Move vs. renovate with a home equity loan

Are you finding your current home too small? Considering moving to a bigger place? Before you put your house on the block, consider whether it might be better to use a home equity loan to renovate your current home to meet your growing needs.

The first consideration is whether your home can be adjusted to meet your needs. Is your lot big enough for an addition? Will your foundation handle the weight of an extra floor? Plan out the changes you would make, and don’t jump into major renovations (and the expense that goes along with them) until you know they are feasible. Ask a professional renovator for an opinion.

Assuming the renovations are doable, think about the tangible and intangible costs of renovating compared to buying a new home and moving.

Financial costs
Whether you take out a new mortgage or a home equity loan, you’ll face closing costs that include fees for appraisals, credit reports and title insurance. A good estimate of how much your closing costs will be is two to six percent of your loan. A home equity loan is likely to be smaller than a new mortgage, so the closing costs will probably be lower.

If you are thinking of selling your home and buying a new one, you will also pay real estate commissions and seller’s closing costs, which together can total as much as 10 percent of the sale price of your home, or $20,000 on a $200,000 transaction. You must also factor in your moving costs, which can amount to several thousand dollars.

For tax purposes, you usually can deduct your interest payments on both standard mortgages and home equity loans used for substantial improvements.

All told, renovating is likely to be less expensive than moving up to a bigger house. However, you are unlikely to recoup all the costs of your renovations when you finally do sell your home.

Intangible costs
The decision between renovating and upgrading to a new house is not solely financial. You should also consider your time, energy and peace of mind.

Each choice has advantages and disadvantages. When deciding which is the best option for you and your family, consider the pros and cons of both:



Selling one house and buying another is a time-consuming and stressful activity. You will need to find out if your planned renovation meets zoning regulations, requires building permits, or needs approval from potentially affected neighbors.
You can find a house with everything you need, in move-in condition, and begin enjoying it immediately. By designing your own renovations exactly as you would like them, you can create your dream house!
By moving, you will avoid the discomfort of living for months in a dusty and noisy home. Renovations are messy, noisy and inconvenient.
If you move to a new neighborhood, you will have to uproot your whole family. This can include new schools for your children and a new commute to work. By staying in your current house, you will avoid the stress of being uprooted and moved to a new location.
When you buy a new home, you know exactly what you are getting into, financially speaking. You run the risk of major structural complications and cost overruns, so be sure of what you’re getting into.

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