The recent global pandemic has led to a big change in the way we view our living spaces. With most of us forced to spend more time at home during lockdowns, it has been easy to find fault with our properties, whether due to a lack of office space or a backyard that has rapidly become too small.
As a result, the number of homeowners investing in improvements to their properties has jumped dramatically. In the first half of 2021 alone, home renovations increased 25%, with over half of US homeowners making substantial improvements that boost their home’s value, according to a survey commissioned by Selective Insurance. For some, this kind of improvement isn't possible - space is always at a premium - and in these cases you'll probably need to consult a mortgage lender about moving home. For others, though, it's a far better way of maximizing the value of your property.
So if you’re thinking of taking the plunge and altering your home for the better, here’s what you need to consider.
Most valuable home renovations
Before deciding on the renovations you want to carry out, it is sensible to factor in the overall cost of the project, along with how much value it is likely to add to your home. As well as considering what you, the homeowner, might most benefit from, you might also want to consider what will appeal to any potential buyers if you resell.
For those looking to add substantial value to their home, Artur Muller, founder and CEO of Amluxe Realty, recommends the home’s layout as a good place to start. “The layout is one of the most important aspects of a home and often the decision-making point for the majority of home buyers,” he explains.
“Upgrading the layout means taking down walls that would open up space - and the more open the better. You can upgrade every room in a house and still many buyers will be put off by a claustrophobic layout which is common in older constructions.”
Depending on the size of the project and the walls that need to be removed, you can expect to spend anywhere between a couple thousand dollars and $10,000+ for layout renovations. The investment can be worthwhile, however, with smaller projects likely to add around $10,000 to the property’s value, and projects of $10,000+ adding at least double the value to the house, says Muller.
Other valuable renovations include remodeling the kitchen and master bathroom. “The kitchen is usually one of the first things buyers will see and usually where they spend a lot of time,” explains Muller.
The downside is these can also be two of the most expensive projects. “A fully renovated kitchen can cost anywhere from $15k+ (average) up to $50k+ (high end homes), unless you are just resurfacing the cabinets and adding new appliances which could keep it under $10k,” says Muller. “However, if you put in $15k you would easily add $20k+ to the home value.”
Bathroom costs are similar, and could also add about $20k to the value of your home. “As long as you are not over-improving the house, according to the comparable homes in your neighborhood, the general rule we use is that such projects would add about 130% of the cost in value to the house,” adds Muller.
If you would prefer not to spend such a large sum of money on a kitchen remodel or a new bathroom, simpler tasks such as updating countertops and faucets, investing in new flooring, and repainting walls can make your kitchen look more modern without the hefty price tag. Bathroom costs can be kept to a minimum if there is no change to the layout and no disturbance to the plumbing or electrics.
More simple renovations
Should your budget not stretch far enough for such extensive home renovations - or even if you could do without the stress of them - there are plenty of smaller DIY tasks that can still add value to your property.
According to the 2021 Cost vs. Value Report from Remodeling magazine, replacing your garage door with an upgraded model costs an average of $3,907, but you could recoup 93.8% of this cost when you sell your home.
Similarly, replacing an entry door could cost around $2,082 but give you 65% of your investment back, while replacing vinyl siding with stone veneer on part of your home, such as the entryway, could give back 92% on a $10,386 spend. Vinyl siding replacement overall could offer a 68% return.
“The siding on your home is arguably the most important exterior feature of your house,” explains Steve Booz, vice president of marketing at Royal Building Products. “Vinyl siding replacement has been in the top five remodeling projects for return on investment nearly every year that I have been around this industry.”
Replacing windows and adding decking in outdoor spaces can also offer a significant return on the original investment. "Carefully laid decking helps to create an increased sense of space by offering a dedicated area for entertaining and unwinding," says Charles Taylor, director at Composite Prime.
Do your research
How much value certain renovations will add to your property will also depend on where you live. To get a better idea, real estate flipper Donald Olhausen Jr. recommends looking at other homes in the neighborhood that have recently sold, or are currently pending, to see what amenities they have and what is in demand.
“The next step is to match these amenities as closely as possible in order to mimic what is currently working in your market,” he says. “If your neighbor's house just sold with laminate countertops, chances are you will not receive your investment back for those shiny new quartz countertops in your kitchen.”
Olhausen also suggests asking an agent which upgrades matter the most to buyers at the moment. “Currently, we are noticing that neutral greys, open concepts, and white cabinets with stainless steel hardware and stainless steel appliances do well,” he adds.
