The pandemic has put many people in the mood to renovate their homes. Between spending way more time at home and not being able to spend money on traditional entertainment such as travel, sports, shows, and fine dining, homeowners are wondering whether now is the time for that new pool, deck, kitchen remodel, or home-office addition. And the arrival of stimulus checks has served as the extra push some folks needed to pick up the phone and call a contractor to put things in motion.
Home renovations vary from small to large, indoors to outdoors, and cosmetic to structural, but they all have one thing in common—they cost money. If you’re contemplating a major home renovation, getting a loan might be a good option. I’ve been in real estate for more than 45 years, and I cannot remember a time when interest rates were so low. If you have enough equity in your home and you haven’t refinanced in the last year, you might consider doing so to fund your renovation project. A 30-year fixed mortgage will allow you to pay for your renovation at a very low rate and over a very long time.
Other good financing option is a line of credit, especially if you believe you’ll be able to repay the loan relatively quickly, like in the next few years. If you know you’ll be coming into some money, for instance your 102-year-old Great Aunt Mathilda has told you she plans to leave her estate to you or your boss just promised you a big fat raise, a variable-rate loan could work well.
Even if you do not need a line of credit secured by your property right now, having one can provide a financial safety net that frees up money you may have just sitting in a savings account. With a line of credit you have quick access to liquid funds, allowing you to invest in a higher-yield option such as stocks or bonds (or more real estate!). Lines of credit are on a variable rate, so they are best for short-term needs. Before moving money around, check with your accountant. They can help you understand the tax implications of using a line of credit. I’m here to provide food for thought, not advice for action.
I will say that depending on the home improvement you undertake, your property tax bill may increase. You’ll need a permit to make structural changes, and as soon as you alert the county to your renovations through the permitting process, you can be sure they’ll want their pound of flesh in the form of a property tax reassessment. A reassessment should not trigger an automatic increase. Ideally, a reassessment estimates the increased value of your property, not the expense of the renovation. If you convert a garage into another bedroom, the value of your property may not increase. You are trading one valuable space for another. If, on the other hand, you renovate an outdated kitchen or add a second bathroom to a three-bedroom house, the value of your home will increase for sure. This is something to think about as you invest in improvements. If you never plan to move and you’re desperate for a pool, add one, but recognize that the $60,000 investment may only add $10,000 in value if you were to put your house on the market.
Finally, as you embark on this home renovation adventure, be sure to consider the disruption to neighbors. Talk to your contractor about respecting neighborhood parking (do not block driveways) and choosing a workday that works for everyone (don’t get started with loud machinery at 7:00 am on a Sunday morning).
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 45 years.