Interest rates are always changing, but 2022 has no doubt seen some of the most drastic changes in US history (according to ValuePenguin, it’s had the highest 12-month spike since 1981!).
Remodeling your home during a time of rising interest rates may not seem like a good idea, but is it actually the best idea?
We often get asked, “When is the best time to remodel?”, and the answer always varies depending on your situation. However, even with the major changes we’ve seen in costs and with the rising interest rates this year, now might be the best time to remodel your home.
In this article, we’ve analyzed the facts to present the five top things to consider before deciding whether remodeling now is the right thing for you.
#1. Your reasons for wanting to remodel
First things first, while you may be concerned about high interest rates leading to bigger renovation budgets, sometimes, remodeling just can’t wait. It’s important to weigh out your reasons for wanting to remodel before making any further decisions.
If you decide that remodeling is essential for you and your family (maybe because you’re welcoming children or parents into your home, or you just really need the extra space), then high interest rates shouldn’t become a factor in the decision.
What may instead become a factor is your budget and how much you want to spend. As we discuss in this guide to home renovation budgets, there’s a remodel for every budget.
When you work with a designer to plan your remodel, you can set a strict budget that takes into account current interest rates, and get expert advice on how to achieve what you need without spending more.
#2. How you plan to finance your remodel
Financing your remodel is, naturally, one of the most important things to consider before starting your journey. If you’re concerned about interest rates, chances are you’re considering a home renovation loan to finance your remodel, rather than a cash payment.
In the US, you can typically fund your project via:
- A cash payment using your savings
- A Home Equity Line of Credit (HELOC)
- A Home Equity Loan
- A Cash Out Refi
- A Construction Loan
At a high level, here’s a summary of the differences between each loan:
| Loan | Definition | Pros | Cons |
| Home Equity Line of Credit (HELOC) | A revolving line of credit that’s borrowed using your equity as collateral. | You only pay interest on what you’ve used from the loan amount You have flexibility in terms of budget and expenditure Repayment terms are flexible | Interest rates are variable throughout the borrowing term It’s revocable and can be taken away if your financial situation changes or your home value decreases It’s easy to overspend |
| Home Equity Loans | Enables you to borrow a lump sum against the equity in your home, with a fixed interest rate and fixed monthly payments over a set term. | You get the loan in a lump sum Interest rates are set for the duration of the loan Interest rates can be lower than other forms of credit You can pay off the loan early You can convert the equity in your home into cash | If your property decreases in value, you could owe more than your home is worth when selling |
| Cash Out Refi | Replaces your existing mortgage with a new loan for a higher amount than you currently owe. | You can get lower interest rates compared with construction loans You can build back equity quickly if your renovation increases your home’s value | You can’t retain your interest rate on your current mortgage Interest rates are generally higher than HELOCs or Home Equity Loans You usually can’t borrow as much money compared with a HELOC or Home Equity Loan |
| Construction Loans | Provides funds in installments to finance the cost of your home remodel, with interest accrued during the construction period. | You can often borrow more money than other mortgage-related loans You only owe interest during construction You can hold off on principal payments until work is completed | You often have to pay a high down payment Interest rates are usually higher than other mortgage-related loans You get the funds paid in installments when the remodel reaches certain milestones You’ll need to undertake several property inspections with your lender |
Interest rates for home renovation loans are almost always higher than mortgage rates. According to BankRate, current interest rates for home renovation loans average between 3-36% (as of November 2022). Statistics from ValuePenguin put general mortgage interest rates at around 5% (as of May 2022).
Despite the higher rates for home renovation loans, you can secure a lower interest rate if you have a high credit score. Remember, your employment status, debt-to-income ratio, and annual income will also be considered before the final rate is offered.
#3. Who you work with
During any remodel project, you’ll need to work with designers, building support, trade companies, and many other people, depending on the complexity of your remodel.
All labor persons charge different rates for different projects, with some charging more for specialist projects or services, e.g., media room consultants or green trades support specialists.
Choosing your team wisely is the best way to ensure your project doesn’t cost more than it should. Shopping around is crucial and, as a minimum, we recommend you get at least three quotes and interview companies carefully during remodel planning.
