Home renovations need to be planned with care. Here are some strategies for planning a remodeling project that makes financial sense:
Decide your primary objective. If resale is your biggest concern, a minor kitchen update may enhance resale opportunities more than adding a home office.
Decide how to finance the renovation. Other than cash, there are three basic options: refinancing, home-equity loans and home-improvement loans. If you have little or no equity in your home, lenders are apt to approve a home-improvement loan, which usually costs an extra point. Refinancing means taking out a larger mortgage, but the loan is based on the projected increase in value. Home equity loans are similar but carry lower closing costs offset by paying a half a point at closing. To see which financing option works best for you, have your bank calculate and compare the price of the loan, closing costs, and future interest costs.
Avoid credit card debt. Interest payments are not deductible, and the interest rates are too high.
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