Clark Howard

Which Is More Practical: Financing a Home Addition or Buying a Bigger House?

Your current home no longer meets all your needs. Should you buy a different house or renovate the one you have?

Perhaps you’ve grown your family since you moved into your current home. Or maybe you now need a home office and recording studio.

Whatever your reasons, the solution may be more complicated in 2023 due to a significant spike in the average interest rate of a new mortgage.

What factors should go into the decision to buy or renovate? That's what a listener of the Clark Howard Podcast recently asked.

Should I Buy a Bigger House or Renovate My Current Home?

I need more space in my house as my family keeps growing.

Which is more cost-effective: Selling my house and buying a bigger one, or renovating the house I have now? That's what a Clark listener wanted to know on the Feb. 20 podcast episode.

Asked Drew in Ohio: "My wife and I are planning to add a third child to our family, but with that comes a need for more space in the home. In the current market, we could get a big chunk of equity if we sold, but are struggling to be able to afford an upgraded home since our current mortgage is at 3% interest. We've also considered financing a 600-square-foot addition to make our current home a forever home.

"What's the smarter financial option to take given current housing market and interest rates, sell or add on? We love our neighborhood and school district!"

Let’s look at Clark’s overall advice first — then explain why he’s giving that advice.

“If you move, your entire home is subject to an interest rate that’s double what you have right now. So that carry cost is gigantic,” Clark says.

“So if it were me, you love the neighborhood, you love everything about the house, I’d do the addition. Even though doing additions is not exactly fun.”

Buy or Renovate: How Mortgage Rates Play a Major Factor

In the past, Clark may have advised Drew to sell and move to a bigger house in the same neighborhood. Or at least in the area in order to stay in the school district.

However, many people locked into new mortgages or refinanced at interest rates of 3% or below from 2008 to 2022.

The Federal Reserve cut interest rates from 5.25% (June 29, 2006 to Sept. 18, 2007) to 0 to 0.25% (Dec. 16, 2008) due to the Great Recession. The interest rate stayed below 2% for almost the entirety of the next 14 years.

“We have so many people who have these unusual, ultra-low mortgage rates that only exist because of special moves by the Fed that artificially held down mortgage rates,” Clark says.

Many people are de facto locked into their current homes. Because it would be prohibitively expensive to switch even to a home of equal value.

The question is, does Drew fall into that camp?

The average 30-year fixed mortgage sits at 6.77% as of this writing compared to 6.19% for a 15-year mortgage. Even with a good credit score and an above-average offer, Drew could be looking at double the interest for a new mortgage, as Clark mentioned.

Why Deciding To Renovate Isn’t As Easy As Pie

The other alternative is to renovate instead of buy.

“The per-square-foot cost of doing an addition to your home is much higher than what homes in your neighborhood sell for per square foot,” Clark says.

“But construction material and contractors are much more available now than they were when housing was going great guns in the United States.”

There’s also the hassle of living in a house while contractors are regularly visiting. Not to mention the potential frustration from neighbors or even the need to temporarily relocate.

And depending on what you’re looking for, the blueprint of your current home may not be perfectly suitable to add what you want.

Final Thoughts

Additions can be an even bigger headache than switching houses. But that’s not as rough financially compared to a mortgage with an interest rate that’s twice as high.

That’s especially true if you love your house, neighborhood and school district, Clark says.

In his mind, that’s the deciding factor when deciding to buy or renovate.

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