By SHELLY K. SCHWARTZ
bankrate.com
22-DEC-05
Armed with equity loans and unprecedented appreciation in property values, homeowners continue to update kitchens, landscape gardens and finish basements at a frenetic pace _ rationalizing the billions of dollars they spend each year with cockeyed optimism that they'll get it all back at resale.
Indeed, many will.
Yet, as the dust settles on the real estate market and prices float back down to Earth, some, too, will find they've spent far more updating their homes than they could ever recoup at the closing table. It's called over improving your home _ and millions have made the mistake.
"A lot of people who over-improved did a cash-out refinancing when rates were at a low, expecting housing prices to continue going up and up," says Sal Alfano, editorial director for Remodeling Magazine in Washington. "But in some places, like the Midwest, prices have already stopped climbing."
With an average kitchen remodel alone costing $44,000, it's easier than you might think to turn the cost-versus-value equation on its head.
"These days, projects are expensive," Alfano says. "You don't have to do a lot of remodeling to spend a lot of money. What usually happens is you'll get a leak in your bathroom and you figure it's a good time to do a remodel. It's magnificent when it's done, but suddenly the rest of the house looks pretty shabby. There's a snowball effect where one remodeling project tends to lead to another."
If you plan to sell soon, or need to sell unexpectedly, you could owe more on your home than it's worth. Remember, home equity loans come due in full the moment of resale.
"This is an issue because of how aggressive the lenders have been" in approving home equity loans to cash-strapped borrowers, says Richard Roll, president of the American Homeowners Association in Stamford, Conn. "You could be in a position where you need to get 105 percent of the total debt on the property and you can only get 98 percent of that from a buyer."
Those who can afford to sell at a loss must pay the difference out of pocket. Those who can't afford it face an unpleasant choice: Remain hostage in a home that no longer meets their needs, or lose the house if they can't make their loan payments.
"Over the last 10 years, we've seen a fairly significant core of the population spending more than half the value of their home on improvements," says Kermit Baker, director of the remodeling futures program at the Harvard Joint Center for Housing Studies. "Some of that is because buyers increasingly are moving into older suburbs convenient to their jobs in the city, and they're renovating smaller Cape Cod and ranch-style homes."
The center reports homeowners spent almost $127 billion on remodeling during 2004, up 6 percent over 2003.
How do you know if you've sunk too much into your biggest investment? That's a lot like asking whether you spent too much on your last vacation, says Roll. Those with money to burn can afford to break ground on a pricey expansion regardless of resale value.
Most of us, though, should take a long, hard look at our neighbors before dropping another dime on granite countertops.
Comparable sales prices are a good place to get started. A real estate agent who is familiar with your neighborhood will often perform a free assessment of your home's market value.
"A realtor can tell you what additional value would be added to your home in whatever type of remodeling you're thinking of doing and whether any improvements you might make are out of step with the neighborhood," says Paul Bishop, manager of real estate research for the National Association of Realtors.
Alfano says: "You can easily get into trouble with an upscale project, especially in kitchens and bathrooms, if you're too high-end or edgy in your design choice. The majority of buyers are not going to have your exact taste in colors or style. It's a little risky."
Generally speaking, you won't recover the full cost of any home-improvement project _ though some clearly boost value better than others. For example, you'll recover nearly 99 percent of costs on a minor kitchen remodel, 96 percent on a midrange siding replacement and 95 percent on a two-story addition, according to Remodeling Magazine's 2005 Cost vs. Value Report.
A few jobs, including an upscale siding replacement and a midrange bathroom remodel, will yield more than a 100 percent return.
The benchmark 30-year fixed-rate mortgage fell 1 basis point to 6.33 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.30 discount and origination points. One year ago, the mortgage index was 5.75 percent, and four weeks ago it was 6.32 percent.
The benchmark 15-year fixed-rate mortgage fell 1 basis point, to 5.91 percent. The benchmark 5-year adjustable-rate mortgage rose 2 basis points, to 5.9 percent.
(Distributed by Scripps Howard News Service. E-mail Holden Lewis at hlewis@bankrate.com)
