Home Economics: Renovate Carefully

Americans are on a home renovation binge. The remodeling experts at Harvard’s Joint Center for Housing Studies estimates that we will spend more than $350 billion on remodeling in the next 12 months, an increase of more than 7 percent.

Rising home values are increasing owner’s confidence that spending on improvements will be a good investment. Meanwhile, the low inventory of homes for sale makes it hard for families to trade-up; remodeling the home you own can be the practical “move” when making a real move isn’t feasible in your area.

This is where my mantra of “Live Within Your Means, But Below Your Needs” can be so very important to your financial security.

• Is it a Need or a Want? If you are planning a major project, I hope you ask yourself this question. You need to replace the aged roof. You want to renovate the dated bathroom. No one who has credit card debt, lacks an eight-month emergency fund or isn’t on pace with retirement savings should spend money on home renovation wants.

• Be Wary of Home Equity Lines of Credit. If you intend to borrow money to finance a big renovation project, a HELOC can be a risky choice. Most HELOCs have a variable interest rate that changes along with general rate changes in our economy. We are now in a period where interest rates are beginning to rise. I anticipate this will continue. That means money you tap in a HELOC can cost you more over time. If you think you will need more than a year or two to pay back this money, I recommend you consider a Home Equity Loan instead of a HELOC. The interest rate on a home equity loan is fixed, meaning it will not change. The interest rate on a home equity loan will be higher than the initial rate on a HELOC. That’s okay. I want you to focus not on what you pay right now but protecting yourself from the risk of the HELOC payments rising in the future.

• Think of Your 75-Year Old Self. If you live in a home you intend to retire in, keep your older self in mind as you plan a major renovation. A bed and bathroom on the first floor. A bathroom with a wider doorway and interior space that can easily accommodate a walker. More and better lighting. There are many online resources for small and big home renovation projects that can help you “age in place.”