How to Budget for A Major Home Renovation
Budgeting for your home renovation can be a challenging task and one that can get
overwhelming quite quickly. However, if done accurately, it can help you save a lot of money
and time down the road.
According to HomeAdvisor, home renovations hover between $18000 and $76500 and typically
costs $46,722 on average, depending on various factors such as the size of the house, location,
material used, etc. One square foot costs $10 to $60 on average, but the cost can go up to $150
per square foot in some cases.
Suppose you are going for a significant home renovation. In that case, a 2500 square foot
house can cost you anywhere between $15,000 to $200,000 depending on the options you
choose, aiming for luxury, and additional charges such as plumbing, wiring, etc. Without a
budget, things can quickly get out of hand. Here’s what you need to know:
How to Budget for A Major Home Renovation
Create An Outline
Creating a robust plan can go a long way in controlling needless expenses and sticking to your
budget. It is vital to differentiate between needs and wants and not go overboard by splashing
half of the budget on the kitchen or basement. As a general rule of thumb, you should spend
about 15% of your budget on the kitchen renovation. So, if your budget is $200,000, you should
spend $30,000 on renovating the kitchen. It would help if you also kept the investment factor in
mind and did not spend more than your home’s worth when you sell it down the road.
Plan for Fixed Costs & Estimates
Your plan should include detailed cost estimates to know exactly how much you are spending
on each item. For example, if you’ve set aside $30,000 for your kitchen, you should break it
down further into the cost of items. This will roughly include the cost of lighting, plumbing,
cabinets, design, labor, and carpentry. Your aim should be to minimize these costs as much as
possible by buying the items yourself, scouring the market for low-cost items, searching on the
internet, etc.
You should also keep some other expenses in mind, such as labor costs, that can make
up almost half or sometimes even more of your budget. Some states also require you to get a
permit from the municipality before starting any renovation work. This varies but can typically
cost you a few hundred dollars at least. You should also keep around 20% of your budget for
unexpected events that may otherwise halt your renovation if you do not account for these.
Find Your Finance Source
Choosing the right financing option is one of the most important decisions in renovating your
home. One wrong decision can leave you stuck in debt for years to come. In contrast, an
intelligent financing decision can make the whole renovation process much smoother.
● Savings & reserves. The best way to finance your house is through savings or reserve
funds, as they are the most economical options out there. However, this naturally works
only for small projects and not for significant renovations.
● Home Equity Line of Credit (HELOC). This option is beneficial for the owners planning
to finance several projects over the year. The first phase of HELOC allows you to
withdraw funds for a defined period against interest payments and the closing costs are
low. Creditors finance up to 90% of your house value. Still, a downside to this method is
that mortgage debt can significantly reduce your borrowing power.
● Reverse mortgage. Reverse mortgage offers seniors the ability convert home equity
into tax free cash. If this is a viable option for you, you’ll need to undergo reverse
mortgage counseling first. Consider these pros and cons and speak to your trusted
financial advisor.
● Credit cards. While credit cards may sound like a convenient option with low-interest
promotions, financing renovation is not a good option, especially if your required amount
is substantial. This is because credit cards typically charge a higher interest rate which
can hurt your future cash flows.
Other methods that can be used to finance the renovation process include cash refinance and
personal loans.
Pick the Right Contractor
After estimating costs and a source of finance, the next crucial step is to find a suitable
contractor. The trick here is to shortlist at least three contractors and then decide based on their
pricing, quality of work, timeline, and commitment. You should look online and ask around to
gather reviews about the contractors to get a good idea of what to expect from the contractor
you hire.
Conclusion
Budgeting for a major home renovation can be frustrating at times, but creating an innovative and
flexible plan can help you immensely, from cutting costs to hiring contractors. Rest assured,
your renovation process will be smooth and flawless if you stick to the outline described above.
