Q&A: Remodel the house or sell it?

Dear Liz: Should we take out a home equity loan so we can do some improvements on our house and make it work better for us, or should we sell it and upgrade to a bigger house? We are not in a rush to move, so we are content to take our time to find the right new home at the right price. We are also considering staying and doing work on our current home. But we have a lot of equity and are wondering: Would it be smarter to cash that in? We both remember the housing crash and are very nervous about getting in over our heads.

Answer: People are spending a lot of time at home these days, and many are longing for a little extra space. Interest rates are low, which makes borrowing for improvements or a bigger home more affordable for many.

You’re smart to be cautious about taking on too much debt, though. Lenders are much more cautious than they were before the Great Recession of 2007 to 2009, but it’s still possible to borrow more than you can comfortably repay. Big mortgage payments could prevent you from saving for important goals such as retirement or your children’s college education.

If you like your current neighborhood, remodeling is often the more economical route. You spend roughly 10% of your home’s value when you sell it and buy another. Real estate commissions take a big chunk, as do moving costs. Bigger houses — whether through remodeling or moving — also can mean higher tax, insurance and utility bills. That’s not to say you should never upgrade, but you’re smart to consider all your options because the cost of exchanging homes is pretty high.

By the way, you aren’t really cashing in equity when you use it to buy another home or borrow against it to make improvements. Some people would say that’s “putting your equity to work,” but the idea that equity needs employment is what led many people to borrow excessively against their homes before the last recession. It’s perfectly fine, and often desirable, to have lots of equity just sitting around. That way, it’s there for you when you really need it. You can tap it in an emergency, for example, or to help fund your retirement.

Wednesday’s need-to-know money news

Today’s top story: Ace back-to-school shopping with six smart moves. Also in the news: How to prepare for the next recession, how a remodeling project changes your property tax bill and adding more cash investments to your portfolio.

Ace Back-to-School Shopping With 6 Smart Moves
Avoiding the splurge trap.

How to Get Ready for the Next Recession Now
Making your finances recession-proof.

How a Remodeling Project Changes Your Property Tax Bill
Upgrades mean an uptick in home value.

Interest rates are going up. Is it time for more cash investments in your portfolio?
The appeal of cash investments is growing.

Tuesday’s need-to-know money news

Today’s top story: Bartenders spill secrets for keeping your tab in check. Also in the news: How a remodeling project changes your property tax bill, tips for back-to-school shopping, and how to use your bank’s automatic transfer tools to make budgeting easy.

Bartenders Spill Secrets for Keeping Your Tab in Check
Avoiding a financial hangover.

How a Remodeling Project Changes Your Property Tax Bill
That new bathroom just increased your home’s value.

Cross Items Off Your Back-to-School List With These Tips
Almost time to go back to school.

How to Use Your Bank’s Automatic Transfer Tools to Make Budgeting Easy
Automating your banking can make saving money easier.