Make Extra Payments On The House or Remodel to Increase the Value?

  •  
  •  
  •  
  •  

[wp_campaign_1]

Do you currently own a house, but still have a mortgage? Do you have a desire to pay the house off early, but also have the urge to make some upgrades? I think it’s safe to say that most of us are in this boat. There always seems to be something in our house that’s either outdated, or is just plain a nuisance, but is it really worth it to remodel, or should you just keep making those extra payments on the mortgage?

Two Scenarios: Extra Payments or Renovation?

Let’s say that your initial home loan was $150,000 at 5% interest. You’re now 5 years into your 30 year mortgage and you have to make that difficult decision: Do you start making extra payments on the mortgage, or do you make that kitchen renovation you’ve been dreaming of since the first day you moved in?

Scenario 1: You decide to make the extra payments until the house is paid off

Your cash flow situation has changed and you figure that you can make an extra payment of $450 each month. You know that this action will save you money on interest, but what impact will it really have?

  • At the 5 year mark, each additional $450 payment will cancel out about $1,100 in interest! That means that every time you pay $450 on top of your regular mortgage payment, you’ve basically just put $1,100 in your pocket, because you never have to pay that interest!
  • If you continue this additional payment each month, you’ll save over $57,097 and pay off your house almost 13 years early!!

Scenario 2: You decide to remodel the kitchen

You just couldn’t stare at that ugly kitchen any longer! It was time for an update. I’m going to give you the benefit of the doubt and assume that you have cash for this update (I’m not sure why I’m doing this….it seems like everyone is getting home improvement loans these days…. but regardless… let’s continue). Rather than pay for a professional to do the work, you decide to take on the project yourself. Between DIY websites and YouTube, you actually pull it off! For only $10,000, you have an entirely brand new kitchen.

The value of your house has increased by $15,000 and you’re feeling pretty good about the transformation. The question still weighs on you mind though, “Did you make the right decision?

Which Decision Was Right?

Well, as is the case for many difficult decisions, it depends. How long do you plan on staying in the house? If your looking to sell your house next month, then the renovation makes sense. You’ll earn more money on your investment and the new kitchen could potentially result in a faster sale.

If, however, you plan on staying in your house for the next 10+ years, then I would strongly suggest that you pay down on the mortgage and put off the renovation. Let’s say that you renovated the kitchen anyway. It cost you $10,000, which equates to about 22 months of extra payments. By not paying extra on the house, you lost about $10,000 in interest savings (your total savings will go from $57,000 down to $47,000).

  • Renovation: -$10,000
  • House Value: +$15,000
  • Interest Savings via Extra Payments: -$10,000

By renovating your house, you’ve ultimately lost $5,000 when you compare it to making additional payments with no renovation.

After reading this, would you choose to renovate or would you continue making extra payments instead?

If you enjoyed this article, Get email updates (It’s Free!)


  •  
  •  
  •  
  •  
  •  
  •  
  •  

Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

33 Comments

  1. I used to pay bi monthly payments with a little on top to lower my mortgage. The problem is the value has dropped significantly and we aren’t planning on keeping the place.
    Jai Catalano recently posted..Dr. Dean (A Thinker & A Knower)

    • So what is the plan with your house? Are you going to sell it at a loss?

      • If if have a lump sum saved and wish to pay down on the mortgage, should I slap all of it down at once in one year or use that and divide it over the 12 months as payment or would it not matter?

        thank you

        • Hi Rose! If you put it all toward the mortgage immediately, then you’ll save more on interest. Say you owe $100,000 and your interest rate is 4%. Your interest payment per month is approximately $333. If you pay it down to $80,000, then your interest payment drops to $267…. A savings of $66 per month! If you wait, you won’t experience those monthly savings. Hope that helps!!

  2. We renovated our bathroom almost as soon as we moved in, we used cash too. But it didn’t significantly add value to our house but it does add sanity to our day to day life. There is something to be said about really enjoying your home.

    For the most part we try to do both extra payments and renovations. For the three years we have owned our home we have shaved 3 years off our mortgage with extra payments and we have done countless renovations, small and large.
    Niki recently posted..How I Save Money by Spending More of it at the Grocery Store

    • That is another good reason to do a renovation Niki! My wife and I started renovating right when we moved into out house. Things were just falling apart and we super ugly, so we had to do something! The remodel is almost complete, and now we’re ready to make those extra payments! 🙂

  3. From a financial perspective, yes hands down, making the extra payment wins. But as I’m often reminded, not everything in life is about a money investment. You’ve also got to consider quality of life and happiness. If you really hate the look of your kitchen (or any room) and would be much happier with a change, then go for it. Your house is your castle.
    MyMoneyDesign recently posted..Is It Time to Change Up My Retirement Portfolio?

