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Extra payments towards mortgage or save for renovations?
My H and I bought a house that needed a lot of work. When it was purchased there wasn't any drywall, flooring, or kitchen, and the outside needed extensive regrading of the land, but the property that the home was on made it worth it, and we felt the house had good bones. It's in one of the best neighborhoods in our area and our house was purchased at less than half the average cost of the surrounding homes per square foot. We had to do a lot of work just for the city to approve the house to be lived in, however we're not completely finished. We still need to do the master bathroom (it's still just studs and roughed in plumbing), landscaping, add a deck and patio.
We planned on finishing the attic space to add bedrooms and we'd also like to finish the basement. Our plan is to address this when the roof starts to fail. At the time of inspection 2 years ago it was given 5-10 years. We won't have enough saved to pay cash for the project most likely, so my question is do I take what we're saving now and pay extra towards our current mortgage in order to boost equity, or should I be putting it into savings to reduce the amount we'll need to borrow for the addition?
Current mortgage and property tax is just under $1k/month there's $130K remaining. Interest is around 4%
I'm saving $1200/ month in automatic transfers, and also move any extra money at the end of the month. We earn 1% in our savings account.
We estimate the renovation to cost us between $150K-$200K (this will still keep the house in the same range as the homes in our neighborhood). This is our forever home so putting so much time, money, and work into the house doesn't bother us.
We hope to tackle the other smaller projects between now and then- the master bath, landscaping, deck and patio. We opened 0% credit cards and then paid them off completely before interest was incurred when putting in floors and the main bath, and plan to do the same for some of these projects. Obviously I'd have to plan to have that amount ready when the time came to pay it off.
Doubling our mortgage payment would be really tight, so I've been trying to have as much cash as possible, but I don't know that that is the best option in this situation. I am a bit confused about how a second mortgage or home equity loan works or if there would be another option for us.
ETA: The mortgage is our only debt. Our cars are paid off but we'll need to replace one in the next 2-5 years.
Re: Extra payments towards mortgage or save for renovations?
If it were me personally in this situation, I would save up the cash to do the renovations and not take any equity out of the home.
FWIW we bought a foreclosure that we could not live in for the first 6 months. We've rennovated it with cash and only have mortgaged 50% of the value of the home. We plan to stay in the home for at least another 10+ years.
I would only do the renovations that can be done with cash, and would make sure we were saving up to replace the roof in the meantime.
TTC since 1/13 DX:PCOS 5/13 (long, anovulatory cycles)
Clomid 50mg 9/13 = BFP! EDD 6/7/14 M/C 5w6d Found 11/4/13
1/14 PCOS / Gluten Free Diet to hopefully regulate my system.
Chemical Pregnancy 03/14
Surprise BFP 6/14, Beta #1: 126 Beta #2: 340 Stick baby, stick! EDD 2/17/15
Riley Elaine born 2/16/15
TTC 2.0 6/15
Chemical Pregnancy 9/15
Chemical Pregnancy 6/16
BFP 9/16 EDD 6/3/17
Beta #1: 145 Beta #2: 376 Beta #3: 2,225 Beta #4: 4,548
www.5yearstonever.blogspot.com
Thanks @brij2006!
Currently I have $20K in savings so we definitely could cover the roof if something were to happen, but I hope it can last until we have enough to do the attic. We don't want to replace the roof just to redo it a few years later when adding the bedrooms.
That definitely makes sense. What about putting off the deck and patio until after the roof and attic are re-done?
Not sure I would be able to put off the master for another 5-10 years though.
TTC since 1/13 DX:PCOS 5/13 (long, anovulatory cycles)
Clomid 50mg 9/13 = BFP! EDD 6/7/14 M/C 5w6d Found 11/4/13
1/14 PCOS / Gluten Free Diet to hopefully regulate my system.
Chemical Pregnancy 03/14
Surprise BFP 6/14, Beta #1: 126 Beta #2: 340 Stick baby, stick! EDD 2/17/15
Riley Elaine born 2/16/15
TTC 2.0 6/15
Chemical Pregnancy 9/15
Chemical Pregnancy 6/16
BFP 9/16 EDD 6/3/17
Beta #1: 145 Beta #2: 376 Beta #3: 2,225 Beta #4: 4,548
www.5yearstonever.blogspot.com
That's definitely something to consider. H is really looking forward to at least a deck but I might be able to get him to think about the big picture.
Right now, I don't mind using the hall bath, but if we ever get pregnant (we're going into month 11 TTC, so there may be some expenses that aren't in our plan for that) I think sharing the bathroom with more than just H would be a little bothersome, but I'd survive.
I'm not 100% sure on how much equity we have right now. We've only owned the home for 2 years, so we haven't paid much on the mortgage but the improvements we've made so far increased the appraisal from $120K to $190K (we had to do a construction to permanent loan in order to get the house up to liveable standards. The city will not allow a dwelling to be occupied if it does not have a functioning kitchen and this house didn't even have drywall, so our loan was for more than the house was worth at the time). I doubt we'd have enough to cover the renovation by the time it was needed unless we doubled up our payments rather than saving.
We'd be adding 2-4 bedrroms and 1-2 bathrooms, and more than doubling the square footage of the home. Currently we have 2100 sq. ft. but the basement (that is now a walk out) and attic would be added as living space once finished.
I'm leaning towards saving as much as possible and then deciding if we should add more debt to make up the difference when the time comes to do the attic in order to keep our payments manageable.
I'll look into mutual funds rather than the savings account (I get so weird about risk, haha).
Thank you all for your help
In your situation, I would probably save the extra money for renovations if they were going to be done in the next couple of years. Otherwise I would invest the extra money to get a higher rate of return. Like hoffse, I would also be okay taking out a HELOC to pay for home improvements that I knew would increase the value of the house if I wasn't able to save for the complete payment, especially if the interest rate would be low.
Do all the removations in cash - do not borrow money. There'd be no point in paying down one debt - just to borrow more money. you already have a lot of equity in the home since you bought it for such a low price - don't worry about paying off the mortgage until all the renovations are done. Besides equity doesn't matter unless your about to sell it or have PMI.
Do them all in stages and always have a certain amount of cash setting on the side just for emergencies - like if something breaks or something needs replacing sooner rather then later. Don't worry about paying off debt - just do your best to avoid going further into debt.