Imaginary Real Estate Profits - Why It’s NOT a Good Idea to Refinance to Remodel

You know the story. You see it all the time on TV. Homeowners refinancing to pull out equity to remodel a kitchen, bathroom or add on based on the hope that their house is going up in value and will cover the costs of the remodel. You know if you refinance in order to remodel, you are effectively financing your remodel over the life of the loan if you stay in it, well past the “design life” of your remodel.

The big risk is that the house may go down in value. But there is even more risk.

The refinancing boom we have had in recent years is actually the largest transfer of assets in the history of the world.

What we have all been doing is selling our assets to banks for loans that have high interest rates based on equity that is a phantom…unrealized by the sale of the property. This is one of the reasons why many homeowners are now “under water” where their home is worth less than their mortgage.

We don’t actually have the real money…as opposed to play money…until we sell.

Additionally fashion in decoration changes with distressing regularity. The granite counter tops you put in today could be passé in as little as 5 years when people all MUST have something else.

So what is the right strategy if you really need to refurbish a bath or kitchen?

Do it for cash and do it as cheaply as possible.

It doesn’t have to look cheap.

It just needs to be cheap.

An interior designer I know told me, “You know all the cheap ways to decorate.”

Well, you know what?

It’s true.

I look for used furniture, rejected paints, good used bath and kitchen fixtures, architectural salvage and anything that can make my houses look the way I want them to look.

I also look for good classic design.

Does a chair need recovering? It’s not hard. I do it all the time. Most of my chairs, nice upholstered chairs, were purchased for $29.00 or LESS! I always shop garage sales with 30 dollars in my pocket, all in ones.

Furniture tends to be a bad investment. You can buy good furniture every day for 10 cents on the dollar. If that’s all it’s worth, that’s all I’m willing to pay.

The best part is that no bill will arrive in my mailbox about the time I get buyer’s remorse.

It always sets in when the bills arrive, doesn’t it?

But it gets better.

Need new tile in a bath? Look for salvaged tile or ceramic tile that looks like real stone.

Then do the work yourself. Make sure you do it right. But, remember it’s not that hard to do.

Make your house look good but don’t sell your equity to get the look.

I once had a club meeting at one of my houses. The ladies were going around lifting the cushions on my chairs and opening the cabinets to see who made my furniture, it looked so good.

No one realized it was mostly second hand stuff and I’m keeping this to myself. You should too. So, stop following the 'Jones' off a remodeling cliff.

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