This has become one of today’s homeowner’s biggest questions. Do we remodel a home that’s not working for our family, or do we pull up stakes and move? Let’s break down what this could actually look like for a family today. Meet Mike and Sarah. They live in a charming bungalow with their family, tucked away in a suburban neighborhood replete with lush green yards and cheerful, waving neighbors. It was picturesque, almost idyllic. But the facade masked Sarah and Mike’s growing discontent. The discomfort in her home was akin to wearing a pair of shoes that were too tight – functional but a constant source of annoyance. 

Their current interest rate on the home mortgage was 3%, an enviable figure by today’s standards. However, their house had aged over time, and wear, and tear had taken a toll. The cracks were now visible. The creaking stairs, faulty plumbing, outdated kitchen, lack of an additional room, and everything prompted them to think: should they move or renovate?

Financial Implications in Today’s Climate

With the current high-interest-rate environment, the financial implications of their decision become even more critical. Moving homes is a substantial step and one that comes with significant financial implications. First, let’s tackle the increase in the mortgage rate. At a 3% interest rate, they enjoy a relatively low cost of borrowing, something that will undeniably change if they decide to move.

The Cost of Selling Their Home

Assuming they sell their current home and purchase a new one at the current interest rate of over 6%, the increase in mortgage payments can be substantial. For example, If they purchase a $500,000 home with a $300,000 mortgage over 30 years at 3%, it would have a monthly payment of around $1,265 (principal and interest.) The same loan at 6% would cost about $1,798 per month. That’s an extra $533 per month or nearly $6,400 annually. Over the life of the 30-year mortgage, that is an increase of $192,000.

In addition to the increased mortgage payment, there are other costs to consider: realtor fees are 5.37% of the purchase price of the home, and closing costs are between $9,000-$10,000 when purchasing the new home. At a minimum, the fees will be about $36,850, and that doesn’t even touch the moving expenses, potential repairs or renovations in the new home, and the less tangible cost of the stress and upheaval of moving. 

The bottom line is it will cost Mike and Sarah an additional $228,850 to move to a new home at a higher interest rate over the life of a 30-year loan.

The Cost of Remodeling

Renovation, on the other hand, was a promising alternative. Mike and Sarah could mold their existing home to her liking, remedying the faults and adding that much-needed space. They thought a remodel might make their space more functional, and they’ve always loved beautiful design, but how would it even work? It was an exciting prospect, an opportunity to refresh her living space without giving up the home’s intrinsic charm. 

Mike and Sarah will need to finance their renovation and are looking at possibly getting a HELOC. What is a HELOC? A Home Equity Line of Credit, or HELOC, is a revolving line of credit that uses your home as collateral. In essence, it allows homeowners to borrow against the equity they’ve built up in their homes. The credit limit is usually determined by a percentage of the home’s appraised value minus the amount owed on the home.

The cost of a HELOC can be broken down into three components: interest payments, principal repayment, and potential fees.

To illustrate, let’s use an example. If Mike and Sarah take out a $100,000 HELOC with an initial interest rate of 8%, the monthly interest cost would be $660. However, keep in mind that the interest rate on a HELOC is variable and could increase over time.

Fees are often associated with opening a HELOC. Depending on the institution, these could include application, appraisal, and annual fees, among others. You are typically looking at $250-$750 in fees

So let’s break that down. Mike and Sarah have a $300,000 mortgage that, over 30 years at 3%, would have a monthly payment of around $1,265. With the addition of the $100,000 HELOC at an 8% rate, they would add a $660 interest payment to their monthly costs along with whatever principal payment they would like to make each month. They would also have initial fees of $250-$750. 

Let’s say that’s an extra $1000 per month or nearly $12,000 annually. For as long as they have that line of credit. They can choose to keep that going until it is paid off in about eight years, or when rates come back down, they can refinance and roll the remaining balance into their new mortgage payment. 

Here’s the bottom line, Sarah and Mike will pay roughly $64,110 in interest and fees to improve their existing home.

Financing Home Renovation Projects

The HELOC isn’t the only option for financing a home renovation. You can always save and pay cash, but if that isn’t in the cards for you at this point, we have several options for financing your desired remodel. 

1. Home Equity Loans: This is a type of loan where you borrow against the value of your home. While interest rates may be higher than in past years, they can still be lower than personal loans or credit cards. This is a good option if you have substantial home equity and a solid renovation plan.
2. Home Equity Line of Credit (HELOC): As we highlighted before, A HELOC is a revolving line of credit that uses your home as collateral. This offers flexibility as you can withdraw funds as needed throughout your renovation project. However, the fluctuating interest rates can be a downside in our current economic climate.
3. Cash-Out Refinancing: This involves refinancing your mortgage for more than you owe and using the difference to fund your renovation. This might be advantageous if you can secure a lower interest rate than your current mortgage, but remember, overall interest rates are higher now.
4. Renovation Loans: Some loans, such as the FHA 203(k) loan, are specifically designed for home renovations. These can be beneficial as they roll the cost of the home and renovation costs into one mortgage. 
5. Personal Savings: If you’ve been diligently saving, using your personal savings can be a cost-effective way to finance your renovation, avoiding paying interest entirely.
6. Private Lending: Some contractors offer in-house home improvement financing through their company. 

