How to Set a Home Renovation Budget

Before you start picking out tile and paint chips, be sure you know how much it will cost to remodel your house.

Ready for a kitchen renovation? Anxious for a bathroom remodel? The easy part is knowing your goal for home remodeling — whether you’re trying to keep up with your growing family, add office space, or increase your home’s value.

But figuring out how to plan a home renovation that doesn’t break the bank can be tricky.

Here are five key steps in planning your home remodeling project.

1. Estimate home renovation costs

As a general rule of thumb, you should spend no more on each room than the value of that room as a percentage of your overall house value. (Get an approximate value of your home to start with.)

For example, a kitchen generally accounts for 10 to 15 percent of the property value, so spend no more than this on kitchen renovation costs. If your home is worth $200,000, for example, you’ll want to spend $30,000 or less.

A kitchen remodel should cost no more than 10 to 15 percent of your home’s value. Photo from Offset.

Something else to keep in mind: Contrary to popular belief, kitchen renovations offer among the lowest return on investment, according to analysis from Zillow Talk: The New Rules of Real Estate. Every dollar you spend on a kitchen remodel increases the value of your home by 50 cents.

The highest return on investment? A mid-range bathroom remodel.

2. Consider home remodeling loan options

If you plan on borrowing money to fund your home renovations, there are a number of loans out there to help with just that.

  • Refinancing. Depending on your current interest rate, you might be able to refinance your mortgage at a lower rate and/or for a longer loan term, which could lower your monthly payments and help you save up for your renovations.
  • Cash-out refinance. If you have enough equity, you could also consider a cash-out refinance, which means refinancing your existing loan for an amount that’s higher than what you owe. Going this route, you pay off your original mortgage and have cash left over. Use a refinance calculator to see if refinancing makes sense for you.
  • HELOC. If refinancing sounds like too big of a leap, a home equity line of credit (HELOC) might work better. A HELOC works a lot like a credit card in the sense that it has a set limit that you can borrow against.
  • Home equity loan. Although it sounds similar to a HELOC, a home equity loan is a bit different. This loan requires you to take out all the cash at one time. They’re often referred to as “second mortgages” because homeowners get them in addition to their first mortgage.

Refinancing, getting a HELOC or taking out a home equity loan are all big decisions, and it can be tough to know which one makes the most sense for you. As with any new loan, consult with a lender to see which option is best for your situation.

3. Get home renovation quotes from contractors

Some contractors will give you an estimate based on what they think you want done, and work completed under these circumstances is almost guaranteed to cost more. You have to be very specific about what you want done, and spell it out in the contract — right down to the materials you’d like used.

Make sure that contractors’ estimates include the full scope of your project. Photo from Shutterstock.

Get quotes from several contractors, tossing out the bid from the one who gives you the lowest estimate. Going with this choice could be asking for problems, as low-priced contractors are known to cut corners — at your expense.

4. Stick to the home remodeling plan

As the renovation moves along, you might be tempted to add on another “small” project or incorporate the newest design trend at the last minute. But know that every time you change your mind, there’s a change order, and even minor changes can be costly. Strive to stick to the original agreement, if possible.

Even minor changes to your remodeling project’s scope can add significant costs. Photo from Offset.

5. Account for hidden home renovation costs

Your home may look perfect on the outside, but there could be issues lurking beneath the surface. In fact, hidden imperfections are one of the reasons renovation projects end up costing more than you anticipated.

Rather than scramble to come up with extra money after the fact, give yourself a cushion upfront. Factor in 10 to 20 percent (or more) of your contracted budget for unforeseen expenses, as they can — and do — occur. In fact, it’s rare that any project goes completely smoothly.

 

Posted by Vera Gibbons on Zillow

 

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How to Finance a Home Remodel

Often times, when you buy a home, it’s not perfect. Fortunately, the magic of remodeling allows you to craft your current residence or a prospective property into your dream home. However, unless you’re flush with cash, you won’t be able to pay for your renovation project out of pocket. When faced with this dilemma, there are several ways for you to go about getting the funds.

Remodeling a Purchase

FHA 203k mortgages
The FHA 203k loan is backed by the Federal Government and is solely for the purpose of helping those who wish to purchase and renovate a home. There are two different kinds of 203k loans, each geared toward different types of projects.

