Put extra money on the mortgage or into uprgrades in the house?

Question

We have a good chunk of money in a savings account and may need to sell our house within a year. What will get a better return on our money? Putting the money down on the principle of the mortgage or finishing the basement, paving the driveway and installing A/C?

Answer 1

Hi sugarjones,

If you are sure you will sell within a year then upgrading the house may bring a faster higher return.

Only do minor necessary renovations. Updating a bathroom probably will not return full value.

Painting and neatening up will give you the most bang for the buck. If you need carpet offer a carpet allowance to the buyers. That way they can choose the color.

You will find some great information on getting your house ready to sell here - http://homebuying.about.com/od/sellingahouse/ht/homeprep.htm

Norm

Answer 2

If you already have the biggest house in the street, don't spend any extra money on the house because it will not increase the value radically.

What I understand from the question is that there is some unfinished sections/works on the property. By all means spend the money and get the product finished. Nobody like to buy "half a house"

Most important - There is always "something" that sell a house for that little more than it is actually worth eg. A kichen where everything is "just right", or an entertainment area that will "fit" the prospective buyers desires/needs etc. Spend money to create the "something" that will increase the worth of the property and sell it quick. From my experience the above 2 places are no.1 with a well designed "workspace for dad" a little behind.

But as usual - Catch the eye of the "buying woman" and you have a winner.

Answer 3

When you say "Good Chunk of Money" how big is big? As a Mortgage Broker form Alberta Canada, I can only give you a Canadian prespective.

A particular popular choice with my clients, is what has come to be known as the HELOC advantage. In Canada your mortgage is not tax deductable, but an investment loan is. So I have clients who will max out a HELOC usually at prime (6% today)and deposit there money with a private lender that I work with who will give the a guaranteed 12% annual return. So they will then deposit there monthly return onto their HELOC and have enough to pay off the interest and principle, plus they get to write off the interest payments. The reason that I'm telling you this is that there's more than one option available to you with your money.

Most renovations will not return even your initial costs let alone give you a better return on your money.

Paying down your principle will save you the interest that you would have paid in the future. Also when you pay off the principle faster it also saves on the taxes that you would have had to pay to earn those mortgage payments. What I mean is that if you pay $1000 a month on a mortgage and have to earn $1400 a month to pay that mortgage. So if you did not have that mortgage you could invest the $1400 a month and save the taxes.

Hope this helps to give you a few more options

Answer 4

As you can see, there are differing opinions on this question. If you fix the place up, will you get your investment back? Does paying down the principle make sense when the mortgage usually gets paid off at closing anyway? These are tough questions. Another option that you should consider is to leave the house as is, leave the principle alone and invest in an income property with the cash you have. When you own an income property, the cash flow is considered income when you seek financing on your next home, allowing you to qualify for a higher loan or better rates, and now you have a property that is generating a monthly cash flow for you and building equity at the same time.

Answer 5

Paying down the mortgage does not give you any real benefit here. Home improvements is a mixed bag, for example:

Normally,

Finishing out a basement only returns about half what you sink into it

Paving the driveway, not usually a big deal to most buyers, meaning only return would be to add to curb appeal, so may attract more buyers at same price

Installing A/C may be important, depending on area and home size. Is it normal for comparable homes? Do you live in Tampa, FL or in Seattle, Washington ?

Definitely spruce up the house with low cost items that can add appeal to potential clients. Sometimes new paint and shrubbery can be a low cost way to increase the sell-ability of a home at a higher price. Clean, remove clutter, position the home to look comfortable, spacey, and fun to live in...and you'll get more bang for your buck

Answer 6

It entirely depends on what your equity is and what the house is worth. I would think that making the house more sale-able would be very good investment. If your going to sell within the year, I would put the minimum amount of money into the house to make it sell quick, while you won't save anything by paying down your mortgage, you might be able to beat the taxman by doing so. In Canada anyways, the money you make on the sale of your primary residence is not taxable, but there is a tax on money paid as interest to your savings.

Answer 7

I'd pay down the principal and if you have anything extra pave the driveway. A/C and a finished basement are personal choices. I wouldn't necessarily want a home with A/C or a finished basement.
I would want to make those decisions on my own. You are not guaranteed to get back what you put in, thus losing money in the process. Get your principal down and get more money at your closing. We are in the middle of a housing slump, keep that in mind.
Good luck

Answer 8

It all depends on the amount of money you have spare. If you have a substantial amount it may be better to put it in a high rate interest account. Check the interest rate you pay on your mortgage- if it's less than you will receive in your savings account- keep the savings in your account. Some home improvements will add value to the price of your property others don't so be careful if you use the money to upgrade your property.
Some lottery winners are advised to keep a mortgage because the interest they pay on the house is less than they receive from the savings account.

Answer 9

If you plan to sell within a year, no reason to make a principle payment and let the bank hold your money and earn interest on it for the time frame. I mean, you will just get the money back when you sell. If work needs to be done, do the work.

Answer 10

There is nothing you can do to save money, but change your habits. Just save for a year. Don't go out, don't go to the movies, don't do a lot of shopping for cloths. Second job helps - not only it gives you extra money, it also doesn't leave you time to spend the money that you earned. Unfortunately, there are not a lot of legal ways to save money fast, but if you remember your goal - you can do it.