Remodeling Projects that Pay Off

About to start a home-remodeling project? Check through these tips first.

For anyone who has ever put their home up for sale, you know that feeling you get when you've fixed up your entire property and inevitably a potential buyer tours your home and says: "Maybe we should keep our house and just remodel."

This may be especially true when you look at the cost of replacing your house. According to the National Association of Realtors, U.S. homes have appreciated 6.8% annually on average since 1968, compared with inflation during the same period at an annual clip of 5.1%.

In addition, the American Homeowner's Foundation estimates that it can cost up to 10% of a house's value to replace it with another, even one that costs exactly the same. That's because real estate transaction costs are high, including agent commissions, mortgage fees, transfer taxes, attorney costs, title searches, surveys, and moving costs.

Thus selling one $200,000 house and buying another of similar value could set you back as much as $20,000. So, when looking both at home appreciations and the cost of moving, it may make sense to stay put. The decision of whether to sell a house, or stay and remodel, is one that is based on many factors, including what type of changes you want to make, how long you plan to stay in the house and the cost of the remodeling in comparison to the value of your home.

Experts say there are at least two rules of thumb when it comes to remodeling your house.

First, you should not increase the value of your house to a point where it is the most expensive home in your neighborhood. This could make it difficult to sell the house in a competitive market.

Second, you should strive to keep your new mortgage debt below 80% of your home's new appraised value. Not only does this keep you below the debt/equity ratio requiring you to pay private mortgage insurance on the new loan, but it also ensures you don't assume a monthly payment that precludes you from having a balanced household budget.

The exact costs of remodeling can vary greatly based on the housing market in your area. When housing prices are rising rapidly, remodeling costs can be recouped faster. In addition, if your remodel simply catches your house up to the others in your neighborhood -- say, adding a third-car garage to your home when all other homes in your neighborhood already have the same -- this type of improvement could actually recoup more than the cost.

The question of how much to spend on remodeling could also depend on whether the changes could be categorized as maintenance or remodeling. Maintenance improvements would be things like replacing the roof, carpet, or repainting. In addition, maintenance projects that focus on energy efficiency may have an even quicker payback than standard remodeling. Replacing windows, adding insulation and upgrading to more-efficient air and heating units are good examples.

It may also be important to think about how much enjoyment you will get out of the improvement. A home office, pool or gazebo may enhance your family's quality of life, but experts say these are examples of upgrades that may not necessarily be recouped when reselling.