4 Steps to Finance Home Renovations
Home renovations can overwhelm even the most economical of homeowners. Renovations can grow bigger and more complicated with each step, and you may end up with a higher total cost than you planned. However, with the right tools to approach financing your home renovations and plan expenses, the better chance you have to stay close to the initial estimate.
In this article, we’ll discuss four steps for how to pay for home renovations. From cosmetic fixes to full-on flips, you’ll gain insight into the best ways to save on this investment.
1) Choose Whether to Invest or DIY
First, you need to get a clear picture of the options you have for your planned renovations. This will help you decide if spending a lot of money is necessary and determine where you can cut back. Having a solid idea of what you want will help you avoid backtracking and redoing some of the project later.
Before you begin, ask yourself the following three questions:
- Which room do you want to renovate?
- Is this cosmetic or a complete rehaul?
- How much money are you willing to spend?
If you’ve realized that you’re looking for a deeper makeover, your next step would likely be to talk to a professional and receive an estimate for the work that needs to be done.
However, you may decide that it’s possible to do some of the less complicated tasks yourself. Or, maybe you’re willing to settle for fewer renovations than you originally planned and that you can do most of the work on your own. Even the smallest DIY tasks, like handmade molding and tiling, can save you money in the long run.
2) Create a Renovation Budget
Even if you go into your renovation project with a goal to cut costs, it’s easier to overspend on home improvement than you think. So while you obviously want your home to look its best and increase your value on the real estate market, you must prepare to make some tough decisions in case you need to lower your budget.
When it comes to your budget, you need to account for three main factors:
- How complex your project is
- The cost of materials and labor
- How much the homeowner is willing to do themselves
However, your location will also affect your budget. For example, spending $50,000 on your kitchen in a neighborhood of $100,000 homes won’t just end up being a waste of money, but you’ll end up pricing yourself out of your own community.
The key is not to spend more but to spend wisely, and evaluate the best rate for each room based on the home’s overall value. For example, if you’re renovating your kitchen, it should cost no more than 15% of your home value.
3) Receive an Estimate
After you budget, you’ll want to consult with multiple contractors and compare their quotes with your estimate. Having anywhere from three to five contractors meet in person at your home to evaluate the space is recommended, so you can figure out which will be best for what you have in mind.
Keep in mind that you’ll also need to factor in potential setbacks as part of the estimate. Any experienced contractor will tell you that home renovation projects almost always take longer than planned and cost more than what was expected, so allow yourself some flexibility in your budget and your project timeline.
4) Seek Additional Financing Options
After you’ve budgeted and received a reasonable invoice, you may realize that you have no other choice but to seek additional financing options for your project.
Luckily, there are several ways you can finance your project affordably, depending on your savings, income, and resources. Here are the four best options for how to pay for home renovations.
Home Equity Loan
Sometimes referred to as a second mortgage, a home equity loan is a popular option for homeowners figuring out how to pay for renovations. This loan is paid to you in a one-time sum which you repay over a set number of years through monthly, fixed payments.
In general, you need to meet the following qualifications to be considered for a home equity loan:
- Have a FICO score above 620
- Have evidence of steady income and/or employment
- Have a low debt-to-income ratio
- Have paid at least 15% of your mortgage
The good news is, market fluctuations won’t change your interest rate. So, if you have a clear idea of your project and some steady income, a home equity loan is a great option.
Once you’ve chosen to leverage your home equity loan, it’s a straightforward process:
- Make sure you meet the qualifications
- Select your lender
- Submit an application
- Have your property evaluated
- Wait for your lender to vet your qualifications and property
- Close on your loan
A renovation loan is another option for homeowners who are budgeting for home renovations. This loan is a Fannie Mae-style loan designed specifically for home renovation projects since the amount homeowners can borrow is based on the future property value after renovations.
With this type of loan, you are permitted to have a higher debt-to-income ratio and a lower credit score. However, you do need to place a 3% down payment and sign up for mortgage insurance.
Most 401(k) programs allow you to borrow a certain percentage of the balance, but there are some drawbacks. Since withdrawing from these accounts is discouraged, there is often a very high fee for doing so. You will also have to pay interest on this withdrawal and have it paid in full within five years.
Since these are also dependent on your employment, it’s dangerous to depend on. If you leave or lose your job, you could end up paying a 10% tax penalty.
When figuring out how to pay for home renovations, taking out a personal loan may be a good idea if you only need a small amount. They can even have more savings than using a credit card since personal loans tend to offer lower rates.
Ready to Finance Your Home Renovation?
Now that you’ve familiarized yourself with the planning process and with your finance options, it’s time to get the ball rolling and start financing.
Contact our team at Associates Home Loan of Florida, Inc. to learn more about loans and the loan approval process for home renovations. We’re happy to learn more about your project and discuss several ways you could finance your renovations this year.