Homeowners often consider moving when they feel they’ve outgrown their current house. However, moving may not be the best decision if you’re basically happy with your current location. Rising housing prices are making remodeling a more popular option for increasing the size of your home or otherwise improving your living space. Business forecaster Kiplinger predicts that housing prices could increase by up to 7% in 2020. Adding to the appeal of remodeling are the costs of selling your existing home and moving your belongings to a new one.
The decision to move or upgrade your home ultimately involves carefully weighing many factors. Most of them are financial in nature, but non-financial considerations are also important when making this choice.
The equity you have in your current home may be a factor in determining whether you should move or remodel. Equity is essentially the portion of the home that you actually own. You can calculate it by subtracting the balance on your mortgage from the market value of your home. For example, if your home is worth $250K and you still owe $100K on it, your equity is $150K ($250K - $100K).
If you are thinking about moving, the equity in your existing home will be unlocked when you sell and can be used as a down payment on your new home. Conversely, if you are thinking about remodeling, the equity in your home can be unlocked by taking out a home-equity loan or home equity line of credit (HELOC).
The amount of equity that you have in your home can influence your choice. If it is relatively low, the fixed costs involved in selling your existing home and buying a new home may eat up much of your equity, making that a less attractive option. Tapping that equity with a home-equity loan to remodel might be the better choice in that scenario. On the other hand, if you have significant equity in your house, costs will not be as much of a factor and you will have the makings of a nice down payment on a new home.
Using your equity to pay for remodeling generally takes the form of a home-equity loan or HELOC. Both of these financial products are loans that use your equity as collateral, although the payment methods differ. A home-equity loan provides the entire loan amount as a lump sum payment when the loan is approved, while a HELOC establishes line of credit for the value of the loan amount. Some lenders offer products that combine the characteristics of home equity loans and HELOCs. For example, Figure’s Home Equity line provides borrowers with the loan amount upfront like a home equity loan, but also creates a line of credit that borrowers can continue drawing on as they make payments1.
Homeowners who decide to remodel may realize that they want specific changes in their existing home rather than a completely different house. By remodeling, they can end up with a house that meets their exact specifications. Even a major change such as adding a new bedroom can be an easier way of finding the home of your dreams than starting the house-hunting process over again.
You should also strongly consider remodeling if you like the schools and neighborhood in your current location. These factors may not be financial in nature, but they can have a tremendous impact on your quality of life.
Moving may be the only way to accomplish your goal in some cases. For example, even a complete remodeling project can’t solve some problems, such as a house built on unstable ground. Likewise, covenants and other legal restrictions may prohibit residents from remodeling certain types of housing such as condominiums.
Furthermore, remodeling is unlikely to provide a positive return on your investment (ROI) if you're trying to increase your home's resale value. Some specific modifications such as solar panels or energy-efficient windows may eventually pay for themselves through energy savings. Larger projects may well increase the value of your house, but it's rare for that increase to exceed the remodeling cost. Remodeling Magazine's 2018 Cost vs. Value Study shows that the average ROI on a minor kitchen remodel is 81%, meaning that you can expect to recoup 81% of this project's cost when you sell your house. Larger projects tend to have an even lower ROI; the same study reports that the ROI on a major kitchen remodel is only 59%.
Another factor to consider is that remodeling tends to be stressful, especially for large projects. In addition to your normal personal life, you have to deal with issues such as budgets, contracts and contractors. You also have to make many decisions throughout the project that can seem minor at the time but have expensive ramifications down the road.
Furthermore, you must accept the fact that a major renovation will require you to live in a construction zone for a prolonged period, sometimes months in the case of a room addition. In the worst case, you may have to live elsewhere until the project is completed. This is particularly true for projects that require plumbing and electricity to be unavailable for long periods. Add to those irritations the potential project delays that can be caused by weather and budget overruns.
A decision to move or remodel isn't based on hard-and-fast rules, because many of the factors are subjective. Answering the questions that are most important to you is vital. Both courses of action can be highly expensive, so you need to ensure that you can afford whatever decision you make. Unless your house needs an essential repair now, you may be able to wait to get the home you want. You also need to anticipate how your personal life will change in the coming years before making your choice.
1 The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.