It is also important to consider which home renovations you can do yourself and which require specialist help. “Any job that requires permitting should be done by professionals,” says Realtor Kristina Morales. “Permitting is usually required for jobs involving electrical systems, plumbing, gas lines, structural work, and added fencing. If permitted work isn’t done according to building codes, you may have to tear it out and start over.”
Your insurance carrier is also unlikely to cover claims filed for damages involving work that was not permitted properly or was performed incorrectly, Morales warns.
Funding home renovations
When it comes to funding renovation projects, there are several options to consider. However, if you’ve built up enough equity in your home over the years, Morales recommends a loan tied to your mortgage.
“This would include a cash-out refinance, a home equity loan, or a home equity line of credit,” she explains. “These loans are secured by your home and will give you the best interest rates and terms.” This also means they can be more suited to those with bad credit.
Refinancing your mortgage allows you to convert some of your home equity into cash. You simply swap your current mortgage with a new, larger loan to give you the funds to pay for your renovations. Refinancing may also allow you to take advantage of competition in the mortgage market and secure a lower interest rate than you’re currently on.
However, before choosing this option, it is important to factor in the costs of refinancing your house to ensure you are completely comfortable with them.
Alternatively, a home equity loan, or second mortgage, enables you to take out a separate loan to provide a cash lump sum and use your property as collateral. Your loan must be repaid over a set period and will usually have a fixed rate of interest. But when used for a renovation project, that interest is tax-deductible.
Home equity loans can be a viable alternative to seeking full refinancing, particularly if you know how much your particular project will cost. However, you must be sure you could afford to keep within the constraints of your new repayment schedule.
A home equity line of credit (HELOC), meanwhile, is a revolving line of credit that offers a way for borrowers to release equity funds whenever they need. This can be a more suitable choice if you’re not sure what the total cost of the renovation will be, or if the project is being completed in stages. Because HELOCs are secured against your home, interest rates are cheaper than unsecured loans, though be aware they are usually variable.
Unsecured options
If you’d prefer not to use your property as collateral, you could consider using a personal, unsecured loan to fund your project. However, borrowing limits are usually lower compared to secured loans, so you’ll need to check the sum is sufficient to meet your requirements.
The best personal loans offer a fixed rate of interest, and you’ll need to repay the amount borrowed in monthly instalments over a predetermined duration. Remember, however, that as the lender has no collateral and is therefore taking on a greater risk by lending to you, interest rates will be higher than they are for secured loans.
For even smaller projects, you could consider a credit card. But Morales warns that these are intended for short term needs and their rates are generally much higher.
If you do want to fund your renovations in this way, hunt out the best credit cards for purchases. By choosing one that offers an introductory 0% APR period, you can spread the cost of your spending without paying interest for a set time. Be aware that once that period ends, you will start paying interest at the standard rate.
Another option to explore is whether you qualify for a Government loan. For instance, the Section 203(k) program through the US Department of Housing and Urban Development (HUD) enables you to take out a new or refinance mortgage loan and roll renovation costs into it. You can use this alongside Title I Property Improvement loans which are designed to “improve the basic livability” of a property.
Check your credit score
Whichever funding option you choose, it is prudent to check your credit score before applying. Your lender will use your score as part of its eligibility criteria and if it isn’t up to scratch, you won’t be able to access the most competitive interest rates. You may even struggle to secure credit at all.
Seeking out the best credit repair services can help you improve your credit score. But you can also take matters into your own hands and fix your credit score yourself. Measures such as correcting any errors on your credit report, paying bills on time and reducing outstanding debt are a good place to start.
Update your insurance
When remodeling your home it is also crucial to update your homeowners insurance. Figures from the Selective Insurance survey show that under a quarter of those who had improved their homes during the pandemic had not updated their insurance, while another 10% said they were unsure.
However, failing to keep your insurance provider in the loop about renovations puts you at risk of being underinsured. “Every home renovation project is unique, but every homeowner needs to protect their investment from future loss,” explains Allen Anderson, Senior Vice President, Personal Lines, Selective. “Independent insurance agents help homeowners evaluate their coverage needs and update their insurance to reflect their renovated home's full replacement value.”
In summary, home renovations come in all shapes and sizes, so no matter how far your budget stretches, there are plenty of ways to improve your home whilst also adding value. Providing you do your research, understand how much each project will cost, and take the time to find the most appropriate financing option, you could reap the benefits both while living in the home and when you come to sell up.
