Borrowing money for home improvements – good investment?
Many home owners borrow to renovate their homes. For a lot of reasons, better enjoyment, increase value, ready to sell and so on. If you borrow to improve your enjoyment, the financial aspect might be a little lower. However, if you are considering selling in the not too distant future you should consider the financial aspect of improving your home. Compare loan rates and terms here.
In any case, a simple look at the numbers might shed some light on borrowing to renovate. Say your home is worth $500,000 should you sell today and in your area the increase runs 10% a year. So in 1 year your equity (less mortgage/line of credit) is $550,000. If you borrow $10,000 at 5% how much would that increase the value? Well, if you do the right improvements the value should increase anywhere from 60-100% of the cost of the renovations. If you do the home improvements today, then the value of the house is $520,000. In a year the value will be $572,000 in increase of $72,000-$10,000 loan = $62,000. $12,000 profit. So your $10,000 loan pretty well doubled in return in a year. Do this math yourself and use the number of years you will still own the house. If you plan to sell in a year or more, this math makes a lot of sense. HOWEVER – each situation is different.
If you borrow for a home improvement project just to improve your enjoyment – even better. Then you don’t have to think much about making a profit. Again, do the math. Over 10 years the compounding increase in value will pay off.
Borrowing for home improvement options
There are basically two types of loans. Secured and non-secured. Secured means you have to put something of value to ensure the lender gets paid back. Like your home mortgage. You could re-finance your mortgage or take out a second mortgage. A home line of credit is this type of loan. A non-secured loan can be obtained via a credit card, personal loans, or deferred payment plans from suppliers. It all depends on your situation.
Home renovations that has a good return on investment
If you borrow to pay for home renovations you might want to consider the return on your investment. One example is, if you spend too much into a master bathroom, you might not be able to recoup the cost. Judging by the stats from Remodeling Magazine, these are a few of the most popular ways to leverage your home equity for home improvements:
- Garage door replacement: 94.5 percent cost recouped.
- Bath remodel (mid-range): 64 percent cost recouped.
- Roof replacement (asphalt shingles): 65.9 percent cost recouped.
- New deck: 72.1 percent cost recouped.
- New master suite (mid-range): 58.5 percent cost recouped.
- Major kitchen remodel (mid-range): 58.6 percent cost recouped.
As mentioned, this first-year improvement will carry on for years and compound.