Homeowners in the United States all seem to have the same thing on their minds: Renovations.
A recent study commissioned by Discover Home Loans found that 79% of homeowners would rather renovate their current home than move to another. Among Gen Z and Millennial homeowners, 58% were currently working on home improvements or planned to start in the next three months.
There’s probably one big reason behind that: Rising mortgage rates. The average 30-year mortgage rate has now topped 7% for the first time in 20 years. Homeowners selling in this environment would likely give up a lower interest rate when they move to a new home, so many decide to stay put and renovate instead—while taking advantage of significant increases in equity to do so.
If you’re one of those homeowners, here’s what experts say you should consider before diving into a renovation project.
The housing market is back to reality
Laya Gavin, a realtor and owner of EXIT Realty Sun City in Phoenix, says the days of crazy buyers and blind buys are over. While home values have held steady and are still historically high in some places, sellers no longer have the advantage they used to.
“Now it’s back to, ‘What is the property really worth?'” says Gavin. “It’s back to the basics of property values.”
Corwyn Melette, a broker/owner with EXIT Realty in North Charleston, South Carolina, says he wouldn’t call it a “slow-down” per se, but that buyers are much more cautious.
“The frenzy, the passion and the speed with which people bought homes a few months ago has changed,” he says.
This shift in the market is motivated by rising mortgage rates, which went from historic lows of 2-3% earlier in the pandemic, to more than 7% now – and still rising. It has pushed many potential buyers out of the market, leaving only people who really need to relocate or relocate.
“We’re certainly seeing a lot of data in terms of the buying market slowing down quite significantly,” said Rob Cook, vice president at Discover Financial Services.
Homeowners are less willing to sell
On the other side of the coin, current homeowners are much less willing to sell than they were a year ago.
Higher mortgage rates are motivating some potential sellers to reconsider. “It’s definitely something that most people can’t miss now,” says Melette.
Melette is in that boat himself: He planned to sell his home and downsize, but rising prices mean his down payment on a smaller house would be the same — if not more — than it is on his current home. “It definitely gives me pause when I look at it,” says Melette.
Here’s an example of how the math works:
Let’s say a homeowner has a 30-year, $300,000 mortgage with an interest rate of 3.5%. Your current monthly principal and interest payment will be about $1,350. If they moved to a similar home and took out a new mortgage of $300,000 at 7% interest, the payment would be about $2,000 per month.
So not only do potential sellers face a market that is less competitive – and therefore less favorable to them – but buying a new house to replace their old one will almost certainly increase their monthly housing costs.
Fortunately, homeowners looking to upgrade their living space without moving to a new home have another option: Renovations.
“Most homeowners are sitting on an untapped, large amount of equity in their home,” says Cook.
While rising interest rates have cooled the housing market slightly, prices remain high compared to pre-pandemic levels. Median home prices in September 2022 were 8.4% higher than a year earlier and 42% higher than in 2019, according to the National Association of Realtors.
Those who bought their homes before the pandemic housing frenzy likely have a large amount of home equity that they can turn into cash through a home equity loan or home equity line of credit (HELOC). They can now invest the money in home improvements that increase the value of their house or make it easier to sell later.
What renovations improve a home’s value?
If you want to increase the resale value of your home with some renovations, where should you start?
“Some of the best renovations happen in the spaces where people spend the most time,” says Gavin.
This means kitchens and master bedroom/bathroom suites are a good place to start. But you don’t necessarily have to do a total gut renovation, says Melette. In a kitchen, for example, it may be enough to paint your cabinets and put in new countertops or white goods. Such a renovation “gives you the benefit, but does not give you the cost [of a full remodel],” he says.
Melette also suggested homeowners consider putting on a new roof or repainting the exterior of the house. “When you go to put that home on the market, if you have those things done … when the buyer comes to make that purchase, that’s one thing they don’t have to worry about doing, so it gives them the peace of mind, so it makes it easier to sell,” he says.
You might also consider adding a bit of square footage to your home by enclosing a patio or renovating an unfinished attic or basement.
However, there are some renovations or aesthetic choices you should avoid if you are thinking of selling soon.
“My caution to sellers is not to overdo it, because it happens a lot,” says Gavin. Don’t lean too far into your specific taste or color choice. Leave some room for the next owner to personalize it and make it their own.
Melette agrees: Bold colors (especially team sports colors) are likely to turn off future buyers. “We want to stay away from … individual tastes,” he says.
Above all, Gavin says it’s best to keep your renovations simple without spending too much. Small changes like a fresh coat of paint, new light fixtures or new carpet can help make your property look new.
Renovations don’t always have to be all-or-nothing. Smaller details – like new colors or finishes – can also go a long way.
How to finance a home renovation
Thanks to the increase in home values over the past few years, many homeowners are sitting on piles of equity.
It’s a reserve you can consider using to finance some of these renovation projects.
“A home equity loan gives people a way to tap into their home equity in an affordable way,” says Cook, who noted that Discover is seeing a record share of home equity loans this year.
It’s a significant shift away from cash-out refinances, which were popular when mortgage rates were at record lows. Cash-out refis are a way to refinance your primary mortgage with a higher loan amount than you currently owe and keep the difference as cash. Because it replaces your original mortgage with a new one that has a new interest rate and new terms, there is a double benefit when market mortgage rates are low: You can simultaneously pull equity out of your home while lowering your mortgage rate to save on the interest rate.
But when market mortgage rates top 7%, as they are now, the calculation becomes very different. Getting a cash-out refinance now means accepting a higher interest rate on your entire mortgage, a particularly unappealing proposition for homeowners who locked in a 2% or 3% rate during the pandemic.
This is where home equity loans or home equity lines of credit can come in handy. They allow you to keep your original mortgage and add an additional loan solely for renovations. Although home loan and HELOC rates have also increased since the beginning of the year, you will only be committing to a higher interest rate on the amount you borrow, not your entire mortgage balance.
“[Homeowners] want to protect their primary mortgage. This is what makes some of the home loan options very attractive,” says Cook.
Whether you should choose a home loan or a line of credit depends on your specific needs and preferences.
Home equity loans give you a large lump sum of cash at once and have the advantage of fixed interest rates (and fixed monthly payments). Many lenders also offer these loans with no closing costs or cash at closing.
Home equity lines of credit, or HELOCs, work more like a credit card. You would have a certain limit and be able to spend as much as you need up to that limit, but only pay back what you use. The downside is that HELOCS typically have variable interest rates, which can make for an unpredictable monthly payment, especially as interest rates continue to rise.
Regardless of which option you choose, Cook recommends working with a lender you trust and doing your homework to make sure you understand all the fees and costs that come with a loan — beyond the interest rate.
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