How To Budget For A Home Renovation

How To Budget For A Home Renovation

Whether you’re trying to keep up with your growing family or increase your home’s value, at some point a home renovation will be necessary. Knowing what area of your home to remodel and why to renovate it is the easy part. The critical part is knowing how to budget for a home renovation without breaking the bank. Here are some key steps in planning how to budget for a home renovation.

1. Estimate costs

You need to have a firm understanding of your home’s current market value (CMA). Having this information will give you a more accurate appreciation of the value of each room and the cost of renovating each room. The cost of renovating a room should not exceed the value of that room as a percentage of the overall house value.

If we assume a home is worth $200,000 and a room accounts for 10 to 15 percent of the property value. The cost of renovating that room should not exceed $30,000. Contrary to popular belief kitchen remodeling offers among the lowest return on investment.

2. Financing your home improvement

Homeowners planning a remodel or home improvement should carefully consider how they will finance the project. Many payment and financing options exist. The one that suits you best will depend on many factors including;

  • The cost of the project.
  • The amount of money you have on hand.
  • The duration of the project.
  • Whether you will be doing other renovations in the future.
  • The amount of equity you have in your home.

These are the most common methods of paying for home improvements;

Paying cash

If cash is readily available, it is best to pay outright for the home improvement project. By paying cash you avoid the financing charges and interest costs that come with financing. You also mitigate the risk of using your home as collateral.

Unsecured personal loan

With unsecured personal loans you can borrow money without using your home as collateral. If you fail to pay back the loan, your home is not at risk for foreclosure. Bear in mind that personal loans are usually for small amounts of money which might not suffice for large remodeling projects.

Home equity loan

With a home equity loan you use your house as collateral. This means you borrow against the value of your home less the amount of an existing mortgage. This is a good option for financing one-time projects as the borrowed amount is fixed. Fixed interest rates can also be quite advantageous in the event of a rise in interest rates.

Home equity line of credit (HELOC)

A HELOC functions like a dynamic line of credit. You can access various amounts over time, up to a certain maximum. The maximum you can withdraw is based upon available equity in your home. A HELOC like a home equity uses your home as collateral to guarantee payment. HELOCs are most appropriate for long-term projects where there might be a need for additional home improvements in the future. Interest rates under HELOCs are variable meaning they change in response to changes in prime rates.

Refinancing

You can finance your home improvement project by refinancing your mortgage for a larger amount and getting the difference. As with any home loan, you will have to pay closing costs and fees. This is an ideal option for financing large home improvement projects.

3. Picking a contractor

Shop around for a competent contractor. Insist on inspecting all contractor’s work history and verifying recommendations. Be very specific on the work you would like done and ensure that it is clearly stipulated in a contract. The contract should contain all relevant details right down to the materials you would like used. Be mindful that not all low-priced contractors have good intentions as some contractors have been known to cut corners at the expense of customers. Here’s what to look for in a contractor:

Check credentials and disciplinary history

You need a contractor that has been in business for for a while and has amassed and world of knowledge and experience. The contractor must be licensed, registered and operate within the statutes of law. Your contractor must have insurance and a solid reputation.

Get bids

After you have gone through your recommended contractors, you need to narrow it down to your top three. Get bids from your top three contractors and be wary of any bid that comes in way under the others. This usually means that contractor is most likely cutting corners somewhere or may not complete the project and claim insufficient funds.

Think beyond price

The chosen candidate must be a contractor that you feel comfortable with. Their personality, background, methods, and communication skills are key elements to keep in mind.

Contract

Regardless of the size or nature of the project a contract should be in effect. Every single detail should be clearly stipulated in the contract. The contract should include:

  • work timetable (start and finish dates)
  • description of the work to the most minute detail
  • materials that will be used
  • payment schedule
  • time limit for fixing defects

How to pay the contractor

Never pay the contractor all the money upfront. It is better to pay the contractor periodically as they complete predetermined portions of the project. This approach ensures that the work gets done when and how you want it.

4. Account for hidden costs

While you cannot always predict those budget busters, you can plan for hidden costs during your home remodel. As you come up with a budget for your home improvement, give yourself a cushion by factoring in 10 to 20 percent of your contracted budget for unforeseen expenses. It is much better to be prepared than to scramble to come up with money in the event something comes up. These additional hidden costs are the biggest reason home improvement projects end up costing more than anticipated.

Here we look at some hidden remodeling costs:

Change of mind: The biggest potential hidden cost comes with every change of mind. Every time you change your mind by adding something new it comes at an extra cost.

Surprise structural changes: Unplanned structural changes will increase the cost of the home improvement project.

Moving out/ in: During a home improvement it may be necessary to vacate your house or move out belongings to make room for works to progress.

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