Homeowners have gained a lot of equity in recent years. Data shows that nearly half are considered “equity rich,” meaning their mortgage balance is less than half the total value of their home. For those who need a larger home or one with different features, this excess equity presents a conundrum: Do you use your home equity with a home equity loan or line of credit to expand your home and increase its value? Or do you sell the house, take the profits and move on to potentially greener pastures?
Moving is an option if you have a lot of equity in your home and need something different from your home, but you should first consider the pros and cons.
-
There are fewer hassles and interruptions. Moving would allow you to avoid the inconveniences that come with remodeling, such as noisy construction and potentially inconvenient schedules.
-
You can capitalize on the appreciation of your home. If your home has appreciated in value since you bought it, moving will allow you to take advantage of that appreciation and enjoy significant gains. You can then use those funds (or reinvest them) however you want.
-
You will be able to find a home that best suits your current needs. You can also use the funds from the sale of your home to purchase a place that better meets the needs of your home, whether in location, size, style or amenities.
-
Your success depends on your local real estate market. The sales prospects for your home depend largely on the state of your local market. If things are slow and there isn’t much demand for housing in your area, selling your home could take a while. You could also lose money on the sale.
-
If you have a low mortgage rate, it could be an expensive option. If you have one of the bargain mortgage rates being offered at the height of the pandemic (think 2.5% to 4% rates), then selling your home and buying a new one will likely mean a big increase in your mortgage rate. This could cost you much more in interest in the long run.
-
There are many upfront fees and expenses. Not only will you likely need to make repairs, but real estate agent commissions, settlement services, and other fees make up the costs of selling your home. Make sure your sales revenue is enough to cover all of this.
Remodeling has its own pros and cons to think about. Here’s what you should consider before choosing this option.
-
You can stay still. You can keep the home you’ve grown attached to, stay in your neighborhood and school district, and align your existing property with your home’s current needs.
-
Add value to your home. By making valuable home improvements, your property can increase in value. This could mean more profits if you ultimately decide to sell.
-
You can keep your mortgage rate low (if you have one). If you’ve locked in one of the ultra-low mortgage rates of the pandemic era, the remodel will help you maintain your rate. (Taking out a new home loan would risk that rate.) If you take out a home equity line of credit (HELOC) or a home equity loan to pay for renovations, they come with separate monthly payments with their own interest rates.
-
There can be many drawbacks.. Remodels, especially large projects like expanding a room or redoing the entire kitchen, can be disruptive. It’s noisy, there are contractors at your house regularly, and it can be difficult to carry on with normal life while renovations are being done.
-
Financing can be a challenge. While home equity loans and HELOCs can be excellent, low-interest ways to finance home projects, they come with a monthly payment—one you’ll owe in addition to your principal mortgage payment each month. Other options, such as credit cards and personal loans, can be expensive and carry high interest rates.
-
Using the equity in your home could put you at risk of foreclosure. If you use a home equity loan or HELOC and don’t make payments, you could lose your home. The most important part of remodeling your home is making sure you can afford the costs, whether out of pocket or by taking out a second mortgage or other loan.
FURTHER: Check out our list of the best home equity loan lenders.
Both remodeling and moving can be beneficial, but the right decision depends on your personal situation, your local real estate market, and other factors. To decide which is the best option, you should try the following:
-
Compare the costs: Look at the full scope of costs for both. How much would your ideal renovations cost, including building materials, labor, permits, and more? Compare that to moving costs, which include factors like closing costs, agent commissions and renting a moving truck, and see which fits your budget. Keep in mind that generally speaking, you shouldn’t spend more than 30% of your home’s value on renovations.
-
Consider your goals and timeline: Know what your end goal is. Do you want a bigger house? Living in a new school district or closer to your job? Do you need extra money to invest or pay debts? Moving is generally better if you’re looking for a new location or want to cash in on your capital, while remodeling may be better if you want to stay in your current neighborhood and can afford to wait for renovations to be completed over time.
-
Research your local real estate market: The real estate market you’re in should play a big role in your decision. Study home sales trends (for example, prices and how quickly homes are selling), as well as current mortgage rate trends. You should also consult a real estate agent. They can help you determine if selling your home is smart in your market or if remodeling may be the best investment.
You should also consider what type of stress and schedule you can handle. Selling your home will require cleaning it, decluttering it, and occasionally leaving the house to view it. However, the remodel will likely mean contractors and construction on site for a while. Talk to other members of your household about what they are comfortable with.
The 30% rule states that you should not spend more than 30% of your home’s current value on a remodel. This can help ensure that you get a return on your investment and that you don’t go overboard financially.
The answer depends on the costs of labor and materials in your area, the local real estate market you would be moving into, and the type of home and renovation you are considering. Contact a local real estate agent to help you understand the unique conditions of your market.
That depends on your renovation plans, as well as the costs of labor and building materials in your area. According to The Home Depot, the average cost of a single kitchen model ranges from $24,000 to $136,000.
You can usually live in your home during a remodel, but you may experience some frustrations and disruptions. Talk to your contractors about how to establish a construction schedule that works for your home.
Laura Grace Tarpley Edited this article.