Families experience myriad changes over time that impact their housing needs. What was once a perfect fit may no longer meet the demands of a growing family or the shifting priorities associated with aging. Just like the HGTV show Love It or List It, many of us find ourselves facing the question of how to adapt our space to meet our current needs. Often this means small adjustments, like replacing a large coffee table with a smaller one to give your children more room to play. As our lives evolve, our needs can shift so much that a fundamental change is required, whether that’s embarking on a renovation or deciding to move into a new home.
The Allure of a New Home
It can often be easier to envision moving to a wholly new space rather than managing – and living through – a major renovation. Moving provides a way to address a variety of needs and desires in one fell swoop. Families that are outgrowing their homes can find additional bedrooms, a new school district, or a larger yard for the kids to play in, all at once. Downsizing to a smaller, more manageable home can remove some of the headache and expense of maintaining a large house, or it can provide single-level living space as stairs become more difficult to navigate.
While the appeal is clear, there are costs to moving that must be considered, including broker’s commissions, closing and moving costs, and potential capital gains taxes. Additionally, as we wrote about recently, housing prices have remained high over the last year and a half despite significantly higher mortgage interest rates. This means that even a lateral move or a downsize can lead to materially higher mortgage payments. As a result, many homeowners who bought or refinanced in recent years feel trapped by their current low-rate mortgage.
The potential adjustment to property taxes can be just as important as mortgage rates. In California, homeowners over the age of 55 can mitigate the cost of higher property taxes by taking advantage of policies that allow them to transfer their current property tax basis to a new home, as long as they meet certain criteria. Ongoing costs, including higher property taxes, a monthly HOA fee, or significant maintenance for a large yard should all be carefully considered when exploring the financial sustainability of a move.
Beyond the financial criteria, there are considerations around disruption to our daily lives. Uprooting from familiar neighborhoods, routines, social networks, and schools can be unsettling. Moving to a new home requires tremendous planning and adaptation, but it can bring with it an element of excitement and new possibility.
The Appeal of an Upgrade
Taking a “love-it-and-improve-it” approach can offer a compelling alternative to a move. Depending on the scope of your needs, renovating your existing home can be more cost-effective than moving, though it comes with its own set of challenges and costs.
For families that need just a little more space, converting your garage into a den or a new bedroom is likely less expensive than moving. The same can be true if you plan to age in place: installing grip bars in the shower and building a small ramp up to your front door are much simpler projects than a flat-out move. Larger projects can address more needs, but the costs also increase significantly. These can include, for example, bringing in an architect to draw up plans, coordinating permits with the city, determining scope and materials with your contractor, and budgeting for unexpected costs and delays that always seem to arise.
Renovating allows you to customize your home to exactly what your family needs in terms of functionality and style, but the disruption should not be underestimated. You may have to live in a small quadrant of your home while the rest of the house is a construction zone, or even cover the costs of temporarily living somewhere else. Also, while renovations can address specific areas of concern, they may not be able to meet all of your needs and wants. HGTV shows are rife with scope reduction when projects inevitably go over budget. This makes for good drama on TV, but it’s also the reality for many renovations.
Financing Your Decision
When it comes to financing a move or a renovation, there are essentially three options: pay in cash, take on debt, or most commonly some combination of the two. With a move, typically you are transferring equity from your old house to the new house, and then getting a mortgage to make up any difference in value. When touring potential homes, it’s easy to fall in love with a house that is bigger or nicer than you were originally targeting. Careful planning is required to ensure that higher mortgage rates and housing costs fit your long-term financial plan.
With renovations, there are several options for financing, primarily because renovating typically involves smaller dollar figures than purchasing a new home. As with buying a house, cash is the most straightforward way to pay remodel costs. Another common path is to use a home equity line of credit (HELOC) or a home equity loan to access some of the equity in your home. Similar to mortgages, HELOCs and other loans have become far more expensive over the past 18 months as interest rates have risen, causing many homeowners to reevaluate the timeline and necessity of renovation projects they had been considering.
The best combination of cash and debt depends on your personal circumstances, as well as the current market and interest rate environment. Importantly, if you are planning to use investments to fund the “cash” side of the equation, it may make sense to take that money out of the market or shift it to more stable funds as soon as you have a sense of the overall budget.
A Complex Decision
Ultimately, the decision to move or renovate depends on a multitude of factors, including your family’s evolving needs, financial situation, and personal preferences. As with many complex decisions, there’s no one-size-fits-all answer. Consulting with experts such as real estate professionals, a mortgage broker, and your financial advisor can provide valuable guidance. Understanding the financial and qualitative impacts will allow you to make an informed decision about what path is best for your family, whether that means embarking on the adventure of a new home or deicing to enhance your current one.
 Transfer of Base Year Value for Persons Age 55 and Over – CA Propositions 60/90 CA.gov
About Sam Wood-Bednarz, CFP®
Sam Wood-Bednarz is a Partner, Senior Advisor, and Director of Financial Planning. He provides clients with a sense of confidence and security in their financial lives.
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