    • I understand your point MMD, but you have to make sure you’re not just trying to keep up with the Joneses. If your kitchen is perfectly functional, is it really worth the money for the remodel?

      • I completely agree. Like all things, you need to weigh the consequences and benefits of the project. I just dislike when people go completely overboard on the opposite extreme in the name of frugality and do no home improvements whatsoever.
        MyMoneyDesign recently posted..Weekend Wind Down

        • Haha, yeah. If your house is falling apart, you might want to open up your wallet and let some money creep out.

  4. We just went through this and had a designer quote both our kitchen and master bath. I was a gnat’s hair away from pulling the trigger but the emotional wave of granite, imported wood and stainless steel subsided after realizing that it would put us that much further away from having the house paid off.

    p.s. he was a really good salesman. He took pictures of the place and the over-layed their design over it to show you the before and after. Very good technique considering it got this tight wad close to opening his wallet!

    • Well great job overcoming your emotional wave! That can really be tough to do sometimes – especially when it comes to kitchen remodels for some reason.

  5. I don’t think you should remodel to increase the value of your home, period. (Unless maybe you’ve only got 1 bathroom and 5 bedrooms.) Remodeling should be primarily to increase your enjoyment of the home, because you’re never going to recover all of the money you put into it.

    That said, I don’t think it needs to cost $10K to remodel a kitchen either. We did ours for about $3.5K, taking it from 70s fabulous to the present 🙂

    And of course we’re paying off our house! I just couldn’t stand those fake butcher-block counters any longer 😉
    Jackie recently posted..It’s Not What You Buy

    • i like your thoughts Jackie – as long as my house is functional, I really wouldn’t change a thing. Most of the time, it’s just not worth the investment.

  6. Great topic Derek.
    We want to remodel (and extend) our kitchen and finish the 1/2 storey that is our attic (we live in a 105 yr old house – great potential in the attic!).

    We would pay for both projects with cash. But the PF Bloggers in me wrestles with putting that $60k or so against the mortgage instead. Debt free (er, less debt) or live/enjoy life more? Tough question.
    Sustainable PF recently posted..The Beauty in Saving Your Skin and the Water Supply

    • That is a tough call. I bet you’d love the extra space, but yeah, $60k is a lot of money…

  7. We bought a foreclosure a little over 3 years ago, knowing we would have to stick a considerable amount of money into it. We have used cash from the other house we sold, our tax returns from the last couple of years, and were still able to pay our mortgage down by making payments every other week, which automatically creates an extra full payment per year. We are hoping to pay the house off in the next 3 to 4 years. We need to have the shingles done yet and will need to replace our furnace probably next fall, but as long as we stick to the game plan, I think w!e can do it
    Kevin recently posted..Character

    • That sounds awesome Kevin! You’re able to do it both – good for you!

  8. Well, considering that I haven’t remodeled my kitchen even after living here for 20+ years , and considering that we paid off the place in 1993, Id have to go with paying down the mortgage.
    Marie at FamilyMoneyValues recently posted..Benefits of Networking

    • Haha, well put Marie! 🙂

    • Don’t get me wrong, I’m not saying that you should never renovate, I’m just saying make sure it’s for the right reasons, and that you get it done for a fair price. It sounds like your backyard may have been in need of the renovation.

    • We are actually doing the same thing right now Wayne. It does make sense to fix the essential things in your house when you purchase it, but if you’re renovating just to update a room, it could very well be money wasted.

  9. Jackie – we need to talk! Lol – hubby and I have been discussing a kitchen remodel but broken up in two chunks to ease the pain of the cost. But I totally agree…remodeling should be for your enjoyment and convenience, not to increase the value of the home
    Deanna Koch recently posted..It’s Okay, I’m Here

  10. Waited 19 years on renovating anything, unless it was falling apart ie: bath tile falling down with wall. Paid off mortgage nine years ahead. Kitchen base cabinets non-functional. Had bases remade to match top cabinets from custom kitchen makers who originally created the kitchen when house was built. They repainted uppers with epoxy paint to match lowers. We are doing some work ourselves and now paying for all plumbing and most electrical updates. The cabinets are 100 % birch wood and should last a very long time. Updated floor, countertops, faucet etc. We are getting away from carpet except on steps. Hardwood flooring is cost economical in the long run. Most of the house is hardwood.

    • So your mortgage is completely paid for?? Good for you! Are you planning on doing some fun renovations now?

