost of the project.
According to REMODELING Magazine’s 2005 Cost vs. Value Report*, which compares the cost-to-construct for a variety of common remodeling projects with the added value they bring at resale, the top five projects that give the most bang for the buck are:
- Siding Replacement – Upscale – With an average job cost of $10,393 and an average resale value of $10,771, you can expect to recoup approximately 103.6% on this project.
- Bathroom Remodel – Mid-Range – With an average job cost of $10,449 and an average resale value of $10,727, you can expect to recoup approximately 102.2% on this project.
- Minor Kitchen Remodel – Mid-Range – With an average job cost of $14,913 and an average resale value of $14,691, you can expect to recoup approximately 98.5% on this project.
- Siding Replacement – Mid-Range – With an average job cost of $7,239 and an average resale value of $6,914, you can expect to recoup approximately 95.5% on this project.
- Two-Story Addition – Mid-Range – With an average job cost of $80,133 and an average resale value of $75,831, you can expect to recoup approximately 94.6% on this project.
Assuming you’ve decided moving forward with your remodeling project is a sound idea, now it’s time to consider how you’re going to finance your project. As you can see from the “Top Five” list above, renovations can cost tens of thousands of dollars. If you happen to be short on cash, here are a few options for your consideration.
Refinance your mortgage. This option is available to you if you’ve already built up some equity in your home, and can help you fund a major renovation. For example, if you want to borrow $30,000 to build an addition and you have $120,000 left to pay on a $200,000 mortgage, you may be able to take cash out by raising the principal on your mortgage to $150,000. This would allow you to pay for the entire renovation up front. Depending on the terms, your monthly mortgage payment might remain the same; only the length of the loan will be extended. If you’re adding something structural (as opposed to simply redecorating) lenders may approve you based on the projected value of your home after the project is complete.
If you currently have an adjustable rate mortgage, this option might be especially beneficial to you now, as interest rates are on the rise. Your ARM interest rate may increase by 60% or more**. Refinance now to a fixed rate mortgage, and fund your home improvement project at the same time.
Obtain a home equity loan. This works much like a conventional first mortgage. You borrow a lump sum that is secured against your home, and the payments are amortized over several years. Usually, the interest rate and monthly payment remains fixed throughout the term of the loan. This option requires an additional payment on top of your first mortgage and usually carries a higher interest rate than refinancing your mortgage. However, the closing costs may be lower and it can be the right decision for you if you don’t want to refinance and you need the money for your renovation all at once.
Obtain a home equity line of credit (HELOC). This is a good choice if you’ll be paying for your project in stages. With this option, the lender agrees to advance you money up to a specified limit, and you access the money as needed with a credit card or checkbook, making it easy to pay contractors. Monthly payments can be lower than those of a home equity loan, since you have the option of paying interest only on the money you withdraw. The other important difference is that HELOCs carry adjustable interest rates, while home equity loans typically have fixed rates.
Obtain a personal loan or line of credit. To fund a smaller project, this may be all you need. The fees to set these up can be lower than those for refinancing your mortgage or borrowing against your home’s equity. However, personal loans are not secured with your home, so they carry a higher interest rate. But depending on the rate, they may still be more favorable than using a credit card. In addition, interest on your mortgage or home equity loan may be tax deductible, whereas interest on a personal loan is not. Always consult a tax advisor about your particular situation.
Each choice has advantages and disadvantages. When deciding which option is best for you, consider the pros and cons, and factor in the cost of the project you wish to complete.
*Source: REMODELING Magazine
Publication date:01-11-2005
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