Q: I am looking at a fairly major renovation of a home I have lived in since 1981. I paid $60,000 for the house, and there is no mortgage.

If I put house on market (with some inexpensive curb-appeal type spiffing up) I think it would be listed in the area of $325,000.

I’m guessing that the renovation costs would run about $300,000, and the house would then sell for $450,000. I plan on continuing to live there for at least another 10 years.

Should I sell the house or should I stay and finance the renovation? Shall I get a construction loan followed by a 15-year mortgage? What about a home equity loan or line of credit? Does my age or income matter?

A: Your numbers are interesting, if they’re accurate. For simplicity’s sake, let’s assume they are.
If you sell your house today for $325,000, you’ll have a rough profit of $250,000, which you could keep tax-free. If you improve the property, the house would be worth $450,000, for a net profit of around $90,000.

Why would you do all of this work for a much smaller profit? Wouldn’t you be better selling your property, pocketing the cash and buying something else? If you sold your home, do you know how much you would have to pay for a another home? Could you sell the home and buy another for less money? If you bought another home in the price range of $350,000 to $400,000, you’d have some price appreciation over the next few years, and you’d start the clock ticking on the next $250,000 in profits that you could keep tax-free.

Ideally, at the end of 10 years, you’d have sheltered at least $500,000 in profits tax-free. That’s a lot of cash.

Now let’s assume that despite the numbers, you still want to improve your property and then stay there for 10 years. How should you pay for your renovation?

The cheapest thing to do is pay cash. Barring that, the next cheapest thing would be to do a cash-out refinance and get a new mortgage at today’s reasonable interest rates. You can do a home equity loan, but for as much money as you’re talking about, you’ll have an easier time with a cash-out refinance and you’ll be able to lock in the lower interest rate. As for a construction-to-permanent loan, you could do that, but the fees may be higher and you’ll have more paperwork.

I vote for a cash-out refinance, although you should still look into construction-to-permanent financing. If the company you work for has a credit union, you should start your search there because credit unions typically offer the best deals on home loans and auto loans.

Published: Dec 21, 2007