Move or remodel?

Which way to go?
Bill and Beth were in a bit of a quandry. They recently bought their home in a neighborhood they love... but a house a few blocks away recently came up for sale, and it has an extra bedroom and a beautiful bathroom, complete with jacuzzi tub. Should they try and buy the other house? Or should they try and make the same type of improvements to the house they already own?

Realtors and other experts generally agree, that it's usually less expensive to renovate your current home than to move to another in the same neighborhood. Think about it. When you buy a new home you have closing costs, commissions, the actual move and don't forget all of the stress involved. Tim Perry, in his book "The Book of Home Purchase," says, "If you buy a house in today's market you are going to pay the same for a crummy house as you do for a good house." Especially in the "hot" markets, it would serve you better to improve on your current property, and possibly sell it in the future for one of those "hot" prices.

Adding value?
So if you do choose to remodel, what type of value will be adding to your home? Well, Remodeling Online's 1998-1999 Cost vs. Value report indicates which jobs provide the most return based on the national average of selling your home one year after the home improvement job is complete. After a year, just like a car, the improvements depreciate.

Affording it
So what are your options when it comes to paying for these improvements? Well, you have several choices.

1. Traditional Home Equity Loan -- This is for people with enough equity to cover the cost of your remodeling job. the equity is the value of your house minus the amount of the mortgage. Be aware of the interest rate hikes of a recent days, though, when considering this option.

2. A Cash-Out Refinance -- This enables you to tap into your equity and hopefully receive a lower interest rate at the same time. From Fannie Mae, the nation's major source of mortgage money: For example, if your home is now valued at $150,000 and your loan balance is $80,000, you might be able to get a new $112,500 mortgage (cash-out refinances generally are limited to 75 percent of the total value of your home). That would allow you to repay the existing $80,000 balance and use the $32,500 for your financial needs.

3. Fannie Mae's HomeStyle Remodeler -- this is for people with excellent credit who do not have enough equity in their home to pay for the whole job.

4. The Federal Housing Administration (FHA) offers a Title I loan that gives creditworthy borrowers up to $25,000 with little or no home equity.

5. Look into an energy-conservation loan. Some utility companies, local housing or neighborhood authorities or businesses offer up to $25,000 for energy related improvements, air-conditioning, heating systems, etc. Some neighborhoods offer loans for general home improvements in order to keep the neighborhood looking neat, such as roof repair, porch remodels, etc.

6. In California and Florida, there are loans designed to help residents minimize earthquake and hurricane damage.

Whatever you choose, don't pay with your credit cards! Even with low introductory rates, the deal is not as sweet as it seems. Those rates eventually go higher, usually to 14% or more, that is much more than you'd pay with any other type of home improvement financing.

The "fixer upper"
What do you do if you're buying a house that needs help? There is another type of Fannie Mae HomeStyle loan. This program allows you to get a first mortgage large enough to cover the purchase and the remodeling costs. The interest rate however will be about 1.5 points more than on regular mortgages, and generally the loan won't exceed $240,000. A good point here is that if you can't move in right away, the loan can cover up to six months worth of mortgage payments. Freddie Mac also sponsors a similar program, Affordable Gold, and the FHA has a 203(k) loan which is purchase plus renovation.

Before you go looking at national lenders, though, look into your local programs. In our city, there has been a huge effort to "clean up" the downtown area, and so there are federal and local funds available to new homebuyers and current residents. One program allows you to borrow up to $30,000, interest free, to remodel your downtown home, and the balance is payable when the home is sold.

Moving to a new home
What if you have to move? Should you remodel before you sell? Surprisingly, most realtors say "no." They claim that it makes much more sense to put your money into your new home as you will not get back all of the money you spend in any market. So, if you are planning to move anytime soon, major improvements should be cancelled, as no one can predict how volatile your local real estate market will be in the future. So unless you must move, the smart money is on staying home and remodeling.

Home improvement costs are expensive, too, though. According to a study commissioned by The Wall Street Journal, "the cost of keeping a typical home up to current standards for 30 years is almost four times the purchase price. In fact, some experts say that it may actually be cheaper to buy a new or fully remodeled home every 10 years than to deal with the mounting repair problems that occur as materials fail." So doesn't this contradict what we just learned from the realtors?

Well, yes and no. Robert Sheehan, the housing economist who performed the study had this to say, "the only sure way to slash repair costs is to do the work yourself." By choosing modest, well-made materials, in essence the $50, sturdy and sleek faucet as opposed to the $500 faucet with every option except actually clearing the table, you will repair less and save more. If you're not up to the task of do-it-yourself remodeling then just relax and pay for your repairs gradually. If you want to find remodeling help, the National Association of Home Builders has many brochures and resources you can utilize to make your efforts easier. Remember that you don't have to do everything all at once, and you will save yourself a lot of money and worry if you use the "cash and carry" method.