How to increase home value
Want to know how to increase home value through a renovation? That’s a worthy ambition that can help you build wealth through home equity.
As you might suspect, not all improvements increase a home’s value by as much as they cost. So when you’re pondering how to increase the value of your home, remember that some renovations offer better returns than others. The key is to do your research and prioritize those that will raise the resale value of your home.
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When you’re selling now
If you wish to sell your property now or very soon, you may not have the time to undertake a large renovation. Therefore, it’s best to stick to inexpensive enhancements that could make an impact quickly. These include:
- A deep clean
- Redecorating rooms in neutral shades
- Fixing apparent defects such as cracked or broken sidings, windows and roof tiles
- Getting the yard into shape
- Increasing the home’s curb appeal
These should make your home immediately sellable and could increase its value more than the small costs involved. Other than that, only replacing an iffy garage door will likely pay for itself immediately.
When you’re investing in the future value of your home
When a business invests to improve its profitability, it looks at its “return on investment” (ROI). It asks how much extra profit a project should generate over the long term and how far into the future the investment will reach the break-even point. That’s when the investment stops being a drain on profitability and starts adding to it.
Things are a little different for homeowners, but not significantly so. First, certain big-ticket home improvements could end up costing more than the value added to the home.
However, as home prices rise, the value of the improvements goes up, too. It’s hard to predict break-even points because they depend on how quickly home prices will rise, and most forecasts for that particular trend are unreliable.
Despite the uncertainty of how quickly you might see your investment pay off, one thing is true. You’ll be living in a more attractive and comfortable home, which will always be more attractive to potential buyers.
We’ll be covering which projects are most likely to generate an ROI quickly a little later in this article.
Home renovation trends overview
If you do a web search for 2023 home renovation trends, you’ll find a ton of ideas. HGTV reckons home offices and “emotional escape rooms” are popular. U.S. News stresses energy efficiency improvements and disaster-proofing properties against things like hurricanes, floods and other threats from climate change. And Forbes focuses mostly on color choices.
The important thing is not to chase here-today-and-gone-tomorrow fashions. Your investment depends on homebuyers still liking what you’ve done years down the road. And this year’s hot trend might look very dated by then.
When you’re deciding how to increase home value, choose the perennially popular. Of course, you can indulge your personal tastes. But, if they’re a long way off the mainstream, be ready to change them back to match your target market’s tastes when you come to sell. And bear in mind the cost of doing that when you’re choosing your projects.
2023 home remodeling study from Today’s Homeowner
Today’s Homeowner, the website behind the TV and radio shows of the same name, conducted a detailed study to establish the average cost and expected value added to the home in 1,200+ U.S. housing markets across 34 remodeling projects.
Where you live is important
And one of the first things it discovered was that different property markets provide different ROIs on home improvements. So, the average project in Hawaii adds 89.3% of its cost at once. But, in Oklahoma, its instant ROI is only 64.6%.
Where you live will greatly affect how quickly your project breaks even. There’s a map on Today’s Homeowner’s site, which you’ll find by clicking that last link, and it shows the ROI for the average project in each state.
The home where you live also makes a big difference to your ROI. From a financial point of view, few ultra-high-end remodelings are likely to ever reach the break-even point if they’re carried out in midrange homes.
Real estate agent Lois Magee gave an example to the website: “In a midrange home, I would not expect to find custom inset cabinets or a Wolf Range or Sub-Zero refrigerator, but I would expect to see these (or similar level) products in a higher-end property.”
Of course, you’re free to carry out any project you want, regardless of your state and home type. But do recognize the potential financial penalties of overinvesting in your property.
Today’s Homeowner identified 34 different projects for its study. And only one provided a 100% instant ROI. That was the garage door replacement we mentioned earlier. Nationwide, on average, that upgrade cost $2,028 and added the same sum to the property’s resale value.
Which home improvements add the most value?
