Keys to Making Home Renovations Pay Off

Date March 9, 2015

After months of hibernating, many people gain a burst of energy in the spring, manifesting in major cleaning and the occasional renovation. The tendency toward the latter has continued to grow in the past year and is projected to expand by up to 5% this year. With more people investing in remodeling, keeping up with the Joneses may bring more value to your home and neighborhood. If sprucing up the house is on your radar, here are a few things to consider.

Projects that pay

If you’re planning a major home improvement, such as a room addition, make sure it’ll pay off in the long run. According to last year’s national averages, transforming empty attic space into a bedroom increased the market value of a home by 84% of the cost. Simple fixer-upper projects such as adding a steel entry door had an even better result, adding 97% of the cost to the property’s value. But a major home-office redo had only a 49% payback. Make sure that the projects you choose are likely to provide a decent return if you sell the house later.

Another worthwhile project to consider is adding a wooden deck, which can recoup 87% of the cost in a sale and can turn your backyard into a summertime oasis. Improving curbside appeal and basic organization are the most cost-effective ways to revamp your home. So if a big project is too costly this spring, invest in some flowers to spruce up the windows and gardens.

Save on financing

 Once you have a plan, figure out a budget for the project and the best way to finance it. Since renovating is an investment in your home, it may make sense to let your house help out when it comes to financing the work. A home equity line of credit, or HELOC, can be a low-cost financing method, provided you’ve built up some equity in the property by paying down part or all of any mortgages. With a HELOC, you don’t need to take out the full sum all at once, but can have access to funds over a set period of time as you work through the project.

Financing this way uses the equity you have in your home, which is the difference between what is still owed on any mortgages and the property’s market value. Often, you’ll be limited to borrowing no more than a certain percentage of the value, such as 70%, when all home loans are combined. Borrowing this way means your house becomes the security for the loan, which is in the form of a revolving line of credit, similar to a credit card. The difference is the rates are typically lower, and you may be able to get a tax deduction on the interest you pay, similar to a regular mortgage (always check with a tax advisor regarding deductions). HELOCs are available at lenders such as Matadors Community Credit Union.

A HELOC can be a low-cost way to invest in your home, but it’s not for everyone. Keep in mind, there can be upfront costs, including application and home appraisal fees. With the house on the line, make sure you can make the payments on time to avoid risking foreclosure.

If you’re good to go, now may be the right time to plan a project and the financing.

 

Cait Klein, NerdWallet

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