How to add $15k of value?

[Eric P.]

Bought our first home 2 months ago, we got a good price and decided to do just 10% and keep the additional $ for emergencies and upgrades then have the home reappraised a year later to remove PMI (extra $100 a month)

Home is currently appraised at $415k.  Our mortgage will be about $365k next year.  The town we live in has a median home price of $485k and has averaged an appreciation rate of about 3% the last 3 years (I'm not banking on this and just hope for 2% next year).

Our initial appraisal mentions the carpet on the steps and in the bedrooms being in bad shape, and the downstairs and upstairs guest bathrooms not being updated (house is only 11 years old).   

So my thought is to replace the carpet in the bedrooms, have the steps done in hardwood to match downstairs, and sinking about $1500 into each bathroom for new floors and vanities (currently vinyl and cheap contractor stuff).  I'm DIY so I figure this is about $7k of work.  Do you think that's enough to get the value up another $15k, which is what we'll need figuring a 2% appreciation to get to 20%.  

Any other simple DIY suggestions, little tips or tricks?  For example the lawn was pretty ugly when original appraisal was done, I know that's not a factor, but we're taking steps now to be sure its green and full for that first impression.  

[Matt Schelberg]

Originally posted by @Eric P.:

Great thread! If you got the loan 2 months ago, you probably have an awesome interest rate. Probably less than 4%...that is some seriously cheap money! I would take a closer look at the opportunity cost of paying down the principal to avoid PMI. If your house is increasing in value 2% each year ($8,000), it might be better to let appreciation do the work rather than making early payments on your mortgage.

I don't know what your exact numbers are, but let's say you reach a point where an $8,000 pre-payment will allow you to ditch PMI a year early. You have 2 options:

Option 1: Make $8,000 prepayment to reach 80% LTV and cancel PMI. You will save $1,200 in the first year on cancelled PMI. It will also save you 4% per year in interest payments on your mortgage (approx $320/year). But you will have $8,000 less to invest in other real estate investments for the foreseeable future.  If you have the opportunity to compound that $8,000 at a high rate of return, your prepayment carries a large opportunity cost.

Option 2: Wait 1 year to let appreciation increase your equity by $8,000. This costs you $1,200 in PMI ($100/month). But you can use that $8,000 to invest in other opportunities for many years to come. If you can achieve annual returns of at least 6%, this is probably the better option.

Bottom line:  A prepayment on your mortgage can be viewed as declining a low-interest loan.  It makes sense for some people, but for most real estate investors it reduces future net worth and is probably not the best decision.