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 There always seems to be something in our house that’s either outdated, or is just plain a nuisance, but is it really worth it to remodel, or should you just keep making those extra payments on the mortgage?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?
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.