It's a Big Decision: How To Know if You're Financially Ready for That Home Renovation
If you're like most Americans, you've been at home a lot more than usual over the past several months. All those extra hours spent in your house may have you focusing on its shortcomings and dreaming of some major upgrades. Whether you're thinking of remodeling your kitchen or adding an entire new wing to the house, one thing is certain: it's going to be a significant expense. How do you know if you're financially ready to take on major renovations? You'll need to answer several basic questions to determine whether the time is right for such a big project.
How Are You Going to Pay for It?
The first thing to consider when contemplating making a major investment in your home is how you will pay for it. There are lots of options, so you'll need to do your research to determine which is best for you. Obviously, the best possible scenario would be to have sufficient cash on hand to pay for it all upfront. If you have the thousands, or maybe tens of thousands, of dollars on hand to make your dream come true, more power to you! But, if you're like most people, you'll need to finance your home renovations over time.
One good option to consider is a conventional loan. This type of loan has a fixed interest rate, so your monthly payment will remain the same throughout the loan. Other possibilities include a home equity loan and a home equity line of credit, which are related but have notable distinctions. Both allow you to borrow against the equity you've built up in your home, but the loan terms and interest rates can differ significantly. All loan alternatives have unique advantages and risks, so be sure to thoroughly investigate each before making your decision.
You may be tempted to use your credit cards to finance your major home improvements, but use caution before proceeding with this option. Using plastic is quicker than going through the loan application process, but it may come at a very high cost. If you can find a card with a promotional rate, like zero percent interest for eighteen months, and are certain you will pay off the balance within that time frame, this could be an excellent choice. However, if you don't pay the card off before the interest-free period ends, you'll have to pay all the deferred interest. Also, keep in mind that credit cards tend to charge the highest interest rates you'll find anywhere.
How Much Is It Going to Cost?
When determining how much money you'll need to find or finance, you must first be clear on your goals. What do you want to achieve? Is it a better-functioning kitchen, an upstairs laundry room, or an open floor plan? Once you know exactly what you're aiming for and why you can begin creating a budget. Look for ways to trim costs by selecting lower-cost finishes when appropriate and reusing materials you already have. For example, refinishing your existing kitchen cabinets instead of replacing them could save you thousands of dollars. Another money-saving option is to do some of the work yourself, if possible. If you're comfortable doing some of the demolition work, like pulling up old carpet, and the final touches like painting, you could significantly lower the overall cost.
The cost of home remodeling varies greatly, depending on the scope of the project, the contractors you choose, and the materials you select. Costs also vary by geography, with renovations in urban areas costing substantially more than those in rural communities. In general, kitchens and bathrooms are among the most expensive to remodel, while bedrooms are typically the cheapest. Your final cost will also depend on the condition of your home to begin with and any hidden structural or systemic issues that are uncovered once work begins. Because there are so many variables to consider when developing a budget for your project, you may want to use an online home renovation cost calculator to assist in your decision-making process.
Is It Going To Be Worth It?
Another important consideration is whether the major project you're considering will pay off in the long run. A dollar spent on renovations does not necessarily increase your home's value by a dollar. If you're planning to move within the next few years, you'll need to think long and hard about whether making a major investment right now makes financial sense by analyzing the potential return on investment. Projects that tend to pay off the most at resale are those that either increase the actual square footage or make the home feel more spacious. Examples include removing interior walls to create an open floor plan and finishing a basement or attic.
No matter what type of remodel you're considering, experts recommend spending no more than 10-15% of your home's value on any single room. For example, if your home is worth $200,000, you should aim to spend no more than $30,000 on remodeling your kitchen. Less complicated projects, like updating a guest bedroom, should come in well under the 15% threshold. Keep in mind that some simple and inexpensive fixes can also pay off well at resale, such as upgrading your outdated kitchen cabinet pulls and faucet with sleek, modern components.
On the other hand, if you know you'll be staying put for at least the next ten years, the financial trade-off may be less important since you'll enjoy the more intangible benefits of your renovation, such as increased comfort and convenience. When you don't need to worry about resale value or pleasing a potential buyer with the choices you make, you have more freedom to design and customize your home in ways that uniquely suit you and your family.
Undertaking a major home renovation is a big deal, involving time, inconvenience, and, of course, money. By taking the time to answer some basic questions, you'll be able to determine whether you are ready for such a big commitment and feel confident in your decision.