How to Decide if a Home Renovation Is Worth the Money

Thinking of improving your home? Ask yourself these questions to see if it's the right move.

Maybe you're tired of staring at your outdated kitchen, in its retro lime green appliance and linoleum tile glory. Or maybe you're ready to turn your unfinished basement into a playroom and lounge area for your kids.

No matter the specifics, renovating your home is a big decision due to the cost involved. Before you move forward, you'll need to make sure it's a smart move.

Should you renovate?

Whether it pays to renovate really boils down to two key questions:

1. Will it improve your home's value?
2. Will it enhance your quality of life?

For the first question, a good bet is to talk to a local real estate agent, who may be able to clue you in to which renovations offer a better return on investment than others. Or, you can consult this home renovation guide.

Improving your home will often help you eke out some extra money when the time comes to sell your home. You may not get your entire investment back, but you may get a large chunk of it in return.

For example, if you redo your kitchen and spend $40,000 in the process, you may only get $35,000 of that back in the form of a higher asking price when you sell your home down the line. But you don't necessarily need to get a 100% return on investment -- many home improvements won't give you that, but they will let you better enjoy your home while you're living in it.

And that leads to the second question. Higher-end countertops in your guest bathroom may be nicer to look at than your current countertops, but if that bathroom hardly gets used, an update may not be worth the money. On the other hand, turning an unfinished basement into usable living space could improve your quality of life on an ongoing basis.

How to finance home renovations

Many people can't pay for major renovations outright. If you don't have enough money in savings to cover your home improvements, you can look at these options.

Borrow against your home

Whether it's a home equity loan or home equity line of credit (HELOC), you can borrow against your equity (the portion of your home you own outright) and repay that sum over time. You'll generally pay less interest with a home equity loan or HELOC than you will with a personal loan, so this can be a good option.

Do a cash-out refinance

With a regular mortgage refinance, you swap your existing home loan for a new one and borrow the amount that's left over on your original mortgage. But with a cash-out refinance, you borrow more than your existing mortgage balance. You can use that extra cash to fund your renovation. Mortgage refinance rates are quite competitive right now, so if you go this route, you may snag a lower rate than what you'll be charged to borrow via a home equity loan or HELOC.

Improving your home could make it a more pleasant place to live. It can also cause your home's value to rise. If you're going to renovate, choose your projects carefully, and think about how you'll finance them so you don't wind up paying an excessive amount of interest in the process.