Updated by: Richard Barrington
There is something about your house that doesn't quite meet your needs. Do you fix it by renovating, or solve the problem by relocating to a more suitable home?
While the right answer to that question depends on the scope of the problem and how attached you are to your current habitat, your decision should be informed by doing a cost comparison between renovating and relocating. Crunching the numbers on a mortgage calculator can give you a feel for how each alternative could work out financially.
Home Renovation vs. Relocation: Crunching the Numbers
Unless you are very wealthy, you would probably need mortgage financing to pay for either a significant renovation to your existing home or to upgrade to a home with the space and/or features you desire. That means there are two components of this cost comparison: the cost of the change itself, and the cost of financing that change.
The simpler calculation is the home renovation scenario. To calculate this, you would have to get an estimate for the cost of the renovation you want to make. Then you would plug that cost into a mortgage calculator using current home equity loan rates to find the total cost of financing that renovation. Add that cost to the remaining payments you owe on your primary mortgage, and you would find the long-term cost of staying in your current home with the renovation you want to make.
The home relocation scenario involves substituting the remaining payments on your existing mortgage with the cost of a new mortgage for a home with the upgrades you seek. That would entail applying any equity in your current home that you would be able to realize by selling it, and financing the remaining cost of the new home at current mortgage rates.
The following sections will walk through these steps using an example for each scenario.
Home Renovation Costs
Let's say you need an extra bedroom, and get an estimate that says it would cost $40,000 to add one onto your house. You could finance that with a 10-year home equity loan at 8.5 percent, which would require you to make total payments (principal and interest) of $59,513 over the life of the loan.
To calculate the total future cost of staying in your home and renovating it to meet your needs, you would add those total home equity loan payments to any remaining payments on your existing mortgage.
If you financed the purchase of your home 10 years ago with a $200,000 30-year mortgage at 5 percent, you'd be looking at $257,674 in remaining loan payments.
Add those remaining payments to your home equity loan payments and you would be looking at a total cost of $317,187 to stay in your home and make a $40,000 renovation.
Household Relocation Costs
Now suppose that instead of investing in a $40,000 renovation to your existing home you decide to buy a larger home worth $40,000 more than your existing home, which is valued at $220,000.
After 10 years of paying your existing $200,000 mortgage at 5 percent interest, you would have built up $57,316 in equity. Your plan is to sell your home and buy one valued at $260,000. You'd put the equity you realize from your existing home towards this, and finance the rest.
Unfortunately, there are considerable costs involved in selling a home and buying another one. Between the commission for your real estate agent, closing and moving costs, and loan origination fees for your new mortgage, you could easily chew up 10 percent of the value of your existing home, or $22,000. This would leave you with $35,316 in net equity from the sale of your home.
Putting that equity towards the purchase of a $260,000 new home would leave you with $224,684 to finance. You could do this with a 20 year mortgage at 4.5 percent, which would require $341,151 in total payments over the life of the loan.
Compared with the $317,187 total cost of the renovation scenario, moving to a home which is $40,000 more expensive than your current one would cost more than a $40,000 addition to your existing home.
Note that this is just one example, and does not mean that relocating is always more expensive than renovating. Your home equity, the local real estate market, and differences in mortgage rates are all key variables that could affect how the math works out in any particular case. You can research mortgage rates that apply to your situation and run the numbers through a mortgage calculator to see how the costs would compare in your situation.
Other Home Value Considerations
Besides the cost comparison, there are other things that factor into how you might value a renovation to your current home versus a move to a new property:
- Convenience. Depending on how conveniently located your house is relative to your job as well as retail and entertainment outlets, you have to consider whether a move to a different home would improve or detract from the situation.
- Quality. Schools, safety, and neighbors all contribute to the quality of life where you live, so you'd have to take into account how a move might change these factors.
- Ability to adapt. Short of renovation or relocation, there are alternatives that might be considerably less expensive. For example, if space is an issue, getting rid of some bulky possessions or re-purposing a room for a different use could be a solution.
- Resale value. Just because you put $40,000 into renovating your home doesn't necessarily add $40,000 to its market value. This is less of an issue if you plan on being in your home for a very long time, but if you might move in a few years it could make renovating a less attractive option.
While part of this choice will involve a subjective judgement on your part, knowing the underlying numbers can help you decide how to weigh the intangibles against the financial realities of your decision.
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