Get the whole financial picture before you begin
Sit down and add up what the job will entail from start to finish, from nails and materials to outside help, as this can completely affect your payment or loan plan. “It’s typical for people to start a small project (say, tiling the bathroom), and just put the items they’re buying on a credit card,” explains mortgage specialist Karen Deis, founder of Mortgage Girlfriends, an online community for female real estate agents. Until you peel off the old stuff to find -- uh-oh -- your job will go much deeper into your walls and pockets than you thought. (Note: You can convert credit card purchases into a home loan, says Deis, but only the items used directly for the job will be covered. In case this happens, keep all your receipts.)
Consider hiring an inspector or an appraiser
If want to save yourself those job-stopping surprises in the middle of a renovation, an inspector can tell you what extra work might need to be done (is there a rotting pipe behind the kitchen walls?) so you can plan for it financially. An appraiser (usually hired by the mortgage company itself for major jobs like home additions) can tell you if it’s worth it.
Talk to local real estate agents to find out what you should be spending
Reason being: After renovations, you want the value of your house to be in the same ballpark as the other homes in the area, explains real estate agent Karen Norris, author of The Real Estate Survival Guide: Secrets, Tips, and Lies From a Beverly Hills Super Agent. So if you paid $400,000 for your house, and other houses with modern kitchens go for $440,000, then you don’t want to pay more than $40,000 on your kitchen. Either call an agent to get the “comps” (prices of the comparable homes in the area) or go to realtor.com and look at the last six months of home sales in the area. Or, go to zillow.com to find the value of a prospective property. Experts agree that there's such a thing as “over-renovating” or “overbuilding,” and that can count against you if you plan to sell later. “You don’t want to be the $600,000 house in a $400,000 neighborhood, which is what could happen if the value of your renovation puts your home in a new bracket," says Norris. "Your home won’t sell." To avoid a situation like this, don’t increase the value of your home to 25 percent more than the existing home values in the neighborhood.
Make sure you’re adding to the value of the house
If you’re serious about making long-term changes for the better, stick to the can’t-lose upgrades. The hottest things now? Stainless steel in the kitchen is big. So are Viking and Bosch appliances (if you can afford them) and real wood floors and granite countertops. “The old tried-and-true things like natural wood and stone will always be valuable,” says This Old House’s Tom Silva. Open spaces are also a big sell: “People love open kitchens that are clean, bright, and airy,” says Norris. But one thing that’s losing value: pools. “People make a mistake by putting in a pool to increase the property value of their home,” says Deis. “People don’t lie out in the sun anymore. They want property for their kids to play on or little koi ponds to look at, and removing a pool is costly.”
Now, the cash part: Decide how best to pay for it
Basically, you’re probably going to need to take out a home equity loan. That’s the umbrella that covers your two options: Either (a) an open-ended loan, which is like credit card debt that you charge as you go along, or (b) a “cash-out” refinance, which means you literally take the cash in one lump sum and pay for what you need. Most refinances will give you up to 75 percent of your home’s value, though lenders differ in how much “cash” you can take out. Deis says neither way is more effective. It’s a lot like lottery winnings: Some people like having that big chunk of money from a cash-out refinance up front, but keep in mind that you'll pay more interest on that one lump sum than if you borrowed a little bit at a time. (Assume for 2 or 3 percent over prime for interest; right now, prime is about 5.25 percent, so plan to pay a little less than 7 percent in interest. So on a $100,000 home equity loan, your monthly payments will come to around $650 a month.)
Plan for funds to cover the renovation plus 10 to 25 percent for unexpected expenses
Jobs always cost more and last longer than you think, so plan accordingly. To determine if you can afford your renovation, says Deis, add up your mortgage payment, taxes, insurance, and home equity refinancing -- they shouldn’t exceed 30 percent of your gross income.
by Amy Spencer
6/19/08
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