There are several things that you are going to need to consider when figuring out how much renovation you can afford. You’re going to need to take a personal inventory of your budget. There are a few ways to pay for home renovations that can help you allocate your money in the best way possible. When it comes to home remodeling, you can pay in cash, take out a personal loan, a home equity loan or line of credit, borrow from your 401(k), apply for a Federal Housing Administration 203k loan or FHA Title 1 loan, or even possibly a reverse mortgage. The requirements of which are all different. We will help you determine which option will work best for you.
Setting a rough budget for your project will help you understand your overall costs. A good rule of thumb is to keep your budget in line with your home’s value.
|Kitchen||10% – 15% of home’s value||$300,000 house = $30,000 – $45,000|
|Master Bathroom||10% of home’s value||$300,000 house = $30,0000|
|Bathroom||5% of home’s value||$300,000 house = $15,000|
|Finished Attic/Basement||10% to 15% of home’s value||$300,000 house = $30,000 – $45,000|
|Hardscaping/ Landscaping||2% – 5% of home’s value||$300,000 house = $6,000 – $15,000|
|Other Areas||1% – 3% of home’s value||$300,000 = $3,000 – $9,000|
How much for hidden costs?
Remember to allot for unseen complications. A good budget allows for 10% – 20% in contingencies. You will also need to consider dual living expenses if you plan to stay off site while the remodel takes place. When you’re in the planning stages, it is smart to open a bank account solely dedicated to your remodel. This will make it much easier to track your budget. You can also open an account that will accrue interest while you save money.
What are my financing options?
Taking an in-depth look at your finances will help you determine which route you should go when it comes to financing. You can always pay cash, but there are several alternatives available that can help you complete your project without depleting your bank account. To determine how much money you may be able to borrow, you should take a look at your debt-to-income ratio. Your debt-to-income ratio should ideally be less than 36%.
Refinancing & Home Equity
Refinancing your mortgage can be a great option in remodeling for people who can benefit from refinancing regardless of the remodel. Though if your current mortgage rates are fine, taking out a home equity line of credit is something to consider.To figure out how much you can borrow, subtract the balance you owe on your mortgage from what your current home value is. HELOCs allow you to access money as you need it, while you make minimum monthly payments. They are tax deductible and don’t accrue interest until you spend the money. The line of credit is usually good for 10 years. Though, if you don’t make your payments your house is at stake. A home equity loan is similar, but allows you to borrow large lump sums of money with a fixed interest rate and a loan term that you can choose. To take out a loan against your house, you must have 10% to 20% of equity in the home.
Personal loans are usually not the best options due to their high interest rates, short loan terms, and minimal loan amounts. Interest rates are one of the most important factors when borrowing money. The lower your interest rate, the lower the monthly payment will be, and in turn the more money you can afford to borrow. A fixed-rate loan means that your interest will never change, while adjustable rates can change and increase your payments. The loan term will determine your monthly payment. The longer the loan term, the lower the monthly payment; though the total interest will be higher with a longer loan.
A construction loan can be used when building a home or when doing major renovations. They are usually used when building additions. These loans are not as common due to short loan terms and heavy requirements. Your funds are released as stages of the renovation are completed, so there will be money management involved.
Homeowners commonly use credit cards to cover some, if not all, of their remodeling expenses. This is common practice for people who have most of the cash, but want to earn points with their credit card companies. This will allow you to take more control of how and when you repay your remodeling costs.
Borrowing from investments
A 401(k) can be a great tool to borrow money from. You can borrow a set amount and pay back the loan over five years time. You may also consider borrowing from other investments, such as a Roth IRA.
If you are planning on taking on a home that needs extensive remodeling, a Federal Housing Administration 203k loan may be the answer. There is also a Streamlined 203k program available that will lend up to $35,000.
What if I have no equity?
If you have no equity in your home you can apply for a FHA Title 1 loan. These loans can be up to $25,000 and for loan terms up to 20 years. Another option would be to use contractor financing. Many contractors offer financing plans through banks that they work with. This may allow you to borrow without going through some of the other hassles, though it is always important to shop around and compare all of your options.
If you are a senior citizen (62+), then you may qualify for a reverse mortgage. These loans can cost more than a home equity loan, but the advantage is that you’re payments will be held off until you sell your home.