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Should I Pay Down My Mortgage or Make Home Improvements

Written on May 11, 2009 by George Krueger & Mary-Lynn Foster in Money

Bigg success is life on your own terms. The five elements of bigg success are money, time, growth, work and play. Today our focus will be on money.

One of our listeners, Bob, called us with a bigg question. He and his wife have some extra money and they are wondering whether they should use it to pay down their mortgage or make some home improvements.

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Both options are very illiquid

You can’t get your money back once you spend it with either option. So make sure you have enough extra cash to cover between six to twelve months of living expenses before you do either one.

A guaranteed return

Paying down your mortgage is one of the safest investments you can make. It’s a guaranteed return equal to your mortgage rate.

For example, if your mortgage rate is 6% and you pay it down early, you’re essentially earning 6% on your money guaranteed!

That’s a decent rate of return right now.

Returns on home improvements are often more sketchy. Start by asking yourself this question:

How does the value of your home compare to other homes in your neighborhood?

If you’re one of the most expensive homes already, making improvements probably won’t do you a lot of good financially. However, this is your home. It’s more than just an investment. So ask yourself a second question:

How long do you plan to live there?

The longer you plan to stay put, the higher the emotional returns – an important point to consider because money isn’t everything. What types of improvements yield the best financial returns? Most major outlays don’t return much if anything. Cosmetic improvements usually show a better return – paint, new floor coverings, landscaping, and those sorts of things. Remodeling the kitchen or bath can yield a reasonable return, particularly if they look a little outdated, as long as you don’t go over-the-top.

Weighing your options

Determine how much it will cost for your desired improvements. Then ask a Realtor or an appraiser to find out the expected increase in your home’s value. Now calculate your return:

Return = (Increased Value – Cost of Improvements) ÷ Cost of Improvements

Compare that to your mortgage rate. If the return for making the home improvements is significantly higher, you might consider making the improvements instead of paying down your mortgage.

Just keep in mind, this is not an apples-to-apples comparison. Paying down your mortgage offers a guaranteed return. Making home improvements does not.

Choosing between improvements

If they go with the improvements, Bob wants to replace the windows. His wife wants to remodel the kitchen. Which would be better for the money?

We wonder why you want to replace the windows, Bob. Is it for cosmetic reasons or are you thinking about energy-efficiency? Perhaps it’s both.

Stimulus for you

We hate to disappoint your wife, but right how is a great time to replace windows or make other energy-efficiency improvements. The Economic Stimulus Act extended and improved the tax credit for these types of repairs.

You get a 30% tax credit up to a $1,500 limit. So you can spend up to $4,500 on qualified improvements.

A tax credit is better than the deduction you’re used to getting on Schedule A. Deductions reduce your taxes by the amount of your marginal rate. Credits reduce your taxes dollar for dollar.

So $1,500 of your new windows could be paid for by the government!

The one cash outlay that pays you back year-after-year

However, it doesn’t stop there. It’s amazing how much air can leak out through poor windows. You’ll save money on your utility bills for years with the right windows.

Your returns for making any energy-efficiency improvements aren’t guaranteed but they’re close. They may also be higher than the returns on a lot of other investments these days. Improving your energy-efficiency is a cash outlay that pays you back year after year!

Thanks for your bigg question, Bob!

Do you have a bigg question?

Please share it with us by calling us 888.455.BIGG (2444) or sending an e-mail to bigginfo@biggsuccess.com.

Please join us next time when we talk about two recent examples of saying, “We’re sorry.”

Thank you for sharing your time with us today. Until next time, here’s to your bigg success!

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Are You Throwing Money Away by Owning Your Home?

(Image in today's post by svilen001)

19 Comments

3 Tips for Buying Health Insurance

Written on May 4, 2009 by George Krueger & Mary-Lynn Foster in Money

Today we want to talk about insurance … just for the health of it!

Health insurance is a significant expense. If you’re fortunate enough to be part of a group, your company is probably paying a good portion of the cost. However, companies are increasingly asking their employees to bear a bigger share of the total cost.

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Hear George & Mary-Lynn discuss today's topic on The Bigg Success Show! To listen while you read, click the purple player: Play Now | Play in Popup | Download

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Of course, if you’re self-employed, you have to pay it all. This really hits your budget in either case and, as we look to the future, it appears it will occupy an ever larger share.

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george I used to sell insurance years ago so I’m familiar with that side of it. I also approved our group plans when I was in business before Bigg Success.

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marylynn When we started Bigg Success, it was an eye opener for me. I went from being an employee with group insurance to being self-employed buying individual coverage. I saw the full cost, not just my share of it. I was amazed at the array of choices. And I couldn’t get some of the coverage I really liked under my group plan.

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Obviously, your age and your health are two major factors in the cost. The other key factors are:

Your deductible. This is the first money that will be paid out. You pay it up to the deductible you choose.

Your co-pay percentage. Once the deductible is satisfied, you begin sharing the cost with your insurance provider. You may split it down the middle or some other arrangement.

Your stop loss. You don’t have to share costs forever. At a certain point, your insurance company will pay 100% of the covered costs.

Your maximum coverage. It will look like a large number (e.g. $2 million) but it can be used up fairly quickly if there’s a serious health problem.

Your maximum out-of-pocket. This compiles the first three factors. Your maximum out-of-pocket equals your deductible plus your maximum co-pay amount. It only considers covered costs so just be aware that your actual out-of-pocket could be higher.

So now we want to talk about three mistakes that people often make when buying health insurance.

Pushing too much risk onto the insurance company. Being too conservative is very costly. For example, the higher your deductible, the less you’ll pay.

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marylynn But George, I know when I’ve been light on money, it’s scary to think about a large hospital bill. Even a doctor’s bill of $300 – $500 can be a burden when you’re really strapped for cash.

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george I understand that, Mary-Lynn. But I’ll give you an example of what I’m talking about. A couple we know has over $50,000 in the bank, yet they insist on having a deductible of $500. They could save a lot of money by being a little less risk averse.

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Not shopping around. As we’ve said, this is a major expense. Like most major expenses, it’s worth your time to try to save some money. So get two, or even better three, quotes.

Make sure you’re comparing apples-to-apples. The plans from two different insurance companies probably won’t be exactly alike.

Settling in. Shop carriers at least every other year. You may be surprised at how much you can save by switching plans.

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george This is something I learned the hard way. I liked my insurance company, but when I finally shopped coverage, I was astounded at how much I could save.

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marylynn This really boils down to personal preferences. It’s nice to only pay a small amount of money when you go to the doctor. But make sure you’re weighing that convenience against the actual cost.

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The key question to ask yourself is, “How much risk can I afford?

The general rule, in a financial sense, is to assume risks that are small, frequent, and inexpensive. You cover large, infrequent and expensive costs.

But also consider the emotional costs. If it’s going to keep you up at night knowing that you’re bearing a larger share of the burden, then push more risk off on the insurance company.

Think about the impact on your finances and your personal preferences to help you make this bigg decision.

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