Making good financial decisions for your home in 2023

A new year brings new possibilities to take control of your personal finances: Save more, spend less and set big goals about making smart decisions with your money. With buyers holding back due to high interest rates and housing prices falling across the country, more homeowners will be hunkering down and waiting to think about selling until the market feels somewhat stable again. If you’re planning to stay put for the foreseeable future, now is the time to make sure your house feels like home.

Why is now a good time to improve the value of your home?

While January and February might have you thinking of hibernating in your home, you might be better off looking at ways to spruce up the lair. Mallory Micetich, home care expert at Angi, points out that, since “summer is the most popular time of year for home remodels,” the late winter months can be an opportunity to beat the house-renovation rush.

The long, sunny days are ideal for taking care of big projects, but the high demand means it can be harder to find available contractors.

— Mallory MicetichHome Care Expert at Angi

“Additionally, building materials can cost more during the peak season as demand for these products increases,” Micetich says. “If you can get a head start on a project ahead of the start of home renovation season in May, you are likely to have more success finding and hiring your top choice of contractor or home pro and could see benefits in terms of budget and timeline.”

If you aren’t quite ready to break ground on a project, there’s nothing stopping you from shopping. As the new year kicks off, keep an eye out for potential discounts/closeout-sales on furniture, flooring and appliances you might need to stockpile for later in the year. It’s particularly smart to think out-of-season: Not too many people are worrying about air conditioning in winter, so there might be bargains in buying a new unit or upgrading your HVAC system.

What should you know about tapping home equity?

A recent survey from digital lending software company MeridianLink revealed that 21 percent of Americans are considering taking out a home equity loan in 2023 – a huge leap from the 8 percent who tapped their home equity in 2022. Home equity loans and home equity lines of credit (HELOCs) both offer some of the lowest interest rates available, but there’s a reason for those relatively low costs: You’re putting your home on the line to borrow the money — as with a mortgage, it serves as collateral. Default, and you’re at risk of foreclosure.

With that in mind, the funds used from any kind of home equity loan product should ideally help increase the value of your home or help you save in other areas, such as paying down credit card balances with high-interest rates.

Regardless of why you’re thinking about tapping home equity, it may be smart to act sooner than later.

“We expect two possible rate increases [from the Federal Reserve] in early 2023,” Tim Wheeler, vice president of consumer lending at Fortera Credit Union, says. “Opening a home equity loan now would allow for a lower payment versus waiting to apply after a future rate increase. Borrowers will free up much needed discretionary income by locking in a lower rate prior to any increase.”

Wheeler points out that taking out a home equity loan isn’t a set-it-and-forget-it financial move, though. Rates are constantly fluctuating. If you lock in a rate for 30 years, you’re going to want to pay attention to when the market shifts and you might be able to save on your borrowing costs. “As rates decline, borrowers will want to evaluate options to refinance their equity loan for a lower rate,” Wheeler says.

Other ways to pay for home improvements

You don’t have to take out a home equity loan to cover the costs of a home project. Consider these other ways to secure the cash you need:

• Credit cards with a 0% APR introductory offer: If you need a smaller amount of buying power and have a clearly defined strategy for paying back your costs in a short timeframe, there are plenty of credit cards with lengthy 0% APR periods. Interest-free funding! You won’t pay any additional finance charges as long as you pay off your balance in full prior to the end of the introductory timeframe.
• Personal loans: Personal loans are another option to consider, and you won’t have to put your house on the line to secure one. However, you’ll want to have excellent credit; otherwise, personal loan rates can be excessively high, adding to the overall cost of your project.
• Savings: Avoid any interest charges or worries about an application by dipping into your savings to upgrade your home. You might also consider borrowing from your 401(k) or withdrawing from your IRA. Just be mindful of keeping enough money in your savings for an emergency fund. If you drain your savings, you’ll have a nice place to call home, but you’ll be house poor — that is, you won’t be able to enjoy it due to the financial stress of a nearly-empty bank account.