Several projects immediately added 90%+ of their costs to the home’s value. These were:
|Project||Cost $||Value added $||Cost recovery %|
|Wood window replacement||$6,893||$6,582||95.5%|
|Screened-in porch addition||$19,367||$18,000||92.9%|
|Fiber-cement siding replacement||$13,379||$12,400||92.7%|
|Vinyl siding replacement||$9,227||$8,400||91%|
|Vinyl window replacement||$3,941||$3,550||90.1%|
Clearly, these figures require a big dollop of common sense when applying them to your home. For example, window replacements can be a mostly cosmetic step in the warmest and sunniest places. But they can transform the comfort of the home in the snowiest states. So, homebuyers are likely to value them differently in those two environments.
Similarly, inground pools can be more or less attractive depending on the climate. You might be surprised to see them so high on the ROI list. Not long ago, many homebuyers perceived them as money pits, and real estate agents often fielded questions about the costs of filling them in. But the pandemic lockdowns have restored buyers’ interest in a home’s ability to keep its residents entertained without going out. So, they’re hot again.
Which projects deliver the lowest ROI?
Three projects provide an instant ROI of less than 50%:
|Project||Cost $||Value $||Cost recovery %|
|Midrange primary suite addition||$86,815||$43,250||49.8%|
|Upscale bathroom remodel||$29,199||$14,250||48.8%|
Again, these numbers must be viewed through a prism of common sense. For instance, suppose your finished basement provided an independent rental unit (subject to zoning and any HOA rules). The income from that, which you could pass on to succeeding owners, might completely change the math.
How to increase home value — Other projects
The two tables above show the top and bottom of the league of home improvements that add value to your property. Here, again, is the link to the webpage that shows the full list of 34 projects.
Check to see if the one you have in mind is there. Just remember to apply that common sense we keep mentioning. And don’t forget to use the map on that page to see if your state delivers a higher or lower ROI on such projects.
Is it time to renovate your home?
When should you renovate your home? There are many personal reasons why you might be ready to take on a home improvement project.
You might notice that people seeing your home for the first time react with less enthusiasm than they did when you first bought it. Or you might find yourself gushing over your friends’ homes. Don’t feel guilty about a twinge of envy. Think of it as two homes competing in the same housing market. You want — and need — yours to attract future homebuyers.
There’s another common trigger that’s purely practical. And it arises when your family’s lifestyle needs change. Maybe you need more space because your kids have hit the age when they need their own bedrooms. Or perhaps you’re working from home more and require dedicated office space. Or it could be that your elderly parents must move in with you.
If you resonate with the reasons mentioned above and have a lot of equity accumulated in your home, there are many creative strategies to put it to good use. One way to pay for your home remodel is to borrow against your equity. Your home equity could serve as an affordable means to finance home improvements, but more on that later.
You can calculate your home equity by taking your current property’s worth minus the amount of any existing mortgage on it.
Benefits of home renovation
Depending on the type of home you own, the sort of project you choose and the state you live in, it might take some time to see your improvements adding more to your property’s value than they initially cost. In some instances, they may never generate that return, most commonly during periods when home prices in your area fall.
But that doesn’t mean you should let your home become dated or run-down. All too soon, it will start to lose value rather than appreciate. And, when you eventually have to bite the bullet and invest to sell it, the work required may be more extensive and the costs might be higher.
Meanwhile, maintaining and improving your home at a level that gives you pride delivers one of the biggest benefits of homeownership. And you’ll have somewhere to live that’s comfortable and stylish.
Don’t forget that some home improvements deliver extra cost benefits. We already discussed the positive impact that a rental unit in your basement could have on your household budget. Or energy-efficiency projects which can cut utility bills while keeping your home perfectly warm or cool, as needed.
Ways to pay for home improvements
If you’re ready to explore how to increase home value, ultimately, through improvement projects, you’ll need to decide how to pay for them. Let’s run through some obvious options.
Save and pay cash
Paying cash is typically the best way to pay for anything. You don’t pay interest or monthly payments and you don’t need to budget for any additional monthly payments.
