The housing market has a lot of renovations instead of moving out. These renovations can maximize your resale value

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Homeowners in the United States all seem to have the same thing in mind: Renovations.

A recent survey commissioned by Discover Home Loans found that 79% of homeowners would rather renovate their current home than move to another. Among Generation Z and millennial homeowners, 58% were currently working on home renovations or planning to start within the next three months.

There is probably a big reason behind this: mortgage interest rate. The average 30-year mortgage rate now exceeded 7% for the first time in 20 years. Homeowners selling in this environment would likely forgo a lower interest rate when moving into a new home, so many decide to stay put and renovate instead—while taking advantage of significant increases equity do this.

If you’re one of those homeowners, here’s what the experts say you should consider before embarking on a home improvement project.

The housing market is back to reality

Laya Gavin, a realtor and owner of EXIT Realty Sun City in Phoenix, says the days of frantic shoppers and off-the-cuff purchases are over. Whereas home values ​​have held steady and are still historically high in some placessellers no longer have quite the advantage they once had.

“Now it’s back to ‘What is the property really worth?'” Gavin says. “It’s a return to the fundamentals of real estate values.”

Corwyn Melettea broker/landlord at EXIT Realty in North Charleston, SC says he wouldn’t call it “to slow downin itself, but that buyers are much more cautious.

“The frenzy, the passion and the speed at which people were buying homes a few months ago has changed,” he says.

This market change is driven by rising mortgage rates, which have risen from historic lows of 2-3% at the start of the pandemic to more than 7% today, and which continue to rise. This has pushed many potential buyers out of the market, leaving only people who really need to relocate or relocate.

“We certainly see a lot of data indicating that the buy market is slowing down quite significantly,” says Rob CookVice President of Discover Financial Services.

Owners are less willing to sell

On the other side of the coin, current owners are much less willing to sell than they were a year ago.

Higher mortgage rates are prompting some potential sellers to reconsider. “It’s definitely something most people can’t miss right now,” Melette says.

Melette is in this boat himself: he was planning to sell his house and reduce, but rising rates mean his mortgage payment on a tiny home would be the same, if not more, than on his current home. “It definitely makes me think when I watch this,” Melette says.

Here is an example of how the calculations work:

Suppose a homeowner has a 30-year mortgage of $300,000 at an interest rate of 3.5%. Their current month payment of principal and interest would be around $1,350. If they moved to a similar house and took out a new $300,000 mortgage at 7% interest, the payment would be around $2,000 a month.

So not only do potential sellers face a less competitive, and therefore less favorable market for them, but buying a new house to replace the old one would almost certainly increase their monthly housing costs.

Fortunately, homeowners who want to improve their living space without moving to a new home have another option: renovations.

“Most owners sit on a untapped, large amount of equity in their house,” Cook says.

Although the rise in interest rates has cooled the housing market slightly, prices remain high compared to pre-pandemic levels. According to National Association of Realtors.

Those who bought their homes before the pandemic housing frenzy likely have a large amount of home equity they can turn into money through a home equity loan or home equity line of credit (HELOC). They can now invest that money in home improvements that increase the value of their home or make it easier to sell later.

What renovations improve the value of a home?

If you want increase the resale value of your home with some renovations, where to start?

“Some of the best renovations happen in the spaces where people spend the most time,” says Gavin.

This means that the kitchens and master bedroom/bathroom suites are a great place to start. But you don’t necessarily have to do a full gut renovation, Melette says. In a kitchen, for example, it might be enough to paint your cabinets and install new countertops or appliances. A renovation like this “gives you this advantage but does not give you the Cost [of a full remodel],” he says.

Melette also suggested homeowners consider getting a new roof or repainting the exterior of the house. “When you’re going to put that house on the market, if you’ve done those things…when the buyer comes in to make that purchase, that’s something they don’t have to worry about, so it gives them that peace of mind. mind, so it makes it easier to sell,” he says.

You can also consider adding some square footage to your home by lining out a patio, or renovating an unfinished attic or basement.

However, there are renovations or aesthetic choices to avoid if you are thinking of selling soon.

“My caution to sellers is not to overdo it, because it happens a lot,” says Gavin. Don’t lean too far into your specific tastes or color choices. Leave room for the next owner to personalize it and make it their own.

Melette agrees: bright colors (especially team sports colors) will likely put off future buyers. “We want to stay away from individual tastes,” he says.

Above all, Gavin says it’s best to keep your renovations simple, without spending too much. Small changes like a fresh coat of paint, new light fixtures, or new carpet can go a long way in making your property look like new.

Pro tip

Renovations don’t always have to be all or nothing. Small touches, like new colors or finishes, can also go a long way.

How to finance a home renovation

Thanks to the rise in home values ​​over the past few years, many homeowners are sitting on piles of equity.

This is a reserve that you can consider using for finance some of these renovation projects.

“A home equity loan gives people a way to leverage their capital in an affordable way,” says Cook, who noted that Discover is seeing record home equity loan volume this year.

This is a significant change from cash refinanceswho were popular while mortgage rates were at historic lows. Refusal of withdrawal are a way to refinance your main mortgage with a larger loan amount than you currently owe and keep the difference in cash. Because it replaces your original mortgage with a new one with new rates and terms, there is a double benefit when market mortgage rates are low: you can simultaneously extract the equity in your home while lowering your mortgage rate to save on interest.

But when market mortgage interest rates exceed 7% as they are now, the calculation becomes very different. Now, getting a cash-out refinance means accepting a higher interest rate on your entire mortgage, an especially unattractive proposition for homeowners who have locked in a 2% or 3% rate during the pandemic.

This is where home equity loans or home equity lines of credit can come in handy. They allow you to preserve your original mortgage, and add a second loan only for renovation. Although home equity loan and HELOC rates have also increased since the start of the year, you will only be committing to a higher rate on the amount you are borrowing, not on your entire mortgage balance.

“[Homeowners] want to protect their main mortgage. That’s what makes some of the home equity loan options very appealing,” says Cook.

Choosing a home equity loan or a line of credit depends on your specific needs and preferences.

Home Equity Loans give you a large sum of money all at once and benefit from fixed rates (and fixed monthly payments). Many lenders also offer these loans with no closing costs or cash due at closing.

Home equity lines of credit, or HELOCs, work more like a credit card. You would have a certain limit and could spend as much as you need up to that limit, but only refund what you use. The downside is that HELOCs typically have variable interest rates, which could lead to an unpredictable monthly payment, especially as rates continue to rise.

Whichever option you choose, Cook recommends that you work with a lender you trustand that you do your homework to make sure you understand all the fees and costs that a loan entails, beyond just the interest rate.

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