When Does Home Remodeling Make Financial Sense?

There comes a time when every homeowner looks around at their house and ponders a few upgrades. Sometimes, those upgrade ideas turn into full-on renovations as you reimagine your living space to better meet your lifestyle and expectations. But before you start calling contractors or budgeting, ask yourself: Does remodeling make financial sense?

It’s a tricky question, and one homeowners often have a hard time knowing how to approach. It’s about more than budgeting the money for a remodel—it’s about getting the best return on investment from your renovations. Here’s a quick look at how to make a decision that benefits you, your home and your finances.

Consider Wants vs. Needs

How necessary are the improvements you want? Some home projects may end up costing you more than the value they provide. That doesn't mean certain projects aren't worthwhile. For instance:

• Repairing a leaky roof or faulty plumbing might spare you from water or mold damage.
• Installing attic and wall insulation and energy-efficient windows or replacing older appliances and light fixtures could lower utility bills and may be tax-deductible (visit energystar.gov for information on tax credits and rebates).
• The IRS allows tax deductions for certain home improvements to accommodate medical conditions or disabilities with a doctor's recommendation. The rules are complex, so read IRS Publication 502 at irs.gov and consult a tax advisor before proceeding.

Prioritize Budgeting

Gather cost estimates for each job or item and create a chart with columns for high-, medium- and low-cost options. Don't forget supplies for do-it-yourself projects and always add an extra 20% or more for unexpected expenses. If contracted labor is involved, gather 3 estimates and carefully check references and business licenses. Plus, you can always ask about discounts for grouping multiple projects together!

Explore Financing Options

Ideally, you've already established a home improvement savings plan. But if you're planning to borrow, proceed with caution. Just a few years ago, home values were skyrocketing and many people took out a home equity loan (HEL) or line of credit (HELOC) to tap their home's equity. But then the real estate market collapsed, leaving many people owing more on their homes than they were worth.

Lenders are more cautious now. They demand stringent income documentation and have reduced the debt-to-value percentage they’ll approve. So, even if you have excellent credit and significant home equity, it may be a heavier lift to get that kind of financing. Navy Federal Credit Union can help you secure home improvement financing that’s right for your project. 

One Important Caution

HELs and HELOCs are considered secured debt. That means your home is used as collateral for the loan. If you miss payments or default, you could lose your home. If you're not certain you'll be able to make the payments (worries about unemployment, prolonged illness, etc.), it's probably best to forego remodeling until you have sufficient savings.