Add semi-custom home upgrades to a mortgage, or pay outright?

Asked by annp, Parker, CO Tue Feb 26, 2013

I am comparing a few different under construction communities, and I've learned that it's possible to add semi-custom upgrades (paint package, upgraded floors, etc.) to a mortgage, so that the price is spread out over the term of the loan.

To me, that seems like a waste of money, with all of the interest that will be added. My question is, if I can afford to write the builder a check for the upgrades during building, should I do that? Or are there benefits to mortgaging these improvements that I don't see?

Thanks in advance.

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Karen Hermelink’s answer
Karen Hermel…, Agent, Denver, CO
Tue Feb 26, 2013
As a realtor, who has a degree in interior design and has always bought new homes, I would suggest you also consider the following:

1. If the builder completes the upgrades, the work is done prior to you closing and moving into the home. This may more be advantageous than living through the remodeling process to do those upgrades after the fact, which can often drag on for months. They will also be covered under the builder's warranty (usually 1 year after closing) as to workmanship, etc. If you do not have time to shop for the upgrades at numerous retail stores, be available for workmen to come and go from your home, or have the knowledge/expertise to act as your own general contractor, you may find the time you'll need to invest costs more than the money/interest you would have saved.

2. Alternatively, the builder may have limited options available to you. Are they what you want? Are they priced competitively to what you can purchase on a retail basis with the extra labor needed for installation? Do you have a designer you can work with to help with color selection and making sure that your choices are good quality, compatible with what you are trying to accomplish and are aesthetically pleasing?

3. If you are making structural changes, it is much less expensive to have the builder do them at the time of construction. Also, you run less chance of surprises that cause your great idea to now be your worst nightmare. If you are only making cosmetic changes, that may be less of an issue.

4. Don't forget that you often need a permit and to have inspections done to pass the work done. The builder is already aware of those permits and inspections. So unless you want to hire a professional (architects, designers or general contractors) to help you "retrofit" the changes, you might have a lot less brain damage by working with your builder. Don't be afraid to ask if the builder can include certain things, or give you a better deal by working with them.

Enjoy the process. Whichever route you decide to go, it can be exciting to see your dream home take shape. Be sure to be involved in the process from day one and don't hesitate to ask questions, make suggestions and create a great home.

Karen Hermelink, CRS, e-Pro
Equity Colorado
0 votes
Robert McGui…, Agent, Denver, CO
Sat Mar 2, 2013

Good to see you here again. My thought when working with buyers purchasing a new home is this:

1. Whatever is structural, have the builder do it.

2. Many other upgrades can be done after closing and moving in.

3. Your $20,000 in upgrades will generally take you further along that the overpriced and limited upgrades of the builder.

4. But if you can;t stand a little dust and debris for a while, let the builder do it all up front. Sometimes the builder is offering upgrade incentives if you ask.

5. Each builders policy is different in how you pay for upgrades. That is why it is sometimes good to work with a custom builder who has more flexibility in how they approach upgrades and method of payment. It is generally better to pay upfront rather than over the term of the loan. But that all depends on your budgetary concerns and discretionary funds available. All the best.

Robert McGuire ASR
Your Castle Real Estate
Direct - 303-669-1246
0 votes
Bill Pearson, Agent, Denver, CO
Tue Feb 26, 2013
In my opinion it is up to your situation at the time. Do you want your cash for some other expenditure or is it easy for you to write a check. With the current rates low your money could be more beneficial in a higher rate situation.
You also might have a bit more bargaining room if you write a check so ask that question!

Feel free to reach out if you have further questions. Hope this help,

Bill Pearson GRI, SRES |"Your Denver Realtor For Life"
ERA Herman Group Real Estate| 201 Columbine Street| Suite 301| Denver CO 80206
720-329-1470 |
5280 Magazine FIVE STAR Real Estate Professional – 2010, 2011, 2012
0 votes
Marina Bay, Agent, Greenwood Village, CO
Tue Feb 26, 2013
There are definite benefits to mortgaging these improvements. You will have the upgrades and cash at the same time. You can use that cash for whatever you want - more upgrades, vacation, new car, invest, etc. The interest you will be paying is tax deductible, so on top of still having cash in the bank, you will be able to take a deduction on your income taxes. All in all, if you look at the big picture, it definitely benefits you to keep the cash and finance the upgrades along with your loan.

I hope this helps.

Marina Bay
Cherry Creek Properties
0 votes
Chuck Strau…, Agent, Denver, CO
Tue Feb 26, 2013
You might also want to keep in mind that you may need that money (of course I have no knowledge of your personal situation) to pay for things like landscaping and window coverings.
Chuck Strauss
0 votes
annp, Home Buyer, Parker, CO
Tue Feb 26, 2013
Thank you for all of the helpful answers so far.

Update: I don't have a specific time in mind for how long I will be in the home, but I would guess it would be 5-10 years, certainly not longer than 10.

I am planning to hold myself to $20,000 worth of upgrades at most.
0 votes
Chuck Strau…, Agent, Denver, CO
Tue Feb 26, 2013
Very good question.
I believe that it depends on whether or not you want your money tied up (paying cash, increasing down payment, etc.) or would rather add some to your monthly payments ($50,000 increase in your mortgage would add about $225/month to your payments at 3-1/2% interest rate). Also depends on how long you plan on staying in the house, and this analysis should factor in estimates for appreciation and what the value of these upgrades would be, should you sell the home.
Finally, you might also, in some cases, want to see what you could buy these upgrades for from someone other than the builder. Just for comparison purposes if nothing else, particularly if you decide to pay cash for the upgrades.
Your Realtor should be able to assist greatly in offering information to help make these decisions.
Best of luck.
Chuck Strauss
Your Castle Real Estate
0 votes
Tony & Karen…, Agent, Denver, CO
Tue Feb 26, 2013
Hi Ann,

Of course a lot depends on your individual financial situation, but you'd probably be surprised at how little increase there would be in your monthly payment even if you rolled in several thousand dollars' worth of upgrades. While there would be quite a bit of extra interest over the term of the loan, it's a rare case these days that anyone actually pays off their mortgage in the first home they purchase - most folks will sell and move to another home within 10 years. It may be that there are better investments you can make in the meantime with that cash, rather than locking it up in your home's equity. While it's often the financial foundation for many families, a home is a very non-liquid investment. You should definitely talk to your financial planner if you have one...

Feel free to give us a call if you'd like to chat!

Tony & Karen
0 votes
Blue Sky Home…, Agent, Littleton, CO
Tue Feb 26, 2013
These are good smart questions. It all depends on the impact on you. Some builders may take a check and just do an install others would say nope, it has to go through the home building company/mortgage. If you are wanting to pay for things out of pocket and they won't work with ya, get the bottom line upgrades or basic features and have an additional contractor on hand to finish it your way once you own it. I have done this both ways and know the right guys. Check out my profile and get in touch with me. I'll point you in the right direction. Good luck
0 votes
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