Not all home improvements need to be expensive

If you’re planning to live in your home forever, you might not be worried about how much you’re going to spend to get things exactly as you want. However, if you plan to sell the home down the road, it’s important to remember that most home improvements don’t manage to recoup their full costs at resale.

“While remodeling a kitchen, updating a bathroom, or finishing a basement can be great ways to increase the value of your home, there are lots of smaller projects you can do that also have a great ROI,” Micetich says.

Be mindful of thinking about projects that can help increase the value of your home without breaking the bank. The first three, in particular, are great for curb appeal.

• A new garage door: Micetich points out that a new garage door will only cost between $750 and $1,600, and you’ll get most of that money back – 94 percent, to be exact – when you sell your home. “ROI isn’t the only reason to replace a garage door, as modern doors offer increased durability, a longer lifespan, and superior protection against severe weather events,” she says.
• A new front door: The entrance is everything, but it doesn’t cost much. Micetich says a new front door will typically cost between $500 and $1,500 and return around 65 percent of its value. “To maximize this ROI,” she advises, “go with a door that is both aesthetically pleasing and exceptionally durable.”
• New windows: Depending on the kind of windows you choose, you can spend as little as $200 per window of $1,300, according to Micetich – an amount that can add up if you have a lot of windows to replace. “For that price, however, you’ll get a 68 percent return on investment, improved energy efficiency, and some added visual updates on both the interior and exterior of your home,” she says.
• Sprucing up your living room: Micetich says that taking steps to focus on the central gathering place in your home can deliver a typical return of 53 percent. “Completing many projects simultaneously, such as adding an accent wall, replacing the wallpaper and repainting the ceilings have a cumulative effect on this ROI,” she says. “Even tiny projects like adding slipcovers, updating the lighting, and decluttering the space have an impact when dealing with prospective buyers.”

The Most Affordable Home Projects With Strong ROI

*Source: Remodeling 2022 Cost vs. Value Report

As you can see, the cost spent on a project doesn’t necessarily correlate to return on investment/improvement in home value. Interestingly, the less one spends, the better the ROI sometimes. For example, Remodeling’s “2022 Cost vs. Value Report” notes that a minor kitchen upgrade, costing under $30,000, recoups 71 percent of its outlay, while a major remodel, costing over $80,000, returns only 56 percent.

No matter what you decide to do to upgrade your home, Micetich recommends making decisions based on broad appeal. “Be mindful that if you are taking on a project for ROI, it is key to avoid hyper-personalization,” she says, “especially in material and design choices.”

Hidden unexpected costs of home remodels

According to the 2022 Houzz & Home study, 34 percent of homeowners went over budget with their most recent projects in 2021. As you plan for your project, it’s important to recognize that buying supplies and paying your contractor aren’t the only cost considerations. From securing permits to finding a short-term rental if the property isn’t livable during the renovation, there are plenty of hidden expenses that can create some additional challenges.

Other popular financial goals

In addition to making smart decisions with your home in 2023, there are plenty of other opportunities to focus on your finances:

• Pay down your debts: A high balance on a credit card can be a very heavy load to carry. Develop strategies for getting closer to calling yourself debt-free. While it might create some tough decisions about reducing spending, it’s ultimately a win-win: You’ll improve your credit score and save yourself money in the long run.
• Dedicate more to your retirement savings: You can’t work forever. To make sure you have a strong cushion of cash for your future, it’s time to take advantage of every retirement saving opportunity available, including IRAs and 401(k) plans (especially if your employer has a strong matching program).
• Start saving for college: The little baby in that crib will be 18 before you know it. Instead of delaying their college fund, open a 529 plan to start stashing away some money for their education.
• Go on a vacation: As travel continues a post-pandemic rebound, you might have your eye set on exploring somewhere new this year. Avoid the temptation to put all those expenses on a credit card, and set up a separate savings account to save for your getaway.
• Pay off your auto: What’s better than having a nice car? Having a nice car that you’ve paid off. Use Bankrate’s Auto Loan Payoff Calculator to estimate how much you can save by making bigger payments.