Home renovations need to be planned with care.
You don’t want to spend so much money improving your home that it becomes significantly more expensive than other homes in the neighborhood.
Here are some strategies for planning a remodeling project that makes financial sense:
- Decide what your primary objective is. If resale is your biggest concern, a minor kitchen update may enhance resale opportunities more than adding a home office.
- Decide how to finance the renovation. There are three basic options: refinancing, home-equity loans and home-improvement loans. If you have little or no equity in your home, lenders are more apt to approve a home-improvement loan, which usually costs an extra point (percentage of the loan). Refinancing is taking out a larger mortgage than you had before, but the loan is based on the projected increase in value of the home after renovations. Home equity loans are similar but usually carry lower closing costs offset by paying a half a point at closing. To see which financing option works best for you, have your bank calculate and compare the price of the loan, closing costs, and future interest costs.
Avoid credit card debt. Don’t ever finance a home-improvement project with a credit card. Interest payments are not deductible, and the interest rates are too high.