Why It Is Important to Look at the Rate of Return in Home Investment

Your home is, first and foremost, where you love. Your home is also an investment; for many it's the biggest investment they will ever make. It's natural - even admirable - to want to make money from that investment. It's also natural to think about how long it will take to make money, and as a result, many homeowners think in terms of time, not in terms of return.

If that seems confusing, think about it this way: If you want to make money from your home, or if you want to refinance and you are deciding whether it makes good financial sense, or if you are considering adding on to your house and you want to know if it is a good financial move... what matters most is what return you will receive and how long it takes to get that return. If you spend $20,000 on a new kitchen, and immediately increase your home's value by $30,000, that is a great return in very little time. If you spend $20,000 and your home's value increases by $20,000, there's no real return - you are breaking even.

What you should care most about is the rate of return you will receive on an investment, and not on how long it takes to break even. Let's use a different example. Say you are considering adding a new bedroom to your house. The cost of the addition is $15,000. You are willing to do some of the work yourself to save costs. Based on home Illinois mortgage refinance sales of similar properties in your location you determine the addition will add $20,000 in value to your home. You will make a $5,000 profit on a $15,000 investment, which is a 33% return. Outstanding!

Your rate of return though, depends on when you sell the home and actually receive your profits - while you are living in the home, you have only made a "paper" profit. If you sell tomorrow, your return is 33%. If you sell in 10 years, your return is 3.3% because the money you invested has been tied up in the home for that length of time. (On the other hand, you get to enjoy the use of the new bedroom, and your enjoyment is certainly valuable, too.)

You can save money another way too. When you buy a home as a residence via home Illinois mortgage refinance, you will typically be asked to sign a statement (called a homestead exemption) indicating you intend to live in the home for 12 months. Terms and rates on owner-occupied properties are lower than for investment properties, so to prove owner occupation government agencies sometimes check utility bills, driver's license records, and other documents to verify where you reside. 

Eventually, when you think about an investment, check out the rate of return, and judge whether it seems practical according to your own financial goals.

ArticleSource: ArticlesAlley.com