Is buying a fixer-upper an affordable way to buy into in-demand neighborhoods or a money pit that’s not worth the effort?

The answer depends on who you ask, but for many people, the benefits of buying a fixer-upper outweigh the pitfalls.

However, that doesn’t mean any old fixer-upper is a smart buy.

If you’re thinking of buying a home that needs work, read this to avoid making an expensive mistake.

How to Assess the True Cost of a Fixer-Upper

The low listing price of fixer-upper homes is appealing to buyers on a budget, but it doesn’t reflect the true cost of the home.

Before making an offer on a fixer-upper, buyers should fully understand what work the house needs and how much it will cost.

In addition to the standard home inspection, ask your preferred contractors to walk through the house to provide estimates of work to be done.

Once you have a rough number, HouseLogic advises to add another 10 to 20 percent to account for hidden problems that are bound to crop up.

If there’s any sign of structural problems, enlist a structural engineer to assess the extent of the damage.

Alternatively, just walk away because structural problems usually make a fixer-upper more trouble than it’s worth.

Some improvements are worth the money. Cosmetic updates are cost-effective, and handy buyers can do a lot of the work themselves to save money.

Additions are another good call: If a home is in the perfect location but doesn’t have quite enough space for your family, you can add square footage with an addition and boost the home’s resale value.

Just be cautious when pricing out additions, especially if you’re adding an external structure like a garage or workshop.

While it’s tempting to base estimates on the lowest quotes, it’s worth paying more for high-quality materials when it comes to structures that are exposed to the elements.

A steel garage or outbuilding might cost more up front, but it also retains its value better and requires less maintenance than a wood building so you come out ahead in the long run.

How to Finance a Fixer-Upper

Most mortgages only finance the purchase price of a home, not repairs and renovations.

However, some mortgages allow buyers to roll renovation costs into the home purchase.

An FHA 203(k) loan lumps the purchase price and renovation costs into a single mortgage.

These loans require a down payment of 3.5 percent, are available for primary residences only, and allow buyers with lower credit scores to access financing. 203(k) rehab loans cap the total mortgage amount and restrict which types of improvements qualify for financing.

Fannie Mae’s HomeStyle Renovation mortgage is another option.

Like a 203(k) mortgage, HomeStyle mortgages roll purchase and renovation costs into one 15- or 30-year loan.

HomeStyle loans require higher down payments and credit scores than 203(k) mortgages but don’t require the property be used as a primary residence.

Buyers can also use a conventional loan to purchase a fixer-upper and finance renovations with a home equity line of credit, second mortgage, or personal loan.

However, these financing options tend to be costlier than a 203(k) or HomeStyle mortgage.

Learn more about financing a fixer-upper at Lending Tree.

Buying a fixer-upper home can be a smart financial decision, but it’s no guarantee.

Before you decide to spend your hard-earned money on a house that needs work, make sure you have a clear picture of the costs and labor involved.

When it comes to home buying, a little homework saves a lot of time, money, and frustration.