To Remodel or Not To Remodel?
Keeping up a home for 30 years may cost you up to four times its purchase price. Is it smarter just to buy another home every 10 years? Here’s how to decide.
Americans love (or say they love) to remodel
There are, of course, plenty of people who are happy with their renovations, and remodeling is certainly a thriving business. Americans spent $233 billion last year fixing up their homes, according to Harvard University’s Joint Center for Housing Studies, and the boom shows no signs of slowing.
For many people, though, moving is the simpler, less expensive and certainly less stressful option.
At first glance, there seem to be plenty of cost advantages to staying put and renovating. If home prices are accelerating rapidly in your area, you may be able to add on for less than it would cost you to buy a bigger home.
You also avoid the considerable costs of selling your home, buying a new one and moving, which can drain away 10% or more of the value of your home each time you change abodes.
Does buying and staying really pay off?
In fact, the conventional wisdom about building wealth is that the fewer times you move in your lifetime, the better.
Let’s say you have two homebuyers, each starting out with a $100,000 home. The first buyer stays put for 30 years, while the second moves up to a bigger, more expensive house every 10 years.
As you can see, the move-up buyer can wind up with a much more valuable home. But this buyer also paid more over the years in monthly mortgage payments, and he still has 20 years left on his final loan. Factor in those two things, and the buy-and-hold homeowner seems to come out ahead.
This example assumes each home is financed with a 6% 30-year loan and that all homes appreciate by 6% a year. Any equity, minus selling and moving costs, is applied to the next house.
Our example doesn’t factor in the higher utility, insurance and property tax payments our move-up buyer would have to make. And our buy-and-holder might be even further ahead if she invested an amount equal to the difference between the mortgage payments she was making and those she would have made on a more expensive house.
Some expenses this equation doesn’t consider, though, are the costs of maintenance, repairs and updates. These are far more than most homeowners realize.
What are the real costs involved?
Getting a handle on costs may be one of the toughest parts of any move vs. remodel decision, largely because renovations can be hard to predict. Once you tear into a wall or start excavating, who knows what you’ll find? An architect can help give you a ballpark on a remodel, and she may even point out some ways to save money.
But for the real scoop, you’ll need to get detailed quotes from a few contractors or builders who do work of the same type and quality that you want.
Remodeling veterans recommend building in a safety net by adding 10% to 20% to whatever estimates contractors give you. Then consider:
* The out-of-pocket costs of construction (any savings or other funds you plan to devote to the cause).
* The cost of any financing (usually your monthly payments multiplied by the time you plan to remain in the house).
* If you’re adding on rather than renovating, the cost of higher utility bills, bigger homeowner’s insurance premiums and greater property taxes from your additional space.
When computing the costs of moving, consider:
* Real estate commissions, closing costs and moving, which typically equal 10% or more of the house you’re selling.
* The cost of the new, presumably bigger mortgage, multiplied by however long you plan to be in the house.
* The cost of higher utility bills, bigger homeowners insurance premiums and greater property taxes over the same period.
* Any new furniture, window treatments, landscaping or other the years.
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