Monday, August 07, 2006

How much should you spend on your kitchen?

How much should you spend on your kitchen?
BY MARY WISNIEWSKI Business Reporter
Copyright by The Chicago Sun Times
August 7, 2006

Remodeling an ugly and outdated kitchen might seem like a fiscally prudent thing to do.

It's the kitchen, after all, not a sports car. And every Realtor says a good kitchen sells the house.

"It's a good investment," said Joan Wiaduck, a Riverside real estate agent who put $60,000 into her own kitchen. "I tell people if you can swing it, do the kitchen."

Investing in a kitchen requires careful planning to decide how much a homeowner can afford, how to finance and what's really needed, according to financial and remodeling experts. A homeowner must also think about how long she'll be in the house, and what the neighborhood's like.

"If you're not out for 10 years, you want to do something very nice that will last a long time," said remodeler Cheryl Daugvila, owner of Cheryl D. & Co. of La Grange. "If you're only going to be there two years, be a little more conscious of budget and with an eye of what might turn somebody off."

In other words -- no red appliances unless you're staying.

For a full, quality remodeling job, rather than a simple update, Daugvila says a good rule of thumb is to spend 10 to 20 percent of the value of the house.

So if a house costs $1 million in Lake Forest, it might not be unreasonable to pay for a $100,000 kitchen remodel. It wouldn't make sense for a rickety house in a dicey area.

"Sometimes you have to talk people down," Daugvila said. "There are clients who want to overspend for their neighborhood. It happens in neighborhoods that are somewhat transitional, and someone has a home that could be a teardown, and they change the countertops to granite."

For financing, cash is best, if possible, said William C. Gooch, Jr., CEO and chairman of the Community Bank of Elmhurst. The next option is usually a home-equity loan or second mortgage.

"It's a low-cost loan to set up, and it's the lowest interest rate," Gooch said. He said the total cost of a home-equity loan plus the first mortgage should not be more than 80 percent of the value of the house.

Another option is to refinance the current mortgage -- if the current interest rate is a better deal, according to Tommy FitzGibbon, executive vice president at MB Financial Bank.

Another option is a home-equity line of credit, which carries a variable rate of interest, allows the borrower to take out money when it's time to pay the contractor -- instead of taking out a big loan all at once. A HELOC carries a variable rate, which can be a disadvantage in a rising interest rate environment.

FitzGibbon, who is also on the board of the non-profit Neighborhood Housing Services of Chicago, advises homeowners against taking lending advice from their contractors.

"A lot of predatory loans start out with people being talked into loans by home improvement contractors," FitzGibbon said. "Contractors know what they do -- they don't necessarily know the best financing alternative for the homeowner."

NHS offers fixed-rate, fixed-term, below-market loans with low fees for low- to moderate-income homeowners, FitzGibbon said. NHS also can help in analyzing what can be done and in finding a good contractor, FitzGibbon said.

Besides making loans, ShoreBank looks at the contractor's estimate, to make sure it's a good, well-written contract, said Michelle Collins, managing director of mortgage lending.

"There are $15,000 kitchens and $50,000 kitchens, but you don't want to pay $50,000 for a $15,000 kitchen," Collins said.

In terms of resale value, a minor kitchen remodel actually brings a better payoff than a granite-counter-center-island extravaganza, according to the 2005 Cost v. Value report from Remodeling magazine.

In Chicago, a kitchen job that costs $16,534 creates an improved resale value of $19,472, or a 117.8 percent return. This job would include new cabinet fronts, an energy-efficient stove, new counters, wall covering and flooring.

By contrast, an $88,575 remodeling job, with a trash compactor and a 36-inch commercial grade range, paid back 93.7 percent on resale in Chicago. Major remodels pay back 77.5 percent on average in the Midwest, the report said.

"Everyone is so exposed to the high end -- between magazines and HGTV," Daugvila noted. "Everyone wants the best, and when they get the prices, they're shocked."

Just as homeowners should avoid spending too much, they should also beware of spending too little if they want a good job, Gooch said.

"Either do it right or don't do it," he said. "Kitchens last a long time. This is a room you want to feel good in."

Gooch should know -- he just spent $72,318 having the kitchen redone in his 35-year-old Elmhurst home. "I'm not going to live long enough to have to do it again."


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