If, like me, you’ve spent more lazy afternoons than you care to remember channel-hopping from one “home makeover” TV show to the next, you may have been thrust against your will into a series of fantasies about how to improve dated wallpaper, shabby furniture and unloved spaces—all achievable, if only you could prise yourself off the couch.
When my growing family and I lived in our former residence, we decided to turn our gloomy, cobwebby basement into a brightly colored living area—somewhere for the kids to escape mom and dad. An increasing number of homeowners are relishing the hands-on challenge of fixing up their properties. If you’re the DIY type, or fancy yourself to be, the pleasure of recreating a living space, or creating a whole new area from scratch, is hard to beat. Even if you get professionals to do all the legwork, the inconvenience of having no functioning kitchen or bathroom for a few weeks is more than offset by the satisfaction obtained from overseeing the project.
Whatever your project, here are five important questions to ask before becoming fully consumed by your fix-up fantasies:
1. Why do you want to renovate? Has your family outgrown your house? Or maybe you’re fixing it up to sell? For us, the decision to renovate and create our basement oasis was motivated as much by long-term thinking as short-term comfort. I knew that maximizing the square footage through renovation might significantly bump up the market value.
2. Will your renovation add value? When it comes to return on investment, not all renovations are created equal. Consider resale value when planning your project, but don’t discount the value of your comfort. Our particular investment paid off in spades—not only did the value of our house (less the time and money actually spent on the renovations) outperform other properties in the neighborhood, but we got to enjoy our dream basement for three years before selling and using the profits to build and design our from-scratch dream house.
3. Could this renovation result in higher property taxes? What many home improvers forget is that increasing your home’s fair market value can raise your property tax bill. Before you do anything, get in touch with your local assessor’s office to get an assessment. Whether your remodeling project would trigger an assessment depends on where you live, and what exactly is being remodeled or renovated: Check your local tax laws before embarking on your home makeover, so you can factor in the tax implications and plan accordingly.
4. How much can you realistically afford to spend? Home facelifts, like actual facelifts, can be very expensive—most of us don’t have idle money lying around that we can tap into for such projects. When it comes to a big-ticket purchase, cash is obviously the cheapest option. That’s why it can be tempting to dip into your emergency fund but don’t forget—unless your ceiling is caving in, it’s not an emergency.
5. How will you pay for it?Borrowing money may be the only way to get your hands on the funds required to spruce up your space. Because homeowners have a substantial amount of collateral in the form of bricks and mortar, they can borrow on relatively favorable terms. Even better, you may be able to deduct the interest on your tax bill, providing the money is used for home renovations—consult your tax advisor. Here’s a look at the two most popular kinds of loan:
- HELOC (Home Equity Line of Credit)If you want to borrow money periodically for home repairs or improvements, but don’t need a lump sum of cash all at once, consider a HELOC (pronounced hee-lock). Think of it as a pool you can dip into over an agreed term (say five years). Your borrowing power correlates directly to the equity you have built up in your home.
For instance, if you’ve paid off $100,000 of your home’s mortgage, you may be offered something like 85%, or an $85,000 line of credit (actual percentage depends on the lender and on your personal circumstances). You will only pay interest, of course, on the money you borrow, and for a set time period. With HELOCs, the interest rate is variable—meaning it can rise or fall, and you never know in advance how much interest you’ll owe.
There’s generally some flexibility around when you can repay your loan, though a monthly minimum will be expected, as with your credit card. But don’t bite off more than you can chew: The roof over your head could be taken away by a lender if you fail to make repayments.
- Home Equity LoanIf you want to borrow a lump sum at a fixed rate of interest with the same payments every month over a set period of time, then a straight home equity loan may fit your needs. Much like a mortgage, it comes with closing costs and may even carry a prepayment penalty, meaning you could be penalized if you pay back too much in any given month.
Once you’ve considered these points, you’ll be well prepared to begin making your dreams a reality.
While you can tap your biggest asset, using a HELOC or home equity loan to buy other aspirational purchases—a car, a vacation, for example—don’t have the potential to build wealth in the same way that home improvements do.
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