If you are treating your home as an investment, you need to choose your remodeling projects wisely. The Early Show financial adviser Ray Martin says that too often, people pour lots of money into a project that does not increase the value of their home.
According to an article in the September issue of Smart Money magazine, Harvard University's Joint Center for Housing Studies estimates that American homeowners spent $214 billion on remodeling and repair in 2001 (the latest figure available). This is a 19 percent increase from 1999.
So which projects make the best use of your money?
Remodeling magazine's latest Cost vs. Value Report concluded that a major upscale kitchen remodel might get you 80 percent of your dollars back on resale, while a top-notch bathroom overhaul would get you 91 percent.
When you are ready to sell, the trick is to do projects that transform your home, but not to the extent that it looks like the Taj Mahal. A new coat of paint, new carpeting, updating door fixtures, etc. can really put your home in the best light.
Random and uneven upgrades should be avoided. If you're going to transform your master bathroom into a spa, but keep the hall bathroom in the original 1950s style, then most buyers will not see what you changed, but only see what you didn't do.
Martin suggests that you start with a minor kitchen-remodeling project: changing your cabinet doors; changing your faucet fixtures; adding a new backsplash at your sink area. These are projects that don't cost too much, but will still give your kitchen a new look.
He stresses that too often people pour lots of money into a project that won't guarantee a good return when you resell your home.
Once you decide on remodeling, here are some ways to finance your project:
Refinancing your mortgage: This was a huge trend this past year. Although fewer people have done so in the past two months because of rising mortgage interest rates, it is still one of the best options according to Martin.
Home equity loans: They allow you to borrow against the equity in your house. Many homeowners find that a home equity line of credit offers them the flexibility they need to handle a longer project. And the interest you pay is tax deductible. The approval process includes an appraisal of the home value and can be approved and closed in a few weeks. There are no closing costs.
Credit line: A credit line allows you to access cash as you need it, up to the amount approved by the lender. You only pay interest on the money you withdraw. This feature is beneficial if you anticipate your project will last for several months, or if you plan to do a partial remodel, then more at a later date.
Personal Savings: Another method of financing a remodeling project is by using savings. Before taking that step, consider how much money you have set aside for emergencies and what your comfort level is with both debt and savings levels. Also consider the interest rate you are receiving for the funds versus what you will pay for any financing.
Credit Cards Keep this as a last resort, as you'll pay upwards of 20 percent interest. Those steep fees can add significantly to the costs of your project. If you want to use a credit card for a short term, make a budget and try your best to pay off the amounts you borrow within a reasonable amount of time - say, 90 days. You don't want to repaint your living room and pay for it for another year.
401(k): Another option that some home owners consider is to borrow from an employer's 401(k) retirement plan. While that type of loan has benefits, it's not advisable by many financial consultants. If you leave your company before the loan is paid off, you have to repay the remaining balance within a short time period. Otherwise, the loan will be considered a taxable withdrawal and, if you are younger than 59, it will be subject to a 10 percent withdrawal penalty.
Another bad scenario would be if you lost your job and the loan is due in 30 to 60 days, and the house is now under construction. You can end up being without a job and owing $40,000 for your new kitchen.
When choosing a financing option Martin suggests keeping the following variables in mind:
Cost of the remodel: Higher amounts usually are financed through a home equity loan or line of credit.Timeframe for the job: If you anticipate the project will stretch over several months, perhaps a credit line is the way to go.Personal financial picture: Good savers may feel most comfortable dipping into their bank account to pay for the project.
Things to Consider when Choosing a Remodeling project:
Think About Resale Value Consumers should approach a project carefully to avoid spending more than they will recoup.
If you have a $200,000 house, you wouldn't put in an $80,000 kitchen because you won't recoup the cost. That same investment may be necessary in a $500,000 to $600,000 house, however, because buyers in that price range expect newer kitchens with modern designs and appliances.
Consider your Neighborhood: Look at similar houses in the neighborhood to see what types of features they include. If you over-improve your home, you may not get the money you were hoping becausew it may put the value of your home out of the league of other homes in your area.
Focus on projects that bring the house up to the standards of the neighborhood without pushing the price too high. Don't over-improve for your price point, your neighborhood and your style of house.
Consider your City: A renovation that recoups 110 percent in Boston may only get you 65 percent in Colorado.
Consider Minor Renovations: If you question whether a large kitchen remodeling project will pay off when you sell, consider spending approximately $2,000 to replace the floor, repaint the cabinets, change the cabinet door knobs and paint the walls. It will be easier to recapture that $2,000 in the sales price.
Limit Your Spending: Rein in any urge to buy the finest materials and finishes. Even the most creative sales contract won't allow you to take the granite countertop and European kitchen cabinets with you. You'll also want to weigh your taste against that of the mainstream buyer. Will that trendy gold sponge painting in the new bathroom turn off more people than it attracts?
Always look at the project as if you were buying the home. That is advice that Martin stresses. If you are indeed doing this project to recoup money when you sell it, you should really look at these projects with the eye of a homebuyer.
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