If your current house isn't everything you want or need, you could buy a new one or you could renovate. How do you decide?
A lot goes into the decision to buy or renovate: the left side of the brain contributes its number-crunching evaluation, and the right side brings the emotional side into the deal. Consider both sides when making your decision.
Cost Considerations of Renovating vs. Relocating
Whatever you choose to do or not do involves costs. Liz Pulliam Weston at MSN estimates that selling, buying, financing and moving can cost you about 10% of the sales price of your old home. If that's the case, if you have a $200,000 property, can you make the improvements you need for less than $20,000?
Depending on your particular housing market and financing situation, there are both costs and potential savings associated with each. For example, in a housing market where prices are rising, even major home improvements may cost you significantly less than buying. However, the opposite may be true in declining real estate markets where new homes are selling for considerably less than it cost to build them. In this way, your potential return on a home improvement can be either a cost or a saving to be considered.
Also consider the character of your neighborhood. If everyone has three bedrooms, linoleum floors and two-car garages, you won't get a good return on your home improvement if you insist on six bedrooms, a four-car garage and marble and hardwood flooring. Appraisers call that "over-improving for the area," and chances are you won't get that money back when you refinance or sell. Moving would be smarter if you want those amenities which far exceed the norms in your neighborhood.
Finally, your mortgage is an additional cost. Throw some figures into HSH.com's mortgage amortization calculator. Take your current mortgage, with its interest rate and the cost of obtaining it, and see how much you'll pay over its life. Then add the cost of financing your home improvement and see what your total is.
For example, you have a home valued at $150,000, with a five-year-old $100,000 no-cost mortgage at 6%. Your desired renovations would cost $20,000 and you take out a 20-year home equity loan at a 7.5% rate with $500 in closing costs to finance them.
- Cost of current mortgage over its life, including principal, from a mortgage amortization calculator: $215,838.
- Cost of $20,500 home equity loan -- including principal -- over its 20-year life: $39,635.
- Total: $255,473.
If you decide to move instead of improve, the cost picture changes. If you could sell your current home for $150,000 and buy one you like for $170,000 and use all the sales proceeds (after subtracting 10% for costs) as a downpayment, you should end up with a $128,054 mortgage at perhaps 5% today.
Using this scenario, here are the costs associated with upgrading to a new home:
- Amount already paid during first five years of current home loan: $35,973.
- Cost, including principal, of $128,054 mortgage over 30 years at 5%: $247,472.
- Total: $283,445.
There are other ways to ballpark these numbers, such as with the Remodel or Move calculator that goes with the book by the same name. That tool also concluded that moving in this case costs more than remodeling.
Intangible Costs and Benefits
Of course, the decision to stay or go is about more than just the numbers. Here are some considerations:
- How much do you like your neighborhood?
- Do you have kids in school? Are they doing well there?
- How's the commute to work?
- How will a stressful remodel affect your relationships?
- Do you like the idea of putting a personal stamp on your home?
- Do you prefer to just buy what you need?
The conventional wisdom is that every move and home purchase sets back wealth-building because of the high cost involved. Maybe you can avoid an expensive move with an economical remodel. You might also consider the following changes, which are cheaper:
- Recycle. Get rid of all the stuff you don't use that makes your home feel too small.
- Refurbish. Instead of gutting your kitchen, installing new countertops, refacing your cabinets and refinishing your floors may be all you need to do to give it a new look and feel.
- Re-purpose. If your little ones need a playroom and the only time you use the formal dining space is at Thanksgiving, turn it into a fun zone. You probably just need some bright paint, pillows and toy boxes.
Regardless of what you choose, keep in mind that new homes and renovations are luxuries. Consider them only if your emergency funds are topped off and your retirement accounts are taken care of.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.