Torn Between Home Buying or Home Improvement?

buy or renovate your home

It really can be tempting to at least start thinking about moving to a new home.   Maybe you are thinking you would like to try a new neighborhood, or perhaps buy a home with additional space.   You are thinking that the interest rates for doing this are great.   With the housing boom maybe you are likely to get a good price for your current home.   This all makes sense but you need to think beyond this.

While it is true that interest rates are great, and you may get a good price for your current home, you are going to have to spend big bucks on a replacement home, so what are you really accomplishing?

If you have a low mortgage on your current home, chances are the interest rates are a little higher if you locked into a long term mortgage.   Now compare this to what it is going to cost you for the new home which may have a higher mortgage but lower interest rates.   Is the new home going to be worth it?  It may be a across the board transaction.  Your new home may not be that much different in its offerings compared to the one you are selling.  Perhaps the neighborhood is better, however.

What this all means is you really need to think about the whole picture.

If you bought your current home at $500,000 at a 5% interest rate for five years, and now you are buying a similar home for $800,000. at 3% interest what is the difference?

The $500,000 home is no different than the $800,000. home.   Let’s say you sold your current home for $750,000.   And you still have a $300,000 mortgage on it.

So you sell your home for $750,000.   And out of this you pay out the existing mortgage of $300,000 .   This leaves $450,000. to put down on the home you are buying for $800,000.   This leaves you now with a mortgage of $350,000. with maybe a 3% interest rate.  Whereas with your old home, you had a balance of $300,000. owing at a 5% interest rate.

You are saving here on the interest rate by about 2% but you have increased the mortgage you owe by $50,000.

This deal maybe a viable one if the new home was giving you a lot more added benefits, however most likely it’s not.

Now perhaps a better deal would be to buy a home that has less value like one that you would need to do some substantial renovations to.   Keep in mind that the renovations are not going to be cheap, and you would need to know what these are going to cost you, and what you will get in return for that price.

For example:

You sold your home at $750,000. And you are buying one that is for sale at $650,000.   With a 3% interest rate.   So now you clear off your original mortgage which leaves you with $450,000.   You have estimated it is going to cost you $100,000. for the renovations on the new home, so you only have $350,000 to put down on the new home.   This leaves you with a mortgage of $300,000 at 3% interest.

This example leaves you with the same mortgage as you had with your original home at $300,000.   But a decreased interest rate from 5% to 3%. You also have a renovated home that is giving you more benefits than the original.

Or you could go an entirely different route.

You could see whether you could re-negotiate your existing mortgage to get a lower interest rate perhaps at 3% from the existing 5%.   At the same time you could increase the mortgage to do the $100,000 renovations to your home that you are wanting.   So now you have a mortgage of $400,000 at 3% interest.   However, you have up-scaled your home to what you wanted, and at the same time increased its value.

The whole concept here is to play with the figures and see what works for you best, and going to give you the most value for whatever changes in your home environment you are considering.


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Sam Seidman, CPA, CA, LPA
629 Sheppard Avenue West
Toronto, Ontario
M3H 2S3

Telephone: (416) 398-1700
Fax: (416) 398-6226

Chartered Professional Accountant, Chartered Accountant, Licensed Public Accountant


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