According to CRBE Construction Price Index, US labor costs have been rapidly rising since 2020, from a combination of inflation, increased demand, and an aging workforce leading to a smaller talent pool.
Increases are predicted to continue through 2023, before stabilizing in 2024. However, this doesn’t mean that prices will go down in a couple of years, merely that percentage rises will stabilize.
The second part of construction costs comes from the price of materials. Materials are higher in price than this time a couple of years ago due to the current climate, but realistically, are prices expected to reduce?
According to CBRE, it’s highly unlikely. In fact, most construction materials (apart from steel and iron) are expected to rise in cost even further in the coming years.
Predictions from CBRE show more stable increases than rises seen in previous years (from 2020-22 where materials costs went up by 42.5%), but they’ll still be present (predicted between 2-4% in 2023-24, which is considered more “normal”).
So, what does this all mean? Well, it means there will never be a time when materials or labor costs will be cheaper than they are right now. Inflation means that prices will always rise, especially with CBRE’s predictions of increased demand for construction from 2023 onwards.
So, there may be no better time than the present to embark on a remodel, despite higher-than-normal interest rates right now.
#4. Whether you can save money in other ways
Despite higher interest rates, you can save money in other ways to make your project more affordable and reduce the impact high rates have on your bottom line. There are so many ways to save money while remodeling, without necessarily scrimping on the result.
Firstly, working with a good designer is the best way to streamline the process and keep construction within budget. Their expertise can help you design budget-friendly solutions that achieve what you want in the most efficient way.
Other ways to save money on your remodel include adjusting the way you run your project and choosing your finishes smartly. For example, you can:
- Leave utilities where they are
- Avoid full open plan and enjoy semi-open plan spaces instead
- Reduce the quality of finishes – especially in rooms where they matter less, like utility spaces and secondary bedrooms
- Purchase your own materials (not via the contractor)
- Act as the project manager yourself
- Focus your funds to make the big finishes count
- Choose generalist services over specialists
Download our Ultimate Remodel Planner for more advice on how to save money during your remodel project (plus get worksheets to complete during every step of the planning journey!).
#5. What your return on investment will be
As many homeowners will know, remodeling isn’t just something you do for yourself. Almost every home improvement project adds value to your property, or is completed with the intention of adding value.
Despite rising interest rates making potential repayment plans higher than usual, what impact will this have on your return on investment? If prices are rising elsewhere, does that mean your home is also going up in value?
Before remodeling, consider getting a real estate agent to assess your home valuation and an estimate of what your property could be worth with certain renovations completed.
If you’ll still be making more money than you would have made without the remodel, plus your family gets to enjoy the change day-to-day, does it matter that the return won’t be as good as it could’ve been with an interest rate from 2020? After all, a profit is still a profit.
As an indication of the changes in property value in the US after remodeling, CNBC states the average payback in a home’s resale value after remodeling can range between 56-75%.
Naturally, if your home won’t be worth more money after remodeling, it’s best to consider how important your other reasons are and, if it’s essential that you still do it, consider a lower-budget remodel.
If you’re still unsure about your return on investment, consider speaking to a designer about your plans. They can guide you toward a solution that meets both your personal and financial expectations.
Summary: Is it a good time to remodel?
Sometimes, remodeling just can’t wait. Despite any financial concerns, you have to do what’s best for you and your family. Remodeling isn’t usually just a financial decision. It’s a lifestyle choice that can change the way you live your everyday life at home for the better.
But finances are always important, and with interest rates going up, it’s understandable to wonder if it’s the right time to remodel, particularly if you plan on using a home renovation loan.
We hope the research presented in this article guides you in making the best choice for you. Wondering, “Is it the right time to remodel?” is an age-old question everyone asks themselves, no matter what’s going on in the world. We believe there may never be the “perfect” time to remodel, but taking the leap is a decision you don’t have to make alone!
Want to discuss your remodeling plans further? We know how big a deal it is to undergo a remodel project, no matter whether it’s big or small.
Book a consultation with us today to chat through your plans and see if it’s the best choice for you. Or download our FREE Remodel Launch Guide to start your journey to a happier home life today!
