Should I Pay Down My Mortgage or Make Home Improvements

bigg_question.jpgBigg 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.



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 Remodeling the kitchen or bath can yield a reasonable return, particularly if they look a little outdated, as long as you don’t go over-the-top.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

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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(Image in today's post by svilen001)

21 replies
  1. Mike Robertson
    Mike Robertson says:

    I really like your post. You give reasons behind your insights and offer perspective most people don’t have. I think another option to consider if you were thinking about paying down the loan or improving the property, would be to invest in the improvements then refi… of course there are many variables to consider before this option should be chosen.

  2. Mark Lieberman
    Mark Lieberman says:

    It has been my lifes work and pleasure advising people about Home Loans and I am an expert in this financial field. But since the housing market has gone into a deflationary spiral, not only has it been more difficult obtaining a home loan, but it has been nearly impossible to keep the value of that newly purchased property up or at best, to the level of the purchased price. Housing prices must “Bottom-Out” before the whole housing industry comes back to normal. Some experts say it will botton-out in 2013, well lets hope it is sooner than that. What is your view on this?

    • George & Mary-Lynn
      George & Mary-Lynn says:

      When was the last time the housing market was “normal”?:) The boom and the bust were both national events while we still believe real estate (especially the market for homes) is largely a local marketplace. You’re probably more qualified than us to make an educated guess on the bottom, Mark. We think if the long-term trends in a local market are positive and a person plans to own a home for the long haul, the current combination of beat-down prices and low mortgage rates is hard to beat. It’s unlikely most of us adults will ever see such a convergence again. What do you think?

  3. Realt Estate MLS IDX Search
    Realt Estate MLS IDX Search says:

    Great post! It’s a tough topic to tackle. As a fellow real estate blogger, knowing which to choose between paying down on the mortgage or improving your home is a very case-specific decision. But, improvements can also be investments if done wisely.

  4. J Oak
    J Oak says:

    A very good wise blog. Every home has a ceiling to its value dependant on location type of property etc.A good way to increase a property is to give each room a single wow factor feature.Example a feature fire place. A stunning solid or engineered oak floor. This is a good way to increase your investment without going over the top

  5. J Log
    J Log says:

    We recently fitted a woodburning stove in our home. Its cut down our gas bills by a mile and we burn briquettes on the stove that are carbon neutral

    • George & Mary-Lynn
      George & Mary-Lynn says:

      We understand your sentiment – and perhaps even skepticism – but we’ll stick with the thoughts given in our post – it depends. The question is best answered is best made after some basic analysis.

  6. J Oak
    J Oak says:

    Every property reaches a ceiling on its price. So never go over the top. If you are intending selling your property a good tip is to give each room a single wow factor.

  7. John
    John says:

    I’d really like the answer to this question. In our area (not in the US), house values seem to have historically increased steadily about 2-3% per year (they weren’t affected by the 2008 crisis in the US) and my mortgage is only 1.8% per year interest. How can I tell whether it’s more worth while to pay down the mortgage or improve my house?

    • George & Mary-Lynn
      George & Mary-Lynn says:

      We’ll preface our answer with this – the best advice will come from your professional advisors who know your whole situation. With that in mind, the general rule is – borrow when the return on the asset exceeds te cost of debt. in your case, that is the case so it seems reasonable to think improvements which also compound at that rate would serve you better than paying down your mortgage.


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