Completing a home renovation project can have many advantages if done correctly. For starters, it can increase the value of the property when it comes time to sell; additionally, it can also make the home feel more comfortable and safe for the current residents.
This guide will provide information on how to budget for a home renovation in a way that could save time and money in the long run.
1. Set a Budget
When setting a budget for a home renovation project, it’s important to decide on which room(s) will be included in the project. To get the best return on investment, homeowners should plan to spend no more than 15% of their home’s value on a single room.
On average, the cost of home renovations ranges anywhere between $10 to $150 per square foot, depending on the type of room that’s being renovated as well as the location of the home.
Kitchens and bathrooms renovations tend to cost more since a variety of trades are involved in the project (demolition crew, plumbers, electricians, painters, tilers, etc.). It’s also important to note that location can also be a factor that affects the costs, with urban areas typically costing more (sometimes twice as much) as rural areas.
The next step after setting a budget is determining how to finance it. While some homeowners can fund the entire project with cash, others may need to turn to other financing options.
One of the most popular ways to finance a home renovation project is to use the home’s equity as a line of credit (commonly referred to as HELOC), as these loans tend have relatively lower interest rates than personal loans, credit cards, or other types of unsecured debt.
Another option to consider is a cash-out refinance, which replaces the current mortgage with a new one (as well as a new interest rate).
Using your home equity for financing makes sense when you renovate your home. Not only will a well-done renovation increase resale value that drives a gain in your equity, you can also take advantage of tax deductions on any interest you pay towards a home loan when the funds are used to improve your home.
3. Prioritize Projects
Prioritize the projects by creating a list and categorize them into two buckets: “wants” and “needs”. During this step, homeowners should think about what they’re willing to compromise on vs. where they’re willing to splurge.
The next step is determining the order in which the projects will be completed. If the home renovation includes multiple rooms, deciding on the order can help save time and money in the long-run. For example, plumbing and electrical work are typically done first (and often at the same time), whereas cosmetic finishes are usually tackled at the end.
4. Collect Contractor Bids
Lastly, homeowners should request bids from multiple contractors. Some contractors may do more than others, and comparing bids can give homeowners more options to make the right choice when choosing a contractor. Some factors that many homeowners consider when choosing a contractor include:
- Overall cost
- Years of experience
- Cleanup (or no cleanup)
It’s generally recommended that homeowners collect bids from at least three contractors. Getting at least three estimates can also highlight which contractor has the best customer service, communication, and attitude.
Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.