How To Pay For Your Upgrades When You Buy A New Home

When it comes to upgrades, essentially you have three choices: finance them through your loan, pay cash, or wait and do them later yourself (aka pay as you go.) There are pros and cons to each decision.

When to finance your upgrades in your loan: Obviously, when you need your available cash for other expenses, including keeping a buffer for emergencies, financing your upgrades makes sense. This way, you pay a higher monthly payment, but you don't have to come up with as much money down.

Buying a home can be expensive. You have to come up with a down payment, pay for closing costs and then make your monthly payments. With a brand new home, there are even more expenses, such as window coverings and finishing your backyard, that you have to factor in. These extras can be costly. When my husband and I moved into a new home in Sacramento, I was in charge of the window treatments. I chose plantation shutters for the front windows in the home and valances over drapes for the large window in the family room and the sliding glass door next to it. I made curtains for the dining room myself!

After the installation, the bill came and my husband said, "Not bad for the whole house."  I looked at him and smiled. "Yeah, this is the second installment." The total bill was over $5,000—and that was 15 years ago!  

So if you need your cash for all the additional move in expenses, consider financing the upgrades. Be careful not to over-improve your property though, says Dana Bull, a first-time homebuyer coach and real estate agent in Boston, MA. "Consider how many extras you’re looking for,” she says. “Say for instance, you want $50,000 in customizations. Will an appraiser agree that the customizations are adding value? You may need to pay for items in cash in order for the property to appraise and for you to secure your loan."  

Remember that when you finance your upgrades, they become part of the purchase price. You not only finance them over the life of your loan, but they add to the price—which means you pay commission to your realtor on them, too. If your appraisal comes in low due to so many extras, you may end up paying out of pocket anyways!

When to pay cash for upgrades: When you finance your upgrades, you are paying for them for the life of the loan. Consider this: If you are upgrading your carpet, and you finance it, you are now paying for your carpet for 30 years (the life of the loan)  instead of 5 years (or however many years until you replace the carpet ). If you are going to finance your extras, choose upgrades such as insulation, cabinets, countertops and bathroom features that you probably won’t replace for a long time.  

It's cheaper to pay cash. When you finance upgrades, in addition to making the total cost (and commission) larger, you pay interest on them as well.

Another thing to remember is even though you may not have the skills or the time to do it yourself, but your builder doesn't know that. "Negotiate with the builder!” Bull says. “You might be surprised by how much they can trim their estimate in order to get your added business."  You can do this whether you finance or pay cash. 

When to do it yourself.

Having everything done by the builder before you move in is very convenient! However, it may be more expensive that way. "Is the builder charging you the best price for the upgrades?” Bull asks. “If you can get a better deal using your own contractors, you may want to consider buying with the basic finishes and then making the improvements after you close."  

If you have the skills, do it yourself.  A friend of mine in Sacramento chose the basic flooring to be installed in his new home.   Before he moved in, he used his handyman skills to put in laminate wood floors in the entire great room and kitchen for a much cheaper price than doing it through the builder.

Consider purchasing upgraded countertops and cabinets through the builder and doing your own flooring, crown molding and other things such as bathroom fixtures that are easily altered later. You can put them in the week before you move in, or in stages over the next few years. You don't have to do everything at once.

Keep an emergency fund: If you would be putting all of your cash toward your home, leaving no liquid funds available for an emergency, consider financing the upgrades. Dollar wise, it might make sense to pay cash rather than paying interest on the cost of the upgrades, but if you lose your job and can’t make your payment, you could be in danger of losing the house! Better to keep 3-6 months of bare-bones budget money in your account. Don't forget to budget for the housewarming party so all of your friends and neighbors can celebrate your new space with you.

Article excerpts courtesy of Forbes.com : https://www.forbes.com/sites/nancyanderson/2017/10/31/how-to-pay-for-your-upgrades-when-you-buy-a-new-home/#25bc0ffe1c8e

 


* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.