You know the home is worth 163/Sq foot. If you can add on for less than that, you are probably building equity, and thus, it makes sense financially. (A 200 sq foot bedroom (roughly 14x14) is $140 a square foot. So that's positive. But also consider: Will you be creating a home that looks like a three bedroom? Or will it always look like a two bedroom with an extra room? Flow, floorplan are important considerations. If the answer is the former, I would probably do it, and do it now. You'll be making 3-5% in the coming years on the total equity in the house, so the more space you have, the better it'll be. Plus, you like it their and the expansion is equity neutral.