Home Renovation vs. Relocating: Pros and Cons

With all of that, Mike and Sarah need to run through some pros and cons. Financially what makes better sense? What will work best for their family and their overall financial and mental health?

Remodeling: A Fresh Perspective on Familiar Ground

Remodeling is a popular choice for many homeowners, offering the opportunity to transform their current house into their dream home.

Remodeling Pros:

1. Personalization: Remodeling allows you to customize your home according to your preferences, ensuring that it reflects your unique style and meets your family’s specific needs. You can also select a timeline that works for you and your family.
2. Financing rates: Typically, interest rates for construction loans are also quite a bit lower than mortgage rates. Therefore becoming a better financial option for many people.
3. Increased property value: Well-executed remodeling projects can boost your home’s market value, providing a potential return on investment when it’s time to sell.
4. Emotional attachment: If you have a strong emotional connection to your current home, remodeling can be a way to preserve and enhance its sentimental value.
5. Cost-effectiveness: Remodeling can be a more affordable option compared to purchasing a new home, especially if you love your neighborhood and don’t want to bear the expenses associated with moving. 

Remodeling Cons:

1. Disruption and inconvenience: Remodeling projects can be messy and disruptive to your daily routine, especially if you plan on living in the home during renovations.
2. Uncertain outcomes: There is always a degree of uncertainty associated with remodeling, as unforeseen challenges or complications can arise during the process, potentially leading to delays and additional expenses.
3. Limited options: Depending on the layout and structure of your current home, there may be limitations to what can be achieved through remodeling. Certain features or expansions may not be feasible or may require significant structural modifications.

Relocating: A New Adventure

Relocating, on the other hand, offers the chance for a new start in a new environment that might better suit your evolving needs.

Relocating Pros:

1. Fresh start: Moving to a new home offers the opportunity for a fresh start, allowing you to reimagine your living space and create new memories in a different environment.
2. Access to desired amenities: Relocating can provide access to amenities, such as schools, parks, shopping centers, or recreational facilities, that better suit your lifestyle and preferences.
3. Potential for improved functionality: If your current home lacks essential features or doesn’t meet your evolving needs, relocating can allow you to find a home that offers the desired functionality right from the start.
4. Reduced renovation stress: By moving to a new home, you can bypass the disruptive and stressful process of remodeling, providing a smoother transition.

Relocating Cons:

1. Financial considerations: Moving to a new home entails expenses beyond the purchase price, including closing costs, moving costs, and potential increases in property taxes or utility bills.
2. Emotional detachment: Relocating can be emotionally challenging, especially if you have strong ties to your current community or have built close relationships with neighbors.
3. Time-consuming and exhausting: The process of selling your current home, searching for a new one, and going through the moving process can be time-consuming and physically draining.
4. Potential for unexpected issues: While a new home may appear perfect on the surface, unforeseen issues, such as hidden repairs or neighborhood concerns, may arise after moving in.

Fears and Frustrations

Each option comes with its unique fears and frustrations. For remodeling, these often include the worry of overcapitalization – where you invest more into the house than you can recover in a sale. There’s also the stress of living in a construction zone, dealing with delays, and encountering unexpected costs.

For relocating, fears revolve around the uncertainty of a new location. Will the neighborhood be safe and friendly? Will the children adapt to their new school? There’s also the hassle of selling your current house, finding a new one, and dealing with the physical process of moving. Plus, the higher mortgage rates can be a significant financial burden.

Making the Decision

Deciding between remodeling and relocating is a highly personal decision that depends on factors beyond just the financial ones. Mike and Sarah need to consider their emotional attachment to their current home, tolerance for disruption, long-term plans, and family’s needs.

Many people are in the same boat. At Carlson Projects, we’re here to help you navigate this complex decision. Whether you choose to transform your current house into your dream home or start fresh in a new location. If you decide on the remodeling route, we’re committed to making the process as smooth and stress-free as possible. Please reach out to us for more detailed information tailored to your specific situation, and let us help you CHANGE THE WAY YOU LIVE!

Disclaimer

The content provided by Carlson Projects in this video is intended for informational purposes only and represents our research and opinions. It should not be taken as personalized financial advice, and we recommend consulting with a qualified professional before making any investment decisions. Carlson Projects is not liable for any financial losses stemming from actions based on the information in this video.