Perhaps your family has outgrown your home or you’re dreaming of a spacious master suite or gleaming new kitchen.
Maybe you need an in-law suite to accommodate aging parents (or boomerang adult children).
Moving is certainly one solution, but economically and socially, staying put and renovating may be a better choice. Housing inventories are tight and the competition for homes is high in many areas.
Location, location, location
It may seem clichéd, but the old real estate adage about location is solid.
If you love your neighborhood, are situated on a great lot, have friends and family nearby or access to a good school system, you may want to stay and remodel your home to suit your current needs and tastes.
You already know what works and what doesn’t in your home, giving you an edge in planning any renovations.
Making the right decision
Before starting a home remodeling project, consider costs and the home’s resale value once renovations are complete.
For example, according to Remodeling Magazine’s Cost vs. Value Report (www.costvsvalue.com), the average cost of a major upscale kitchen remodel in the Milwaukee area is more than $130,000, with close to 53 percent of the cost eventually recouped.
But that’s just an average. In high-demand areas, the right renovation may yield a higher return dollar-for-dollar.
Consulting with a real estate agent, contractor and banker can help ensure you’re not over-improving.
Find a reputable contractor and have them plan, spec and price out the project. But don’t sign the contract until you share the plans with your banker who can order an appraisal and estimate what the house will be worth once the work is done so you can make an informed decision.
Leverage financing with a HELOC
You could finance your home renovation by taking out a conventional construction loan or paying cash. But a home equity line of credit (HELOC) may make more sense. Here’s why:
Consider fees. Traditional construction loans may have higher fees than a HELOC. In addition, most construction loans require you to pay off the existing first mortgage and wrap it into the new loan. With a HELOC, you may be able to finance up to 90 percent of the home’s improved value. If you’re sitting on a first mortgage below 4 percent, why pay that off and roll the entire balance into a higher-rate variable construction loan?
You pay only for what you use. Interest payments are calculated only on the dollar amount you’ve drawn from the line of credit, with draws based on a contract with the builder.
Potential tax advantages. Both construction loans and HELOCs may offer tax advantages when used for home improvements. Be sure to consult with your tax advisor or attorney to determine deductibility of interest in your particular situation.
There are downsides to using cash. If you liquidate an investment to pay for a renovation, you may trigger taxable capital gains. When you can get a HELOC with a rate that’s still historically low with potential tax advantages, why not keep that money working for you? An investment professional can help you consider the pros and cons.
Make your dream home come true
If you’re ready to tackle a home renovation, start talking with a real estate agent and contractor as well as your financial adviser to explore your best options for financing.
Karla Krehbiel is regional president of Johnson Financial Group.