Using a home equity loan for improvements such as new kitchens, bathrooms and fireplaces can help get a higher selling price for a home. The remodeled areas, real estate agents say, should lead to a better price for a home that needed the repairs anyway.
To get the most return on investment, or ROI, the home should be sold within a year of the improvements being made. That results in an average of 64.4 percent of a project’s investment dollars getting recouped, according to a 2016 report by Remodeling Magazine of 30 popular remodeling projects.
That’s quite a quandry to be in as a homeowner looking to sell their home versus someone who wants to enjoy the new comforts they’ve created. Should they get a home equity loan, home equity line of credit or some other form of financing for improvements and then sell the home, hoping to get a higher price than they would otherwise?
Or should they live in their remodeled home for more than a year and use the additional bedroom in the attic or enjoy the warmth of having new windows, or whatever renovations they did, and not get such a high home resale value?
Using home equity
A standard home equity loan allows a homeowner to borrow a certain amount of money and repaid it over a specified period of time.
A home equity line of credit, or HELOC, allows a homeowner to borrow against up to 80 percent of a home's value to use as they see fit. HELOCs have a draw period that’s typically five to 10 years, which would lessen the ROI on home improvements if done to help sell a home.
About half of HELOCs are used to make home improvements, according to the U.S. Census Bureau. They’re also often used to consolidate debts.
After the housing crash in 2008, the best news now may be that home prices are increasing and that homeowners again have equity in their homes, giving them the option of renovating or moving. Home remodeling is on the upswing again after falling since 2007.
The Joint Center for Housing Studies at Harvard University projects that annual spending growth for home improvements will increase from 4.3 percent in the first quarter of 2016 to 7.6 percent in the third quarter, surpassing the previous peak in 2006.
A HELOC is good to use for short- and long-term reasons — selling soon or staying in your home for years — but it makes the most sense for sellers because the upfront costs are low, says Diana Gleason, regional sales executive for home loans for Bank of America in Southern and Central California. Refinancing a home loan and taking cash out would be more expensive, Gleason says.
“It’s so important for them to consider all of their options, to make sure they’re doing what’s right for them,” she says of homeowners considering using home equity to pay for renovations before selling.
Best home improvements
Homeowners can easily find themselves with a long wish list of home renovation projects. In deciding which to do to add the most value to a home when they sell it, owners should avoid improvements that are specialized to their tastes and trends, says Bob Gordon, a real estate agent in Boulder, Colo., who has written about bathroom remodels.
“When making a remodel, owners need to be aware of the trend and stay current,” Gordon says. “Five years ago cherry cabinets and slab granite were the hot, expensive choice. Today, IKEA and a quartz countertop trumps that.
Northshore Fireplace in Evanston, IL, developed a graphic on the percentage of the estimated average cost of a renovation project that is projected to be recouped in resale value, using numbers from Remodeling Magazine and real estate and appraisal estimates from 2015.
Here are some of the best renovation projects for return on investment, all based on selling the home within one year:
Attic into a bedroom
Turning an attic into a bedroom resulted in an 83 percent ROI. On average, this transformation increased a home value by $39,908. The biggest cost here are adding a bathroom, and strengthening the floor, adding insulation and finish to the room.
Just adding attic insulation, a job with a national average cost of $1,268, had a 116 percent cost being recouped.
85 percent ROI. Projects budgeted at 6-10 percent of the total home value see the strongest return. The most popular items replaced in a kitchen remodel were countertops (74 percent), wallpaper/paint (70 percent), cabinetry (67 pecent) and flooring (64 percent).
Kitchen remodels are the second most popular projects, at 69 percent, with the average kitchen remodel costing $56,768. A minor kitchen remodel, however has a better return, costing $20,142 on average and 83 percent is recouped.
Kitchens are often outdated in technology and accessories, design schemes and layout, says Reagan Toal, marketing manager for Federal Brace, which sells supports for countertops. Kitchens can almost be claustrophobic with poor movement patterns and more appliances.
“Expanding the kitchen, creating an open floor plan, or simply reevaluating the current structures to create a more expansive feel can not only increase the homeowners’ enjoyment of their kitchen, one of the areas of the home most people spend immense amounts of time in while sentient,” but it can also increase their home’s resale value, Toal says.
101 percent ROI for a new steel front door, according to Northshore Fireplace. It recommends that the door matches the style of the home and doesn’t go too grand, otherwise the ROI will increase.
That’s higher than the 91 percent ROI that Remodeling Magazine found for a $1,335 steel door in 2016, or the 82 percent ROI for a $3,126 fiberglass door.
Replacing a garage door also has a high ROI, 91 percent for a $1,652 new one, according to Remodeling Magazine.
80 percent ROI for vinyl siding, according to Northshore Fireplace’s data. For fiber cement siding, ROI increases to 84 percent, and foam-backed vinyl has a 77 percent ROI, based on 2015 figures.
The estimates are for 1,250 square feet of siding, including factory trim at all openings and corners.
Remodeling Magazine had slightly lower returns in 2016: 78 percent for engineered siding replacement, and 73 percent for vinyl.
65 percent ROI. The average bathroom remodel in the U.S. costs $17,908. It’s the most common remodeling job request.
A midrange bathroom addition costs $42,233 on average and returns 56 percent.
On average, a bathroom remodel isn’t a very high ROI, but it’s the most common remodeling job request in the country. It could almost be considered one of the worst home improvement projects.