How Home Renovations Could Increase Your Monthly Mortgage

by Christy Bieber | Published on Sept. 24, 2021

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Young couple working together on a home remodel project.

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Don't end up regretting an upgrade because your mortgage payment increases more than you're comfortable with.

Home upgrades can be expensive. If you can't afford to pay cash for a remodel, it's important to know how to finance home renovations.

But you also need to think about the long-term costs associated with any changes that you are planning to make to your home. That's because some of the renovations that you make to your property could actually end up making your mortgage payments much more expensive. Here's why.

Increased property taxes and home insurance could cause mortgage payments to rise

Upgrading your home could result in an increase in your mortgage payments for two primary reasons.

First, making improvements to your home could result in an increase in your property taxes. When you do an upgrade, you will have to get permits. When your township sees that you're renovating, they may reassess the value of your house. If your property values go up, this could lead to property taxes rising since you're typically taxed based on what your home is worth.

Second, some home improvements or renovations can make your home insurance more expensive. This could happen if the improvements raise the replacement cost of your home so you need to increase the amount of dwelling insurance coverage that you have. And if your upgrades increase the risk of a liability claim -- which could happen, for example, if you install a swimming pool -- this could also result in higher insurance premiums.

Many homeowners pay both their property taxes and their home insurance as part of their monthly mortgage payments. Lenders generally determine the monthly cost of property taxes and homeowners premiums and add this onto the monthly mortgage bill. They collect the money each month and put it into an escrow account, which is a special dedicated account they maintain on your behalf and use to pay the bills when they come due.

An increase in property taxes and insurance costs could, therefore, raise the monthly amount that you must put into escrow, which increases the entire amount of your monthly mortgage payment.

Of course, not everyone escrows their payments. But even if you don't, you could still face these higher bills that you'll be responsible for paying each year -- which will raise your total housing costs for the long term.

It's crucial that you take this potential risk into account when you decide to renovate your home, as you don't want your mortgage payment to rise to a level that stretches your budget. You can get an idea of what your cost increase might be by talking to your insurance company and your township before doing the job to ensure that the long-term financial consequences won't be damaging.

While it's not fun to think about the ongoing costs of a renovation project that you're excited about, it's far better to do your financial due diligence before the renovation is done and you're stuck with the financial consequences. So be sure to take this preliminary step before you contact a builder or pool contractor to come and remodel your home.

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