How to Choose Between Building an Addition or Buying a New House
Interest rates are high and closing costs can eat into equity—here’s how to figure out if you’ll be better off adding onto your existing home instead of buying a larger one.
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Interest rates are high and closing costs can eat into equity—here’s how to figure out if you’ll be better off adding onto your existing home instead of buying a larger one.
Credit: Sue Smith/Shutterstock
It’s a fact of life that we tend to need more space as time goes by. We acquire new stuff, new hobbies, and new family members, and we need space for all of it. One day you wake up and realize that the charming two-bedroom house you bought 10 years ago is no longer so charming: You’ve got a garage filled with exercise equipment, your mother-in-law is sleeping on the couch, and the new baby’s room is actually your walk-in closet.
In these situations the obvious move is to buy a new, larger house. But sometimes it might make more sense to renovate your current home with an addition. Both are large-scale, expensive projects with distinct advantages and disadvantages, so how can you choose between moving your whole life to a new spot or radically upgrading your existing house? Here’s what you should consider.
Space
First, think about how much more space you actually need—and it’s best to be pretty loose here. Will one more room give you what you need? A bump-out in the kitchen? Or do you need a lot of new space for your growing family and collection of classic arcade game cabinets? If an additional bedroom, sun room, or expanded kitchen will solve your problems, an addition might work. On the other hand, if you need to double the size of your house it’s probably best to buy a new one.
The other space consideration is whether you actually need more space, or if you just need to be more efficient using the space you already have. If you have a bedroom currently being used to house garbage bags full of old clothes or boxes of stuff left over from your last house move, paying for a storage unit and reclaiming that space makes more sense than either an addition or a new house.
Finally: Do you have the space to spare? If you can technically squeeze an addition on your property but it will cost you most of your outdoor space, it’s worth asking yourself if it’s worth it. Sure, you get more space inside, but if you lose the ability to enjoy fresh air, you might not be happy in the house and wind up moving anyway.
Costs
If you decide that you do need more space, costs will be one of the most important considerations—and the most complex. If you have to finance a new home or an addition (which most of us will), your first stop is to compare the costs of that financing. Right now, for example, getting a home equity line of credit (HELOC) to pay for an addition averages about 9% interest, while average mortgage rates are around 7%. Plus there are closing costs to consider, which can eat into the equity you’re able to cash out—those average close to $7,000 when purchasing a new house, and closing costs on equity lines can run into thousands of dollars.
Of course, depending on how much equity you have in your current home, you might need to borrow a lot more to buy a new house than to put in an addition; new home prices average nearly $500,000 across the U.S. Additions can be a lot cheaper than that—the average home addition costs about $50,000, though the high end can shoot past $150,000. Finally, consider moving costs: Local moves can cost more than $2,500, and moving long-distance can cost as much as $10,000, depending on how much stuff you have and how far you’re moving. In other words, it will almost always be cheaper to add to your home than to sell and buy a new one.
One more thing to consider is the relatively low return on investment (ROI) for additions. Most additions only return 50-65% of your investment in terms of higher sale price. But choosing an addition likely means you’re not moving any time soon, anyway, and the additional space will make your existing home more valuable, increasing your equity stake.
Adding up the total cost of an addition versus all the costs associated with buying a new home and moving will make it easier to decide which option works best for you.
Intangibles
Money isn’t everything, of course, and there are other things to think about when choosing between a new home and an addition:
Location. If you love your area, have kids in a good school, and/or have a tight relationship with your neighbors, moving might be unhappily disruptive. Unless you can find a larger home in the same area, an addition will allow you to maintain consistency in other aspects of your life.
Inconvenience. An addition is a major construction project. If you have to remain in the house while it’s being done, you’ll be living in a loud, dirty, and disruptive environment for weeks or months. Or you’ll have to add rental costs to your bottom line, which might shift the math on which option makes more financial sense.
The unknowns. No house is perfect, but you know the house you’re in. You know its foibles and drawbacks, its secretly terrific features, and the problems that always crop up. A new house is a mystery—it might be terrific! It might be a leaking, foundation-cracking, drafty mess. Sometimes the devil you know is preferable to a quagmire.
The neighborhood. An addition makes your house larger on the outside as well as the inside, which might make it stick out in your neighborhood like a sore thumb—and might irritate your previously friendly neighbors. Having an oddly-shaped, too-large-for-the-block house can also hurt your chances of selling down the road. Ideally, an addition will look like a natural extension of the house and not something glued on by aliens who don’t understand how humans work.
The choice of moving to a new home or adding on to the one you already own is never easy. But crunching those numbers and considering the intangibles will guide you to the right decision.
