by Amy Shepard, CFP
With so many people using their homes for multiple purposes these days (working remotely, online school for their kids, everyday living, etc.), there has been a huge increase in demand for both buying new homes and renovating existing ones. Like most big decisions, choosing to “love it or list it” comes down to a lot more than just dollars and cents.
For those considering an upgrade to their living situation, a great first step is to make a list of pros and cons for your current home. What are the things you love about it – big backyard, lots of storage, great school district, proximity to family and friends? What about the things you want to change, such as more space, needing a dedicated home office, better layout for entertaining, adding a pool?
Once you know what is working and what is not, you can start thinking about whether it makes sense to move or to change your existing home. With both, there are again pros and cons. With moving, most of us consider it a big undertaking to pack up our entire lives and move everything to a new place. That can be a lot when so many of us our juggling working at home and kids at home doing online school. But on a positive note, moving can allow you the opportunity to find more things on your wish list. With a renovation, there likely isn’t as much work, but there is still the inconvenience of living through a construction project. Renovating might be ideal if you have the ability to change the things you don’t like but keep the things you do.
Thinking through these various lists of pros and cons can help you determine what you really want. Next, you can begin to crunch the numbers to see what is doable financially.
With moving, one of the biggest considerations is determining how much house you can comfortably afford. Even with mortgage rates near all-time lows, housing pricing have skyrocketed throughout most of the country in recent years. You may experience some sticker-shock when looking at what it costs to upgrade. A general rule of thumb is that ALL of your fixed monthly expenses, including your mortgage payment, should not be more than 50% of your monthly take-home pay. It’s important to determine how a new mortgage payment will impact your budget and both your short- and long-term goals. It’s also important to factor in all the ancillary costs associated with moving such as moving supplies, repair costs, cleaning costs, utility increases, new furniture, etc.
With renovating your existing home, you’ll have to determine how to finance the costs. Having cash saved up is one option, but you shouldn’t deplete your savings – it’s important to always have some cash available for emergencies. If you’ve been in your home for any length of time, there’s a good chance you have some equity. This opens up options such as using a Home Equity Line of Credit (HELOC) or doing a cash-out refinance. If you are lucky enough to have significant equity, and have determined from your pros and cons exercise that a renovation makes sense, you have a great opportunity to take advantage of low mortgage rates while also avoiding having to purchase a new home at a much higher price. You’ll also want to consider how the potential renovation may impact the value of your home – will you be over-improving for your neighborhood or will you be making changes that will increase your home value enough to make financial sense?
If you’ve ever watched shows like “Love It or List It” on HGTV, you know that it’s rarely an easy decision to make. Spend some time talking to a few real estate agents and learning about your options. Go see some homes for sale and see if they are matching up with what you’re looking for. Talk to a few contractors to get ideas and estimates on upgrading your current home. Explore financing options by talking to a mortgage broker.
It will take some time to sort through all of these considerations but they are all exercises to help you methodically come to a conclusion that you’re excited about!
About the author: Amy Shepard, CFP®, RMA®, BFA™, MBA
Amy Shepard, CFP®, RMA®, BFA™, MBA is a Financial Planner at Sensible Money. She has been working with clients since 2013 and loves helping them create and implement a financial plan so they can achieve their life goals. She is involved in the CFP Boards Mentor Program and previously served on the board of the FPA of Greater Phoenix. Outside of work she enjoys spending time with her husband and kids – they have a goal to take a family picture in all 50 states!
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