Is it Time to Renovate?

Home renovation is a $500 billion a year industry. Although the average renovation will cost $10,000, many Americans will spend far more. While kitchens and bathrooms are the most popular rooms to renovate, all other rooms in a home will often get their turn. But when is it time to renovate from a value perspective?

With home prices near an all-time high and the 30-year fixed mortgage at 7.1%, this would seem like an opportune time to renovate. Since renovating will cost far less than buying, many families may not need a loan. And even if they do, they may qualify for a Fannie Mae or Freddie Mac renovation loan (depending mainly on your credit score) which allows you to borrow up to 97% of the cost of renovating. And although you’ll still face a higher-than-normal loan rate, the principal you’ll be borrowing will be far less, meaning the monthly payment will be far less, as well. Also, if you’ve locked in a lower mortgage years ago, renovating might make more economic sense than buying now when mortgage rates are far higher.
If the area you live in has seen home prices rise sharply, and you want to continue living in that area, it might also make more sense to renovate than to buy. However, if for example, a job offer you are considering would involve moving to a less expensive area, it might pay to sell your home, take the profit, and then spend less on a home in a new area, pocketing some extra cash.
Renovating can also keep you out of bidding wars in hot markets. "Renovating may be wise in an increasingly competitive market such as South Florida, where it is often challenging to find desirable properties without high competition among buyers," says Carolina Gerdts, executive vice president at RelatedISG Realty.
Another reason to renovate instead of buying a new home is you can increase your home’s value and livability in a way that creates more long-term gain and/or comfort.
Also, you will find that renovating avoids the whole real estate transaction process and its various costs (lawyers, transfer taxes, appraisers, etc.). "Renovation can often be more cost-effective than purchasing a new home due to selling and buying costs such as closing costs and moving expenses, all of which can add up significantly," says Gerdts.

But sometimes a new home option is the wiser choice.

When the real estate market in the area you want to move to is at a reasonable rate.
When renovation rates are too high. Sometimes the construction costs in your area can be very high. And although you’ll usually borrow less in absolute dollars for a renovation, the rates are higher for home equity loans, lines of credit, and renovation loans than for mortgages.
Sometimes a home needs such an extensive, and therefore expensive, renovation that buying becomes a more sensible option. "If your current home has significant structural issues or requires major repairs, it may be more cost-effective to purchase a new property. Renovating a home with major structural issues can be expensive and time-consuming, and there is no guarantee that the repairs will completely fix the problem," says Adie Kriegstein of Compass Real Estate. And remember, renovating may sound like an easier endeavor than buying, but don’t be fooled. It can be very complex and costly, as well. "Buying may be more practical to avoid expenses and time-consuming renovations that might only partially resolve some problems," says Gerdts. "Construction to add significant space can also be expensive and sometimes not even feasible due to local zoning restrictions.” Buying a new home can also be the sensible choice if you want to change your location (a new job, high crime, better school district, etc.).