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Banking on home improvements; will adding a hot tub put you in hot water?


If you own a house, you would not remodel a kitchen, add a bathroom, or install a swimming pool solely to enhance its resale value. But you will get back most of what you spend--if you choose the right home-improvement projects. As one writer, Robert Runde, has pointed out, some of them stand to pay off dramatically better than others when the time comes to sell your house.

Energy-efficiency improvements have begun to pay for themselves--but only since the oil-price shocks of the 1970s. Earlier, home buyers often could not care less about insulation or energy-saving windows. Now, most people are concerned about saving on their energy bills. But trendy innovations--for example, solar-heating panels--offer a less certain return.

The more personalized a project, the more chancy the return. Remodeling a kitchen usually adds sales appeal. But if you put in a deluxe gourmet kitchen and try to sell it to a canned-soup cook, do not expect to get your money back.

An extravagant improvement can make your home harder to sell. Not every prospective home buyer will love a $15,000 pleasure center with a custom-made whirlpool, hot tub, steam bath, and built-in stereo system. Indeed, it could be a turnoff. So do not spend too much on your home improvement, especially if you are thinking of moving in a few years.

The limits on what a house can sell for are well-defined in any neighborhood. If the houses range from $90,000 to $120,000, your top resale price still will not be much more than $120,000, no matter how many rooms, baths, hot tubs, or skylights you add. You are not likely to recover any costs that raise the value of your property to more than 20 percent over that of similar homes in your neighborhood. People tend to want the least expensive house in an area. If yours is the most expensive, it will be less marketable.

Just as you should not invest too much in improvements, you should not make them yourself, either. Hiring professionals to do the entire job usually gives you the soundest investment. If you are less than craftsman-like, your botches can subtract from the value of your house.

The most profitable home improvement is to remodel your kitchen. That is because the kitchen is again becoming the nerve center in many homes, a combination family room and workplace. So it should be sunny and spacious. It also should have new appliances, plenty of storage, and a step-saving layout that positions the stove, the sink, and the refrigerator close togther. But try to confine your remodeling expenses on it to 10 percent of the estimated value of your home. As mentioned, if your renovation is sensible and not extravagant, there is a strong chance you will recoup almost your entire investment when you sell.

Another project that should return almost its entire cost is to add a second bathroom. A third bathroom is popular, too, but most prospective home buyers consider more than three unnecessary. Because decor is so much a matter of taste, elaborate bathroom remodeling is less likely to pay for itself. But do not skimp on finishing touches. An elegant ceramic tile floor creates a far better impression than vinyl.

Fireplaces can be one of your best investments. That is rather surprising; people know that fireplaces usually waste more heat than they provide, but figure they can afford it. A fireplace you install will return much of what you paid. As for central air conditioning, it helps you sell your house if it is in the Sunbelt. But in colder regions buyers are reluctant to pay extra, because air conditioning is so expensive to operate.

Because people crave a comfortable place to lounge outdoors, another worthy investment is a deck or a patio. Yours could return 50 to 70 percent of its cost. When you sell, you can also get back 40 to 70 percent of the cost of adding a conveniently located family room. But an addition that disrupts the traffic pattern, or fundamentally clashes with the style of the house, can detract from its worth. If you convert the garage to a game room, you eliminate all the buyers who want a garage. As an investment, a swimming pool does not add much to the market price of a house in one of the cooler regions of the country. Many people worry about the time and trouble it takes to maintain a pool, as well as about the potential danger to children. Even in warm areas, recovering your outlay is uncertain.

If you make big, important improvements that add to the value of your house, you can subtract the costs from your profit when you sell your house. That will cut your tax bill. Beware, though: Ordinary home repairs and replacements do not qualify.

Raising Capital for

Home Improvements

This year alone, Americans will spend more than $40 billion on major home improvements and additions. How will they raise all that money? They will borrow it.

Your best deal when seeking money for a major home-improvement project is to borrow from your company profitsharing plan or against the cash value of your whole-life insurance policy. You will pay below-market interest rates, and you will not be hit with rather hefty loan-origination fees. If you cannot tap these sources, you can apply for a variety of loans offered by banks, credit unions, and finance companies. Interest rates are lowest at credit unions, higher at banks, and highest at finance outfits.

Most homeowners finance their remodeling projects by taking out a second mortgage on top of the one they already have. You can borrow up to 80 percent of the appraised value of your house--minus the unpaid balance on your first mortgage. Bankers charge one to two percentage points more for second mortgages than for first mortgages, and you can repay over 30 years. As with any loan secured by real estate, you must pay closing costs--usually several hundred dollars.

You might do better financing your improvement if you paid off your first mortgage and took out a new, larger loan. This is known as refinancing. It makes the most sense if you bought your house between 1979 and 1982, when interest rates were at nosebleed levels. You will face stiff closing costs and possible a prepayment penalty of up to six months' interest for paying off your first mortgage early. But refinancing will be worth it if it lowers your interest rate three percentage points or so.

Many affluent borrowers are using home-equity lines of credit to pay for home renovations. You can get these loans from brokerage firms as well as from banks, savings-and-loan associations, and some credit unions. You open a line of credit equal to 75 to 80 percent of the appraised value of your house, minus the unpaid portion of the mortgage principal. Then you simply write your own loan by writing out checks as you need the money. The interest rate is adjustable, varying monthly with whatever index the loan is tied to. But you do not pay any interest until you actually borrow the money, and then only on the amount you borrow. You will have to pay closing costs, but you can use the borrowed money for any purpose--not just for remodeling.
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Title Annotation:how improvements can raise or lower the resale price of a house
Author:Loeb, Marshall
Publication:Saturday Evening Post
Date:Jul 1, 1986
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