  11. We did a renegotiation with our mortgage holder. Half we pay interest balance $490k and the other half is interest free $489k . If we paid any extra it goes to the interest free side of our debt and doesn’t reduce the amount of interest we pay, only principle. The kitchen is literally falling apart piece by piece. It doesn’t match the rest of the house (that was also falling apart but we remodeled before we had financial troubles). We have a solar loan and an educational loan. The educational loan is being paid with the raise that was achieved because of it…the solar loan is paying for itself with the savings in utilities. Eliminating those debts would give us some breathing room, together they are about $60k. Our kitchen will cost about $70k. Whoever is saying a kitchen will cost $10k doesn’t have a million dollar house, so everything is relative. Should we pay off the solar and educational loan or remodel the kitchen? Saving takes a very long time. We could be enjoying our kitchen for all of the years, that it would take us to save again for this amount of money. If we run into a situation where we have to sell then our house would sell for top dollar with a newer kitchen. But I can’t see where that would happen being on sound financial footing finally…living with our current kitchen is the worst. I avoid making dinner until the last second.

    • Hi Jill. I’m cringing a little reading your comment. You basically have a full-interest mortgage no matter how you pay, you have a solar loan that probably won’t pay for itself in 10 years (proper “investments” should pay for themselves within 3 years or less), and you have an educational loan…which most of us have had, so I’ll say nothing about that.

      Your question is about taking out a loan to remodel the kitchen. The bigger question should be, why do you live in a million dollar house if you can’t save up the cash to renovate the kitchen? You would be much better off if you lived in a $400,000 house, pay off the educational loan and solar loan as quickly as possible. Then do a kitchen remodel if necessary. Then pay off the house (that should have a 15-year, fixed rate mortgage – not the crazy terms that you’ve got now).

      I don’t mean to be harsh, but you’ve got to take about 500 steps back on this one. Thanks for the question, Jill.

  12. Hi Derek,
    After the divorce, I refinanced the house as a rental at 4.375 and am renting a bedroom while renters pay my mortgage. With the rent payments, I have been making the monthly mortgage payments of $735 per month and an additional $600 payment per month for the principal payments only (which is $50 over the principal payment of $550 per month).

    I have a savings of $8000 so far for any repairs or lack of rent needed between renters that I have put into the hands of my property manager.

    There are a few things that need to be upgraded or fixed according to the appraisal which I have not taken care of yet (windows, electrical updates, etc). My question is: Should I continue to make the extra payments per month on my principal or should I upgrade the house instead? I owe less than $110,000 on my house right now and the value of the house is aprox. $175,000 right now.

    I am not sure if I will be moving back into the house after it is paid off, or if I will continue to rent it out, or sell it.

    Sincerely, Carol

    • Hi Carol,

      When it comes to paying off debt quickly, you should always repair what’s necessary, but that’s it. Any additional items that are nice, but not necessary, wait until after you have the house paid off completely. So it sounds like the windows could probably wait, but the electrical sounds kind of scary. If there’s a safety issue there, take care of it. If not, then that can probably wait too.

      How quickly do you think you’ll have the house paid off?

  13. I’m hoping to have it paid off between 7-10 years…. I haven’t calculated it yet nor have I seen my mortgage statements yet (since I do autopay, there is no paperwork)

    My interest is only 4.375% so I’m not really saving much in interest (?). Also, I’m wondering how this will affect my tax returns since not much interest is being pulled out.

    Another thing I try consider is that the more money I spend on repairs and improvements on the rental is counted toward income tax deductions. I hate to dip into my savings for repairs/upgrades for the house, and I am shying away from slacking off on my double payments to the mortgage so I’m wondering if it’s wise to use my credit cards for renovations and then pay they off with my tax returns?

    The electrical is old but does not present a safety hazzard.

    • Hi Carol. Don’t over-complicate things here. You mentioned:

      1) Making additional repairs to save on taxes. Don’t get caught up in this game. Here’s why. If you spend $20,000 renovating the kitchen, the house might increase in value by $12,000 (which you won’t realize until you sell it), and you’ll only save about $5,000 on your taxes. So yes, you avoided paying taxes, but net net, you’re in the hole $3,000. This is pretty common among investors. They put so much effort into avoiding taxes that they actually end up losing money in the long run. Plus, they forfeit the $20,000 that they could have invested in something better!

      2) Putting renovations on your credit cards. Absolutely not! This is highly dangerous. If you lose your renters, lose your job, or don’t end up getting the tax return you thought you would, this balance will just stay on your credit card and accumulate interest (probably a crazy high interest rate too!).

      If I were you, I would make sure I was completely debt free other than this house. Then, I would have 3-6 months of expenses, plus another $10,000 or so for the rental. And then I would aggressively pay down the house while investing for retirement as well.

      Hope this helps Carol!


Add a Comment

Your email address will not be published. Required fields are marked *

CommentLuv badge

Related posts