Thinking of sprucing up your home? Renovation and remodeling are at record highs, with homeowners expected to spend $400 billion by the third quarter of this year alone, according to a quarterly study by Harvard University’s Joint Center for Housing Studies.
Before embarking on a new project, it is important to understand the differences between a remodel and a renovation. Not only does everyone have their own range of costs, time frames and permit rules, but they can also differ in the value you will recoup from your investment. Considerations like these can help guide your decision and determine the scope of project you choose.
Renovation versus remodeling
Although often used interchangeably, a home remodel and a home renovation have different meanings.
When you think of a home renovation, it’s best to think of it as a refresh or a minor makeover. A renovation typically involves projects that homeowners choose to do themselves, such as painting, changing kitchen cabinet hardware, and updating lighting. These projects are “embellishments” for the aesthetics of your home. Home renovations don’t break the bank and are often started and finished on the same weekend.
When you think of a renovation, it’s easier to think of it as a reconstruction or a major undertaking. A home renovation usually involves hiring professionals, such as an electrician, plumber or architect. It also usually involves obtaining permits before the project begins and passing inspections during the project.
A remodel can include raising a ceiling, moving a tub to a new wall, adding an extension or new room, or even installing a kitchen island, complete with plumbing. and electricity. Renovating a home is no small feat. It’s a commitment and it can be expensive depending on the size and scope of the changes.
The cost of a renovation compared to a renovation
A simple renovation can often be done for a few hundred dollars. After all, paint supplies and fixtures can fit almost any budget. A home remodel, on the other hand, can cost thousands of dollars.
Home improvement and renovation costs average $46,891, with most real estate projects ranging from $18,009 to $76,499, according to HomeAdvisor. Breaking it down further, the data shows that home renovations can cost anywhere from $5,000 to $150,000 or more. Home renovations average $10 to $60 per square foot and can approach $150 per square foot depending on the room and your location. Additionally, the size of your home and the type of materials used will also impact the price.
Renovate or remodel: which is best for you?
When deciding which home renovations to go for, it helps to consider which projects will provide the best return on investment. Some changes will increase your home’s value and equity more than others.
For example, you’ll recoup 93.8% of what you spend on replacing a garage door, but 47.7% of what you invest on adding a high-end master suite, based on cost vs value. 2021 from Remodeling. This analysis compares the average cost of 22 home improvement projects and the estimated value of each project. You can use this annually updated information to assess the remodeling or renovation value you’re likely to see if you’re building equity in your home or looking to sell.
In addition to the impact on value, other factors must also be considered. For example, it’s usually best to only spend money on remodeling or remodeling rooms you use frequently, and you need to consider how long you plan to stay in your home. If a move is planned for the foreseeable future, a simple renovation may be the best option for you. The smallest touches can change the energy of a room.
If this is your forever home and the changes will increase the functionality of the home, a home remodel might be the best bet. For example, if you frequently host large dinner parties but have a small dining room and kitchen, it would make sense to do a full-scale remodel of that area to make it more functional for your needs.
Evaluate your budget, motivations, added value, and future intentions with the home before deciding on the scope of the project, how much money you want to spend, and where you want to spend it.
How to finance a remodel or renovation
There are many ways to finance home improvements and renovations, but many homeowners opt for a personal loan, home equity loan, or home equity line of credit (HELOC).
You can often get a personal loan for more than any credit card limit, and it will likely also have a lower interest rate than a credit card. For this reason, personal loans are a less expensive way to finance any major real estate project you undertake. Rates fluctuate with personal loans, but interest rates currently range from 2.49% to 35.99%, depending on the lender and other factors such as your income, debt-to-equity ratio and credit score . Personal loan terms can vary from one to 12 years, with loan amounts ranging from as little as $600 to $100,000.
Home Equity Loan
If you have accumulated equity in your home, a home equity loan may beat personal loan rates and may also be easier to obtain. A home equity loan uses some of the equity you have accumulated in your home to secure a lump sum loan that can be repaid over the long term. This type of loan works well for large renovations because you can borrow a large sum of money at a low interest rate. The downside is that your home will act as collateral for the loan if you can’t repay it.
The amount you can borrow depends on your home’s loan-to-value (LTV) ratio. Let’s say a lender is willing to lend up to 85% of the value of your home, minus the amount remaining on your mortgage. If your home is valued at $200,000 and your mortgage balance is $130,000, that means you may qualify for up to $40,000.
- $200,000 (house value) X 0.85 (85%) = $170,000 (85% house value)
- $170,000 (85% of home value) – $130,000 (mortgage balance) = $40,000
- $40,000 = maximum loan amount
Lenders will also look at other factors, like your credit score and debt-to-equity ratio, to determine if you qualify to borrow against your principal.
Home equity line of credit
A HELOC lets you borrow against the equity in your home like a home equity loan, but it’s structured more like a credit card. If you qualify, you will have access to a line of credit equal to a portion of your home’s equity that you can draw on if needed. Many home remodelers choose HELOCs over home equity loans because the former gives them greater financial flexibility. It’s a great solution for projects that don’t have a finished price, or for projects that might end up being on a larger scale than expected.
Most lenders allow you to borrow up to 85% of the appraised value of your home minus what you still owe on your mortgage. The drawing period is usually around 10 years and you are only required to pay interest on any amount you borrow during this period. You can also repay principal during the drawdown period to replenish your line of credit and then borrow again. Once the drawdown period is over, you will make regular monthly payments on interest and principal.
For example: if your home is appraised at $300,000, but you still owe $200,000, you could potentially get a $55,000 home equity line of credit.
- Home appraisal: $300,000
- 85% of home appraisal: $255,000
- Remaining mortgage: $200,000
- 85% of appraisal minus remaining mortgage: $255,000 – $200,000 = $55,000
- Potential HELOC: $55,000
The bottom line
Renovation and remodeling have significant differences in terms of time, cost, and financing method. Additionally, you will want to determine which projects will give you the best return on investment and contribute to the value of your home.