How the Wealthy Plan Their Home Renovations

This is the time of year when many of us begin planning home renovations and according to an article in the Wall Street Journal, spending on home improvements is predicted to grow from 4.3% to 7.6% by the third quarter of this year. This will be the highest amount since 2006.

Apparently some 62% of Americans are planning home renovations this year, an increase of 9% compared to last year. So-called jumbo mortgage holders will typically pay for home renovations with a home equity loan or line of credit or in cash. While most homeowners consider whether or not the improvements will help increase the value of their home if they decide to sell, wealthy homeowners are less likely to think about this aspect. Whereas many people look for a home that is ready to move into, wealthy buyers expect to renovate and to add their own personalized touches to the property.

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Additionally, location is more important for high-end homeowners as they know the next person who buys the property will be able to afford to redo the finishing to their own tastes. High-end homes tend to get top price because they might have a spectacular view or are in an exclusive area and it’s not necessarily down to whether or not they have been renovated. Real estate brokers point out that most improvements tend to be ignored when appraising the value of high-end homes as they are well aware that the next buyer can afford to redo them. Another consideration is that land value can account for up to 50% of the home value.

Nearly two thirds of those homeowners who are planning home renovations this year will dip into their savings to pay for them. Typically the higher the cost of the renovation, the more likely it is that a homeowner will use cash to pay for it and the timing may coincide with a windfall that is the sale of another property or business, a work bonus or when cashing in stocks. As mortgage rates are still low, even the wealthy are sometimes choosing to get a Home Equity line of credit or a loan to avoid cashing in investments that may be earning at a higher rate. Additionally, homeowners who get a Home Equity loan or who refinance a loan are generally able to deduct up to $1.1 million in mortgage interest when the money is used towards improving a home.