The Housing Market Has Many Renovating Instead of Moving. These Renovations Can Maximize Your Resale Value

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Homeowners in the U.S. all seem to have the same thing on their mind: Renovations.

A recent survey commissioned by Discover Home Loans found that 79% of homeowners would rather renovate their current home than move to a different one. Among Gen Z and Millennial homeowners, 58% were currently working on home improvements or planning to start in the next three months. 

There’s likely one big reason behind that: Rising mortgage interest rates. The average 30-year mortgage rate has now topped 7% for the first time in 20 years. Homeowners who sell in this environment would likely be giving up a lower interest rate when they move to a new home, so many are deciding to stay put and renovate instead—while leveraging considerable increases in equity to do so.

If you’re one of those homeowners, here’s what experts say you should consider before diving into a renovation project.

The Housing Market Is Back to Reality

Laya Gavin, a real estate broker and owner of EXIT Realty Sun City in Phoenix, says the days of frenzied buyers and sight-unseen purchases are over. While home values have held steady, and are still historically high in some places, sellers no longer have quite the advantage they used to.

“Now, it’s back to, ‘What’s the property really worth?’” Gavin says. “It is back to fundamentals about real estate values.”

Corwyn Melette, a broker/owner at EXIT Realty in North Charleston, South Carolina, says he wouldn’t term it a “slow-down,” per se, but that buyers are being a lot more cautious.

“The frenzy, the passion, and the rate at which people a few months ago purchased homes has changed,” he says.

That shift in the market is motivated by rising mortgage rates, which went from historic lows of 2-3% earlier in the pandemic, to more than 7% now—and are still rising. It’s pushed many potential buyers out of the market, leaving only people who really need to move or relocate.

“We’re certainly seeing a lot of data in terms of the purchase market slowing down pretty considerably,” says Rob Cook, a vice president at Discover Financial Services.

Homeowners Are Less Willing to Sell

On the other side of the coin, current homeowners are a lot less willing to sell than they were a year ago. 

Higher mortgage rates are motivating some would-be sellers to reconsider. “That is definitely one thing that most people can’t miss now,” Melette says. 

Melette is in that boat himself: He was planning to sell his home and downsize, but the rising rates mean his mortgage payment on a smaller house would be the same—if not more—than it is on his current home. “It definitely gives me pause as I look at that,” Melette says. 

Here’s an example of how the math works out: 

Say a homeowner has a 30-year, $300,000 mortgage at a 3.5% interest rate. Their current monthly principal and interest payment would be around $1,350. If they moved to a similar home, and took out a new $300,000 mortgage at 7% interest, the payment would be about $2,000 per month.

So not only are potential sellers facing a market that is less competitive—and therefore less favorable to them—but purchasing a new house to replace their old one would almost certainly increase their monthly housing costs.

Luckily, homeowners who want to upgrade their living space without moving to a new home altogether have another option: Renovations.

“Most homeowners are sitting on an untapped, large amount of equity in their home,” says Cook. 

While rising interest rates have cooled the housing market slightly, prices remain elevated compared to prepandemic levels. Median home prices in September 2022 were 8.4% higher than a year prior and 42% higher than in 2019, according to the National Association of Realtors

Those who bought their homes before the pandemic housing frenzy likely have a large amount of home equity they can turn into cash through a home equity loan or home equity line of credit (HELOC). They can now invest that cash into home improvements that increase the value of their house or make it easier to sell later. 

What Renovations Improve a Home’s Value?

If you want to boost the resale value of your home with some renovations, where should you start?

“Some of the best renovations happen in the spaces where people spend the most time,” Gavin says.

That means kitchens and primary bedroom/bathroom suites are a great place to start. But you don’t necessarily have to do a full gut renovation, Melette says. In a kitchen, for example, it could be enough to paint your cabinets and put in new countertops or appliances. A renovation like that “gives you that advantage but doesn’t give you the cost [of a full remodel],” he says.

Melette also suggested homeowners consider putting on a new roof, or repainting the exterior of the home. “When you go to place this home on the market, if you have those things done … when the buyer comes to make that purchase, that’s one thing they don’t have to worry about doing, so it gives them that peace of mind, so it makes for an easier sell,” he says.

You could also consider adding a bit of square footage to your home by enclosing a patio space, or renovating an unfinished attic or basement

There are, however, some renovations or aesthetic choices you should avoid if you’re thinking about selling soon.

“My caution to sellers is not to overdo it, because that happens a lot,” Gavin says. Don’t lean too far into your specific tastes or color choices. Leave some room for the next owner to personalize it and make it their own.

Melette agrees: Bold colors (especially team sports colors) will likely turn off future buyers. “We want to stay away from … individual tastes,” he says.

Above all, Gavin says it’s best to keep your renovations simple, without overspending. Smaller changes like a fresh coat of paint, new light fixtures, or new carpet can go a long way in making your property look new.

Pro Tip

Renovations don’t always need to be all-or-nothing. Smaller touches—like new colors or finishes—can also go a long way.

How to Finance a Home Renovation

Thanks to the rise in home values over the last few years, a lot of homeowners are sitting on piles of equity.

That’s a reserve you can consider using to fund some of these renovation projects.

“A home equity loan gives people a way to tap into their equity in an affordable way,” says Cook, who noted that Discover is seeing record home equity loan volume this year. 

It’s a considerable shift away from cash-out refinances, which were popular when mortgage rates were at record lows. Cash-out refis are a way of refinancing your primary mortgage with a higher loan amount than what you currently owe, and keeping the difference as cash. Because it replaces your original mortgage with a new one that has a new rate and terms, there’s a double benefit when market mortgage rates are low: you can simultaneously extract equity from your home while lowering your mortgage rate to save on interest. 

But when market mortgage interest rates are topping 7% like they are now, the calculation becomes a lot different. Now, getting a cash-out refinance means accepting a higher interest rate on your entire mortgage, a particularly unappealing proposition for homeowners who locked in a 2% or 3% rate during the pandemic. 

That’s where home equity loans or home equity lines of credit can be useful. They allow you to preserve your original mortgage, and add in a second loan solely for renovations. Although home equity loan and HELOC rates have also risen since the beginning of the year, you’ll only be committing to a higher rate on the amount you’re borrowing, not your entire mortgage balance. 

“[Homeowners] want to protect their primary mortgage. That’s what makes some of the home equity loan options very attractive,” Cook says.

Whether to choose a home equity loan or a line of credit depends on your specific needs and preferences. 

Home equity loans give you a big lump sum of cash all at once, and have the benefit of fixed-rates (and fixed monthly payments). Many lenders also offer these loans with no closing costs or cash due at closing.

Home equity lines of credit, or HELOCs, function more like a credit card. You’d have a certain limit, and could spend as much as you need up to that limit, but only pay back what you use. The downside is HELOCS typically have variable interest rates, which could make for an unpredictable monthly payment, especially as rates continue to rise.

Regardless of which option you choose, Cook recommends that you work with a lender you trust, and that you do your homework to make sure you understand all of the fees and costs that a loan entails—beyond just the interest rate.