Here’s a question from Kyra posted in the HTM Facebook Group:
“Is it better to pay down the principal of your mortgage or put that money into home improvements? Which would get a better ROI? Interest rate of 6.875%”
Matt & Joel’s response: From where we’re sitting the answer is clear: Paying down the mortgage will provide the best return on investment.
Here’s some context on why…
Most home improvement ROI isn’t great
The fact of the matter is, most home improvement projects have a negative ROI. They cost more than the value added to the house.
Sure, there are a select few home improvements that will net you what you paid. Like, surprisingly, installing a new garage door if your old one sucks.
But the biggest projects that get homeowners the most jazzed – like new cabinets and fancy countertops, the brand new bathroom redo, etc – those certainly make a big visual impact, but they have, on average, a negative return. You might get ⅔ of the money you spent back in your hands if you end up selling.
Here’s a recent study done on average home improvement project costs and how much value they add to the resale value of your home:
As you can see, small upgrades under the $10,000 mark might be a net positive. But they should be performed right before you sell the house so you are able to enjoy that immediate value boost.
The bigger, more expensive projects are usually not productive from an ROI perspective.
Paying down your mortgage
Kyra also has an interest rate close to 7%. That’s high enough that it’s usually a great deal to pay down early if you have spare cash.
And let’s not forget it’s a guaranteed return. Anytime you make extra debt payments, that “return” is locked in because you won’t pay interest on any of that debt going forward.
Home reno’s have no guarantee at all. You might recoup the money. It’s a gamble at best.
The interest rate is always a factor when considering paying down debt. But even if your rate is 2.5%, the same info about the ROI of home improvements remains true.
In this case, paying down debt trumps a negative ROI for home improvements.
What about personal enjoyment?
This doesn’t mean we’re against improving your home, Kyra!
We’ve both taken on home reno projects of various sizes from time to time. You need to enjoy your space, be proud of where you live, and keep up with necessary maintenance.
It’s ideal to take on those projects because you have the money saved up and are excited to update your bathroom, porch, mudroom, or whatever.
While work you perform to your precious abode might increase the value of your home a little bit, do it for the joy and happiness, not the money equation alone.
What about DIY renovations?
Here’s a curve ball… Don’t forget that any sort of DIY work you can tackle (if you know what you’re doing) can help make those projects more financially astute.
You can learn TONS of handyman skills on YouTube these days for no cost. And with tool rentals and materials, you might be able to pull off some really cheap home upgrades. These will ensure that your home improvements come with a superior ROI because you’re not sinking nearly as much money into them. Elbow grease for the win!
Here are a few things to consider before DIY or calling a pro for help.
The Bottom Line:
We’re money nerds at heart and can’t help but focus on the ROI portion of the question. It irks us when people talk about buying things as an ‘investment.’ A new car or TV isn’t an investment, because those things rapidly depreciate in value! Sadly, so do most home renovations over time.
Homes are certainly more of an investment than other physical items folks tend to buy, so you’ll want to keep it in good shape, of course! Maintenance and light updates are great projects to put money into. But that still doesn’t mean you’ll see the value/ROI for all or most of the improvements you make.
All in all, throw your spare cash at the mortgage. Once you own the place free and clear, you’ll be laughing all the way to the bank.
For the full version of this discussion, check out Podcast Episode #859 (it’s the last question in the episode)
Related posts:
