Improving Your Home? Prepare for This Financial Shock

The average U.S. home has a value of about $350,000, says Zillow. But even if you buy a home that's worth a lot less, in time, the value of your home might rise due to a combination of buyer demand, market conditions, and the improvements you decide to make.

You have plenty of reasons to invest in home improvements. Not only can they make your daily life more enjoyable, but they can also add to the value of your home so that when the time comes to sell it, you're able to pocket a larger profit.

Now, you're probably aware that home improvements can be expensive. And it's important to be careful when financing them. After all, you're already in the process of paying off a mortgage. That's a large pile of debt right there. So piling on with a personal loan or home equity loan to cover renovations could throw your finances for a loop if you aren't careful.

But let's say you've run the numbers and have determined that you're capable of paying your mortgage lender every month while also paying off the loan you need for home improvements. You may be feeling confident in your decision -- but be careful.

Another expense could rise after you improve your home. And if it catches you off guard, your finances might suffer.

When your property tax bill soars

Seeing your home's value increase is a good thing from a resale perspective. Plus, the higher your home's value, the more home equity you end up with. That gives you the option to borrow against your equity should you so choose.

But there's a downside to seeing the value of your home increase, and it's that it has the potential to lead to a higher property tax bill. Property taxes are an unavoidable expense you incur when you own a home. And unlike your mortgage payments, they're not set in stone.

When you sign a fixed mortgage that leaves you with a monthly payment of $1,200, that's the amount you need to fork over. But your annual property tax bill could start at $4,000 and increase to $4,500 the year after, and then $5,000 the year after that. And the more you improve your home, the more your property taxes might soar.

Property taxes are calculated by taking your home's assessed value and multiplying it by your local tax rate. So if your tax rate is 1% and your home is worth $300,000, you're looking at $3,000 in annual property taxes. If you improve your home so it's worth $400,000, you can expect your annual property tax bill to rise to $4,000.

Make sure there are no surprises

A higher property tax bill could be problematic if you're in the process of covering a mortgage while also paying off renovations. It's a good idea to research what sort of property tax impact your planned improvements are likely to have.

Often, you can call your local tax assessor, run through the specifics and cost of your renovations, and ask for an estimate of how it will impact your property taxes. Your assessor may not be able to give you an exact number, but they should be able to come up with a ballpark. (And the more specific you are, the more they can help you. So rather than just say you're upgrading your kitchen countertops, say what specific stone you're using.)

Also, many major home renovations need permits. So if that's the case, your assessor might be able to refer to those permits to give you a more accurate estimate.

Either way, having that information ahead of time could help you run the numbers to make sure your total costs will be manageable. It's a step worth taking to avoid unpleasant surprises after your renovations are done.