Over time, homeowners recognize the value of paying to improve their houses in manageable increments. Popular projects include room upgrades with energy efficient appliances, installation of cost-cutting HVAC systems, added decks and recreational space, and rooms that support changes in family size. Improvements, chosen carefully, can pay dividends over time in protecting or increasing the value of the property. Those who plan on retiring in their current homes may face decisions on home modifications and how to pay for them.
Home Equity Loans and HELOCs
A home equity loan or home equity line of credit (HELOC) is a solid financing option for those who can't pay cash for much-needed repairs or improvements. Both loans are often referred to as "second mortgages," and both are secured by a residence. The homeowner with a good credit score can borrow against 80 to 90 percent of the property value.
The home equity loan is best for those who want a fixed interest rate and need a large sum -- for example, to pay a contractor for a home addition or major remodel. The HELOC is a revolving line of credit with a variable rate, and that's best for a series of smaller projects or a long-term ongoing renovation -- when facing improvements and repairs with costs that are uncertain.
Put the Home Equity Loan to Work
Homeowners/borrowers would do well to examine Remodeling Magazine's Cost Vs Value Report for 2014 before planning a project. The magazine ranks common remodeling or improvement projects each year based on the return of investment (ROI) in increased home value. Choosing high-return projects makes sense given the cost of labor and materials.
The following projects topped the magazine's national list. They are organized by project name, cost to complete, and percentage of ROI:
- Attic Bedroom $49,438, 84.3%
"Convert unfinished attic space to a 15-by-15-foot bedroom and a 5-by-7-foot bathroom with shower."
- Deck Addition, wood, $9,539, 87.4%
"Add a 16-by-20-foot deck using pressure-treated joists supported by 4x4 posts anchored to concrete piers."
- Window Replacement, vinyl, $9,978, 78.7%
"Replace 10 existing 3-by-5-foot double-hung windows with insulated vinyl replacement windows. Wrap existing exterior trim as required to match."
- Major Kitchen Remodel, $54,909, 74.2%
"Update an outmoded 200-square-foot kitchen with a functional layout of 30 linear feet of semi-custom wood cabinets, including a 3-by-5-foot island; laminate countertops; and standard double-tub stainless-steel sink with standard single-lever faucet. Include energy-efficient wall oven, cooktop, ventilation system, built-in microwave, dishwasher, garbage disposal, and custom lighting. Add new resilient flooring."
- Bathroom Remodel, $16,128, 72.5%
"Update an existing 5-by-7-foot bathroom. Replace all fixtures to include 30-by-60-inch porcelain-on-steel tub with 4-by-4-inch ceramic tile surround; new single-lever temperature and pressure-balanced shower control; standard white toilet; solid-surface vanity counter with integral sink; recessed medicine cabinet with light; ceramic tile floor; vinyl wallpaper."
The report also rounds up project ROIs by region. Here are few top-rated upgrades from across the U.S:
- New England, Deck Addition, wood, $10,116, 101%
- North Central, Garage Door Replacement, $1,553, 83%
- South Atlantic, Entry Door Replacement (steel), $1,119, 101%
- Pacific States, Window Replacement (vinyl), $11,220, 113%
- Southwest, Basement Remodel, $56,110, 92.0%
ROI Depends on Mortgage Rates
One part of the cost of remodeling is financing the improvements. The more the borrower can keep financing costs down (for example by shopping for the best rate and terms for home equity loans), the higher the rate of return on investment.