Is Your Home Improvement Project Worth the Expense?

Is Your Home Improvement Project Worth the Expense?

Planning a home improvement project can be exciting. Whether you’re renovating your kitchen, adding a deck, remodeling the bathroom, or installing a pool, the one question that often arises: will the expenditure for the home improvement project increase the value of my home?

For most people and projects, the answer depends on several factors.

What Impacts the Value of Home Improvement Projects?

Location
A few crucial factors that determine the value of a home improvement project is the location of your residence and current market conditions. The demand for certain renovations varies based on the housing market and the area in which your home is located. A buyer will typically be attracted to a specific area or neighborhood because of the price range or nearby amenities. If you make renovations that exceed those in other similar homes in the area, it doesn’t mean a buyer will pay more for your home just because of the extra improvements.

Competition
If improving the value of your home for a quick resale is important, study the market before starting any renovations. Explore upgrades made to other properties on the market to see how your home compares. If you’re seeing updated bathrooms and yours looks like the 1980s, you may want to move ahead with those reno plans.

Workmanship and Materials
Spend time reviewing contractors and products before beginning any project. The quality of materials and workmanship can influence the perceived value of your renovations.

Personal Enjoyment
Don’t base your decision solely on the return on investment when it comes times to sell. Upgrades such as adding a pool or creating an outdoor living space can improve the way you use your home, the enjoyment it provides, and your quality of life.

It’s hard to quantify investments like these in dollars, so don’t discount a home improvement simply because you won’t recoup the cost when you sell. Consider the emotional satisfaction of a project in addition to any increase in monetary value.

What are Popular Home Improvement Projects?

Although kitchen remodels are one of the most popular ways to add value to homes, they can be pricey, ranging from $64,000 to more than $125,00 or more, depending on your contractor and the finishings you choose. And you may not recoup the full investment of a complete remodel, particularly if you plan to sell in the next few years. The average return on investment for a full kitchen upgrade is only about 54%. If you spend $100,000 on a kitchen remodel, you could reasonably expect about $54,000 to be added to the total value of your home.

If you plan to sell your home soon, consider refreshing the look and feel of your kitchen rather than completely remodeling. Painting the walls and trim, updating hardware, upgrading appliances, installing new countertops, and refinishing cabinets can make a significant impact on the visual appeal your kitchen for a fraction of the cost.

Bathroom renovations are another popular home improvement project. They typically cost between $20,000 and $67,000 with the average return on investment running at about 64%.  Given these statistics, it may be more cost effective to make smaller updates such as installing modern fixtures, painting walls and existing cabinets, and updating flooring.

Other popular renovations include adding a deck or patio to enhance outdoor living spaces and create additional entertainment areas. Also, eco-friendly upgrades, such as solar panels or insulation, are gaining popularity due to the long-term, cost-saving potential. According to a recent survey, 81% of potential buyers look for ENERGY STAR-Rated Appliances.

How to Pay for Home Improvement Projects?

If you decide a home improvement project is right for you, the next step is determining how to pay for your project. You may be able to make small refreshes and improvements using cash on hand. Bigger remodels can be more cost-prohibitive and may require financing. Price your updates, look at your savings, and carefully consider your options if decide to borrow funds to finance your plans. 

One option is a cash out refinance. With this type of loan, you refinance your home, which is a new mortgage loan, and you can take out some or all of your accrued home equity as cash. The money can help fund home upgrades, and, if used in accordance with current tax laws, may even provide you with deductible interest for your tax return.*

Another option is a home equity loan or line of credit. These tools may also allow you to borrow against the equity you have built in your home. Payments go toward principal and interest, allowing you to rebuild the equity quickly. In addition, interest may be tax deductible, if you can demonstrate the funds were spent on home improvements.*

If increasing the value of your dwelling is the goal, weighing all these factors will help you determine whether it’s worth it for you to fully renovate an area of your home, add outdoor amenities, or simply spruce up the place with a light touch. Regardless of your choice, your bank is a valuable resource when it comes to funding home upgrades, and your banker or mortgage loan officer are your allies when you are looking for the right financing solution.

* FNBO and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.