Consider Home Values
Before You Renovate

Question: In March 1997, I signed a 10-year adjustable-rate mortgage at 6.75% with three points. The purchase price was $397,500, and the loan value was $318,000. I have been told that my home could sell for between $650,000 and $700,000 today. I've decided to add a master-bedroom suite with a new bath, a new bathroom on the ground floor and an updated kitchen, hoping that the work will raise the value of the house to between $800,000 and $900,000. I secured a $200,000 home-equity line of credit at the prime rate to pay for the renovations. Given that rates are so low, should I refinance and put the $200,000 I need into a mortgage now?

-- Bill, no city provided

Bill: I certainly hope that whoever told you your home would sell for $700,000 discounted the price because you had an old-fashioned master-bedroom suite, a missing bathroom and an old kitchen. In other words, homes in your neighborhood with updated master bedrooms, extra baths and renovated kitchens should be selling for $900,000, otherwise the money you invest in the renovations won't be returned when you sell.

The biggest mistake most renovators make is thinking they will get back dollar-for-dollar what they spend on upgrading. The fact is that the value of your home is determined more by neighborhood values than by what you add. If you're upgrading to neighborhood standards, expect to get your money out. But if you're upgrading beyond neighborhood standards, you're probably creating a white elephant and will have trouble getting your desired price.

As for refinancing, it sounds like you're planning on a quick resale. If that's the case -- and since your home-equity loan is at prime -- it hardly makes sense to refinance for a few months and spend extra money on closing costs. On the other hand, if you're planning to stay in the house for a while, locking all the financing into a single low-interest, fixed-rate 30-year mortgage makes much more sense.

Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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