Let's face it, you're tired of the old house. You want more room or different rooms or a new neighborhood. Time to trade up to another home. Maybe even build a new home. Or is it? Would remodeling or adding on be the better way to go? A lot of money is involved in the decision. Such decisions are often made purely on emotions. Here are some financial factors to consider, as well. 

Don't move solely as an investment. Be sure you want to move because you really want the extra space or you want to live in a different neighborhood. Don't buy a bigger home just because home prices are climbing. Median home prices in good years might go up four to six percent. A hot city or neighborhood might climb ten percent or more. But you can't count on that year after year. Over the long run, you'll likely be better off playing the stock market, not the housing market.

Consider the neighborhood. A home is more than four walls. It's the neighborhood, the view, the schools, the proximity to grocery stores and restaurants, the traffic, the crime. You can change your home through remodeling or adding on, but you can't change a neighborhood you don't like. 

Consider what you want to change. Do you want to add more square footage, say in the form of another bedroom and bath? Would you "pop the top" by adding a second story? Or is what you want really just a good overhaul: a better kitchen, perhaps? Certain remodeling projects recoup their money better than others when you eventually sell. Major kitchen remodels or adding another bathroom do well, swimming pools don't. 

How's your home priced for the neighborhood? Experts say you're more likely to recoup remodeling or addition expenses if your home is below the average price for homes in your area. An add-on that makes your house the most expensive on the block may not pay for itself if you ever sell.

Assess the true costs. When comparing the cost of remodeling or adding on versus the cost of moving, be sure you're comparing apples to apples. Trading up to a bigger, more expensive home involves selling and buying costs. Between commissions, appraisals, 

points, application fees, and so on, you might pay eight to ten percent of the cost of your current home. It's also common for people to do some remodeling to the home they move into. Throw in moving expenses, too. And there's higher real estate taxes and maintenance costs. Add all that to the difference between the price of your current home and the one you want to buy. Financing costs is another factor. Mortgage rates could be less than the cost of borrowing to remodel. Compare that total to the cost of remodeling or adding on.

Compare square footage. One way to compare apples to apples is to calculate all costs on the basis of square footage. If your home is worth $200 a square foot, and you move into a home costing $300 a square foot, you're essentially buying the same size home for 50 percent more. Of course, this may work in your favor if you move from a hot housing market to a cooler market. Other factors weigh in here, of course: the age and quality of the new home, the neighborhood, the commute to work, and so on.

Also use the square footage comparison to assess remodeling. For example, if it costs $300 a square foot to buy another home (don't forget to include the buy/sell costs), but $150 a square foot to add on, it makes more financial sense to stay, all other factors being equal.

When looking at remodeling, get bids from at least three reputable contractors and be sure you've got all the costs figured in. 

What shape is your current home in? Is your current home due for major maintenance? Do the roof, furnace and windows need to be replaced, and the house painted? A study commissioned by The Wall Street Journal found that over the typical life of a 30-year mortgage, homeowners spend four times the purchase price maintaining and remodeling their homes. Homes really start to have problems in their 10th to 20th year, according to the National Association of Home Builders. [WSJ Money Pit article]  Moving every ten years may be cheaper, say some experts.

This article was produced by the Consumer Affairs Dept. of The Financial Planning Association and provided to you courtesy of Nigel B. Taylor, CFP, Santa Monica, California. If you have any questions or concerns regarding this, or any other financial topic and are a resident of Southern California, please call me at 1-800-444-2237 (California residents only please), or click on the "MORE INFO" button to arrange for a free initial consultation in the comfort of your home or office.

 
*** Please note that beginning January 2000, the Institute of Certified Financial Planners will become a part of the new Financial Planning Association (FPA). It will continue to offer articles such as this one to serve you on an ongoing basis.