1. Standard 203k
The standard 203k is for all projects that require professional architectural drawings and inspections. Typically, if the property has any sort of structural damage, or any other problems that make it unlivable, the Standard 203k is the way to go. There is a minimum cost of $5,000, and the project must be completed in six months, although a lender can approve extensions.

2. Streamlined 203k
The streamlined 203k is for less complicated projects that do not require the help of a consultant, architect, engineer, or that will not exceed $35,000. Due to the simpler scope of the task, the loan process is straightforward and will allow you to finish the project in a timely manner.

For both types of 203k loans, the properties will have to meet FHA requirements, including a maximum home value. Fortunately, the FHA’s guidelines are more lenient than those of conventional loans – including more flexible credit, income, and appraisal requirements.

Energy Improvement Mortgages (EIMs)
If you are planning to make renovations that increase energy-efficiency, the energy improvement mortgage is the way to go. An EIM allows you to add the cost of the energy-efficiency improvements to your mortgage without increasing the down payment. The way the lender sees it, you will be able to use the money saved from utility bills to finance the energy upgrades.

Remodeling Your Current Home

Home Equity Loan

A home equity loan is basically a second mortgage based on the equity in your house. Typically the max you can borrow is 85% of the equity in your home, but it will vary depending on income, credit history, and your home’s market value. So if your home is worth $300,000 and you have a mortgage balance of $200,000, you could potentially get a home equity loan for up to $55,000. The repayment plan is exactly like your first mortgage with monthly payments over a fixed term. As with any mortgage, there will be fees and closing costs.

Home Equity Line of Credit

Not unlike a credit card, with a Home Equity Line of Credit (HELOC) you have a revolving line of credit that you can borrow from—as much as you like—by using a check or card that is connected to your account. If you had $100,000 in equity, as in the previous example, that would be your account’s limit. The difference here is that you only make payments on what you borrow.

Cash-out Refinance

With a cash-out refinance, you get a new mortgage with a new rate and term, and you ”cash out” the available equity in your home. Most lenders require at least 15% equity. So to continue with the same example, it would mean a lump sum of $55,000 and a new mortgage for $200,000. Since you’re getting a new mortgage, make sure you factor in closing costs and fees.

Bottom line:
No matter what route you go, make sure you take a hard look at your budget. Home remodeling projects almost always take longer and cost more than initial estimates, so having some wiggle room is incredibly important. In the end, if you take your time, shop around, and speak with experienced professionals, there’s no reason your home remodeling project shouldn’t be a success.

Posted by Carter Wessman on HomeZada

The Do’s and Don’ts of Home Equity Loans

Let your home put up the cash for its own improvements (but not for that new sports car).

Shutterstock ID 179975591;

Shutterstock ID 179975591;

With home values rising, homeowners who have equity, a much-valued resource, might be tempted to tap some of that wealth and use it for other purposes. But depending on your personal situation and how you’d like to use the equity, it may not necessarily be the right thing to do.

Here’s when a home equity loan, which allows you to use the equity of your home as collateral, makes sense — and when it doesn’t.

DON’T: Fund a lifestyle

Remember a decade ago when homeowners yanked cash out of their homes as if they were bottomless piggy banks to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations, and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.

Lesson learned: Don’t squander your equity! A home equity loan should be looked at as an “investment,” and not as “extra cash” when making spending decisions.

DO: Make home improvements

The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (for example, you need a new roof), then a home equity loan might make sense.

Need access to money over a period of time to fund ongoing home improvement projects? Then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go, and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.

DON’T: Pay for basic expenses/bills

This is a no-brainer, but it’s always worth reiterating: basic expenses like groceries, clothing, utilities, and phone bills should be a part of your household budget.

If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.

DO: Consolidate debt

Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers — who doesn’t want to save potentially thousands of dollars in interest?

Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again, and end up in even worse shape.

DON’T: Finance college

This may seem like an attractive use of home equity for those with college-age children. However, the potential consequences down the road could be significant. And risky.

Remember, tapping into your home equity may mean it takes you longer to pay off the loan. It also may delay your retirement, or put you even deeper in debt. Furthermore, as you get older, it will likely be more difficult to earn the money to pay back the loan. Don’t jeopardize your financial security.