Q: We have a brick tri-level ranch home that was built in 1950. The windows and kitchen are original, and desperately need replacing. We bought the house 7 years ago for $90,000, and the houses in the neighborhood are now selling for $170,000 to $220,000.
Could we refinance our home for more than our current mortgage amount so we can replace the windows and doors and update the kitchen? If we plan to sell in the next couple of years, would we get the investment back?
A: Here’s how to think through the financing of your renovation project.
Many lenders will allow you to refinance your home up to 75 or 80 percent of its value when you do what’s known as a “cash-out” refinance, meaning you take cash out of the deal instead of just refinancing the mortgage balance. (Be aware that some lenders do limit how much cash you can take out during a refinance.)
So if your home is worth $150,000 undone (without the new kitchen, new windows, etc.), your maximum loan amount would be $120,000 on a “cash-out” refinance. If you paid $90,000 7 years ago, you probably have a mortgage balance of around $80,000. That means you could take out $40,000 in equity.
Unless you’re building a kitchen swank enough for Julia Child, that should be enough to do a kitchen and maybe replace doors and some windows, depending on what you choose to do, and how much of it you do yourself.
If you need more cash than that, you can still take out a home equity loan (a good value today since interest rates are so low), for the rest. If, however, your house is worth as much as $200,000 undone, then you can take out up to $160,000 on a home loan, providing you can afford to pay the monthly costs of the mortgage.
As for whether you’ll get the value out of your renovation, you’ll need to find out what your neighbors have done to their places. Talk to local real estate agents about what kind of improvements owners have made to homes in your neighborhood and what kinds of prices they’re commanding for their updated homes.
If you plan to move within a year, I’d only do minor cosmetic fix-ups, like painting and recarpeting. You probably wouldn’t get back the cost of a brand new kitchen and windows within a year. Longer than that, and you might well get more than 100 percent of cash you spend fixing up your home.
How much should you spend to fix up your home so you don’t lose money on the sale? Here’s how you figure it: If your home would sell for $150,000 today, undone, but only $180,000 totally fixed up, then you know you shouldn’t spend more than $30,000 fixing up your home.
Oct. 28, 2004.