August 12, 2022

Renovating During Inflation

With inflation at a 40-year high and mortgage rates more than 2% points higher than…

With inflation at a 40-year high and mortgage rates more than 2% points higher than they were six months ago (and continuing to climb), you might find that now is not the right time to buy a new home. Instead, it might be time to love the one you already own.

Need a little help feeling good about staying put for the time being? Then perhaps, it’s time for a remodel project to turn your house into the home you’ve always dreamed about.

Before you run away screaming at the thought of renovating, hear us out.

A remodel could increase the overall value of your home, which would be beneficial if you consider selling in the future. (And maybe a home face-lift will make you want to stay put.)

“Renovation projects are a great way to retain the value of your money in a high-inflation environment,” says Rick Berres, owner of Honey-Doers, a Lakeville, MN–based company that provides residential remodeling services. “But you shouldn’t put yourself into debt doing so.”

While the prices for everything from lumber to labor might be higher, it’s still possible to embark on a home remodel project without draining your bank account. Here’s how.

Is a home improvement project worth it right now?

While the cost of renovating your home will depend on square footage, the region you live in, and what you’d like to get done, the average home remodel costs anywhere from $25,000 on the low end to $76,000 on the high end.

And the latest remodeling impact report from the National Association of Realtors® found that Americans spent about $420 billion in 2020 on home remodeling projects. The majority remodeled for the following reasons:

  • To upgrade worn-out surfaces, finishes, and materials
  • To add features and improve livability
  • To simply make a change

Homeowners experienced more enjoyment in their homes after specific interior remodel projects and saw huge returns on their investments. Improvements that earned a more significant cost recovery included refinishing hardwood floors (147%) and installing new wood floors (118%).

The exterior home improvements that saw the most significant cost recovery in homeowner investments included a new roof (100%) and a new garage door (100%).

How to pay for a home renovation project during inflation

We all know that “cash is king”—however, it might not be the best option for financing a home renovation project.

If you have enough money in the bank to cover the cost of a home remodel and to maintain an emergency fund, then cash is likely the best way to finance your home improvements. After all, it means not worrying about loans or interest.

But if you don’t have enough cash for a home renovation, consider other standard options: a home equity line of credit, a home equity loan, or a credit card.

Let’s break down each financing option below.

Home equity line of credit

A home equity line of credit, or HELOC, is a line of credit that uses your house as collateral. The amount you’ll be able to borrow is contingent on how much equity you have in your home, your credit score, and your debt-to-income ratio.

Home equity is based on the difference between your home’s value and the amount you still owe your mortgage lender. As you make mortgage payments and continue to pay off your home loan, you are increasing the equity you have in your home.

A HELOC essentially provides a revolving line of credit—much like a credit card—over a set period of time (usually five to 20 years).

“One benefit of using HELOC to pay for your home improvement project is that, since your home equity line of credit is secured by your home, the interest rate on the loan will be lower than the rate on an unsecured loan,” says Kevin Bazazzadeh, a real estate investor and founder of Brilliant Day Homes in Houston.

Remember that interest on a HELOC or a home equity loan is tax-deductible because the funds are used to renovate your home.

But there is a potentially big downside to a HELOC: Interest rates are variable, which means rates will go up or down with market conditions.

Home equity loan

A home equity loan also allows homeowners to take out a loan, borrowing the money based on the value or equity they have in their property.

But unlike a HELOC, homeowners who take out a home equity loan receive one lump sum upfront, then repay it in monthly installments with interest over a set time (usually five to 15 years).

Another upside of a home equity loan is that it tends to be fixed-rate, making it less volatile than a HELOC. And if you are solely using the funds for home improvement, you can deduct the interest paid on up to specific amounts ($750,000 for a married couple or $375,000 for an individual).

Credit card

According to a recent survey from online consumer lender LightStream, 35% of homeowners “intend to use their credit cards to pay for home improvement projects.”

But should you? The answer lies in how quickly you plan to pay off the credit card.

“If the renovation is small and can be paid off quickly, a credit card may be the best option, says Shaun Martin, the owner and CEO of Denver Real Estate Solutions. “Credit cards typically offer interest-free periods of up to 21 months, which can help minimize the renovation cost.”

If you plan to carry that balance forward for a few years while you pay it off, credit cards are not the way to go—especially now.

“Using a credit card during high inflation means you will pay a higher interest rate on the outstanding balance of your credit card if the Federal Reserve raises interest rates,” warns Bazazzadeh.

Remember, paying interest on a credit card balance will only add to the overall cost of your project.

How to add value to your home without going broke

If you’re just not up for taking on a home remodel or renovation project, there are still things you can do to add value to your home that might not involve taking out a home loan.

“Focus on low-cost and DIY home improvement projects you are capable of doing on your own is another way to increase value without draining the bank account,” says John Bodrozic, co-founder of HomeZada, an app that helps homeowners keep track of their finances.

“Examples include installing landscape lighting or replacing old carpeting with engineered wood floors you can learn to install yourself,” he says.

Or make cosmetic improvements, such as painting the interior or exterior of your home to add value and increase its curb appeal.