Sadly, only some of us have sufficient spare savings to fund a major home improvement project. However, many homeowners do have quite a bit of equity built up after property prices appreciated during the red-hot pandemic. This leads us to the next way to pay for home improvements.
Home equity line of credit (HELOC)
A HELOC is a second mortgage that is highly flexible. It lets you borrow against your own home equity and pay a relatively low (but variable) interest rate only on your balance.
When you borrow against the equity in your home, your property is used as collateral for the line of credit. Similar to a credit card, when you pay your outstanding balance, the amount of available credit is replenished.
If your plans are still at the preliminary stage or you’re the sort of person who invariably pushes your budget envelope, you might appreciate this financing’s flexibility. But read up on HELOCs before you choose one because there are complexities you need to understand.
Home equity loan
A home equity loan is another type of second mortgage. But this is a straightforward, low-interest, fixed-rate, installment loan. So you receive a lump sum and make equal monthly payments through the term (length) of the loan.
The biggest benefit of a home equity loan is that you can cash out your home’s value without refinancing. That makes it a good financing option for a home remodel, especially when mortgage rates are high.
Conservative, safe, predictable… What’s not to like about these home equity loans?
Fannie Mae HomeStyle renovation loan
The HomeStyle loan is great if you’re buying a home that needs renovation. Instead of a purchase mortgage, a renovation loan, and then a refinance to combine the two, you get just a single mortgage with 3% down. And that could save you a bundle in closing costs. Freddie Mac’s ChoiceRenovation loan is very similar.
At one point in time, numerous homeowners would refinance their mortgages to HomeStyle ones to fund home improvement projects on their existing homes. But this refinancing is less popular today because — when this was written — new mortgage rates were higher than most existing ones. And in those cases, it makes little sense to refinance to a higher rate.
FHA 203(k) mortgage
The FHA 203(k) mortgage is very similar in concept to Fannie’s HomeStyle and Freddie’s Choice renovation. The main differences are that you need a 3.5% down payment and will be stuck with mortgage insurance until you move, refinance, or pay off the FHA loan. You’ll probably choose this one if your credit score is below Fannie and Freddie’s thresholds.
The FHA loan also shares the same refinancing issue. You’ll almost certainly have to pay a higher rate on your 203(k) loan than you’re paying now. So, you’re less likely to want one of these for your existing home.
A cash-out refinance lets you borrow for any purpose. And, if that purpose is home improvements, that’s perfectly acceptable. You might even get tax breaks if that’s the case, just as you may with the Fannie, Freddie, and FHA loans.
But you know what’s coming next. You’re unlikely to want to refinance to a loan with a higher rate than your existing mortgage. If you hang around long enough and mortgage rates tumble again, all these refinance options may be back on the table. But, unless you’re among the tiny number of homeowners paying a higher rate than you can get today, move on.
Zero-percent credit card
One of these can be great if you need a few hundred dollars to cover paint and basic repairs. But note two potential drawbacks, especially if you’re planning to apply for a mortgage or any large loan soon:
- You need to keep the balance on each and every one of your credit cards below 10% (30% at a stretch) of your credit limits. And that applies to this new one, too. Let your balances stray above those levels and you risk harming your credit score
- Applying for any new credit account could harm your score a little for a few months. But even a slight decrease can sometimes affect your application for a new mortgage, auto loan, or other borrowing. And it could mean you shift into a worse credit score range that pushes up your loan rate
If you choose to go the credit card route to pay for home improvements, here are some great options to consider.
One alternative to a card is a personal loan. You’ll pay interest but can’t avoid the second hit to your score from applying for any new credit.
Next steps — How to increase home value and make savings
Are you ready to move forward with a home improvement project?
The first rule when borrowing large sums is to shop around for your best deal. And we can do some of the work for you. Fill in a simple form and review loan types, rates, and terms from several lenders to find the best loan for home improvements.
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