It’s no secret that the Portland housing market is tight, and affordable homes in high demand.

While U.S. News and World Report recently named the city a Top 25 “Best Place to Live” for many quality-of-life reasons, it also acknowledged that Portland’s median house price is about 23 percent above the national average.

Homeowners looking to upgrade face limited inventory and rising prices. Could renovating your current home be a better option? Here are some questions that may help provide clarity.

•  Can you renovate within your existing square footage? It is often more cost-effective to remodel within your home’s existing footprint than to add square footage.

•  Sometimes a smarter floorplan that makes better use of existing space is all that’s needed.

•  What can you fix, and what can’t you replace? A renovation can’t improve location, and it might also be difficult and costly to fix features like exterior design and ceiling height.

•  Historic and older homes can be a challenge if original materials and craftsmanship are not easily replicated. You need to consider what you can change and what you cannot.

•  Are you tough enough? Living through a renovation can be disruptive. You could be living without a functioning kitchen or bathroom for an extended period, not to mention construction crews, noise and dust.

•  Will improvements make your home easier, or harder, to sell? You must always consider long-term plans and the possibility of an eventual home sale.

•  Are the improvements you’re making in line with other homes in the neighborhood? It is possible to over-improve, making it difficult to sell or earn top value for your house down the road.

•  What type of return will you generate? This is where home renovation TV shows can be misleading.

•  Yes, the improvements you make can increase the value of your home, but home improvements typically do not pay for themselves entirely. Most improvements can be expected to recover only 50 to 90 percent of their cost.

If, after all things considered, renovation sounds like a good idea, the big question is: Does it make financial sense?  Often the answer comes down to how much equity you have in your home, and whether borrowing against that equity is more cost-effective than acquiring a new mortgage for a new home.

 Understanding home equity


Home equity is the value of a home minus any mortgages or liens owed. For example, if a house is valued at $300,000 and the remaining balance on the mortgage is $150,000, the house has $150,000 in equity.

For homeowners looking to sell a property, positive equity equals profit, which can be used as a down payment on a new house. For homeowners wanting to renovate, equity equals borrowing power, which is available in the form of home equity loans and home equity lines of credit (HELOC).

A home equity loan provides a one-time lump sum payment that the borrower repays in equal payments over a fixed amount of time, while a home equity line of credit (HELOC) provides cash as needed. HELOC payments will vary depending on the outstanding balance, and as the loan is repaid, the line of credit is replenished providing more funds for borrowing.

A home equity loan is ideal for a large, one-time expense, such as a home addition. If your renovations will include various projects undertaken over time, a HELOC might be a better option.

Talk to a trusted banker

 Regardless of whether you decide to renovate your existing home or put it up for sale and buy a new one, your first step should be to talk with your banker. Like a mortgage approval, borrowing against the equity in your house requires the usual ability-to-repay qualifiers: assets, income, credit history and current financial obligations.

Your banker can help you assess your financial situation and borrowing capacity, build a workable budget, and understand the lending process.

Finally, keep in mind that different lenders have different programs. Talk with various lenders to learn about their programs and see which works best for you.

Tony DiSotto serves as KeyBank’s New England Regional Retail Leader. He can be reached at 207-874-7102 and anthony_disotto@keybank.com.