How to budget for home improvements and repairs
Creating a budget to cover all the improvements and repairs that your home may require can be quite difficult. This task will require you to spend quite a bit of your time conducting research on various financing options, overall costs, etc. There’s a lot to do. For example, if your home is old, you will need to spend some time investigating all the top rated home warranty reviews, as purchasing a home warranty might be your best choice. Creating a budget for home improvements and repairs is all about making lots of “little” choices. That is why we are going to present you with everything you need to know to make the best ones!
How much should you spend on improvements and repairs?
The first question that might be in your mind is: “How much should I be spending on improvements/repairs?”. While there is no set answer that will be ideal for every homeowner and every home, the general rule of thumb is to budget by room. If you are looking to add value to your home, you will not want to spend more than 15% of your total home worth on a single room in repairs and improvements.
Let’s say that your home value is about $200,000. That means that if you are renovating a single bedroom, paying anything more than $30,000 will not provide you with enough “bang for your buck”. Most of the time, in this specific case, you will want to go no higher than $10,000! Of course, all of this is purely from a value standpoint. If your goal is to create a perfect home, there should be no limits!
Be that as it may, home improvements and repairs will require quite a lot of money. If you don’t have considerable savings to cover the costs, you may need to explore the financing options available to you.
There are six main financing options when you want to budget for home improvements and repairs. They are:
- Renovation loan
- HELOC (Home Equity Line of Credit)
- Cash-out refinance
- 401(k) loan
- Personal loan
- Credit card
The “best” option is to utilize neither of these options but to use your own reserve funds. If you can finance your home improvement and repairs on your own, it is always the best thing to do. But not many homeowners have that luxury. For that reason, let’s explore each of these options and when you might want to employ them.
A renovation loan, otherwise known as FHA 203(k) loan, is a great way to finance home improvements, as it can pay for up to 97.75% of the improved home value. The greatest benefit of this loan is the fact that the borrowed amount is based on the future value of the home and not on the current one.
To qualify for the FHA 203(k) loan, your improvements cannot include luxuries (swimming pool, jacuzzi, etc.), and your lender will need to approve your contractors.
There is also a minimum 3% down payment required from the homeowner, as well as at least 5% home equity. The renovation loan is usually the best option for homeowners that do not have high equity.
For homeowners who do have high equity, there’s HELOC (Home Equity Line of Credit). HELOC is a great option if you plan on making numerous improvements over the course of several years, as you will only pay interest on the part of the line of credit that you are actually using. Furthermore, the HELOC closing costs are rather low, making this quite an attractive option.
Most of the time, you will be able to get a credit of up to 90% of your current home value. While this might not sound too bad, the problem is that your first mortgage “interferes” with the calculations.
For example, let’s say that your home is worth $400,000. The maximum HELOC would thus be $360,000. Now let’s say that your mortgage debt is $300,000. The total HELOC that you can get will be “only” $60,000.
If a homeowner has a good credit score and needs a large amount of money “right now”, the cash-out refinance is an extremely viable option. The amount that this option can finance usually goes up to 85% of the home’s current value.
The interest rates for this option are usually lower than HELOC rates, but the closing costs are significantly higher. The benefit of cash-out refinance is that you will be making payments on the whole debt right away, but the period is extended over up to 30 years.
If your home requires considerable repairs, a 401(k) loan might be your best option. This loan type offers lower interest rates than other financing options, and the interest is paid to the borrower as opposed to a lender. While this may sound like a great option for any homeowner, there are some drawbacks to it.
The first problem is that you will need to repay that loan (with interest) within five years. Second, if you lose/leave your job and don’t repay the loan on time, it becomes taxable income, incurring a 10% tax penalty. That is the main reason why most professionals avoid recommending 401(k) loans. But the option is there to be used in specific situations.
A personal loan is perhaps the best option to budget for home improvements and repairs when you don’t need a lot of money. The costs involved are usually a lot lower than with other financing options but the loan needs to be paid in a shorter timeframe, usually within 6 or 7 years. The interest rate is higher than some of the other options but they are usually better than credit cards.
Speaking of which, did you know that, according to Houzz Survey, 1 in 3 homeowners chose credit cards to budget for home improvements and repairs? Most of them took one of the available promotions that included a very low-interest option or the one with no interest rate at all.
While this may sound great (and it is), the fact of the matter is that the average credit card interest rate is usually much higher than one in other financing options. Unless you get a great promotion offer on your credit card, you will usually do better by exploring other options instead.
How to budget for home improvements and repairs?
The “usual” budgeting process goes something like this:
- Choose your finance option according to your needs
- Set a maximum budget cap
- Consider purchasing a home warranty
- Create a detailed plan
- Get a “hard” quote
- Finalize the details before you start improving/repairing
- Accept that you may go over budget
- Always have the end goal in mind
Your choice of financing options will be determined by your situation, credit score, and similar considerations. Once you find the best option, the next part is:
Setting a maximum budget cap
There is no “end” to home improvements and repairs, you can always do more. That is why you may want to set a maximum budget cap and try to stick to it as much as possible. You will want to be conservative and set an amount you simply do not want to go over.
To do so, you will want to carefully analyze your finances respective to your needs. It is very easy to get sidetracked by the allure of new improvements. But you need to look at them from a logical standpoint.
Home warranty and why you may want one
Aside from numerous other reasons why you need a home warranty plan, purchasing a home warranty can allow you to not worry about any future cost of repairs. Home warranties usually cost anywhere between $250 and $700 per month, with a usual service fee of up to $100. Home warranty plans are usually best for older homes, as they can provide significant savings when it comes to repairs.
But, more importantly, a home warranty provides you with much-needed peace of mind. You will not need to consider possible repair costs and can focus your efforts and finances on home improvements. Home warranty plans are also quite customizable. Homeowners can select specific appliances/home systems that they want coverage on, providing them with a great deal of flexibility.
You need a plan
Aside from exploring the benefits of home warranty plans, you will also want to create an improvement/repairs plan. As with any other costly project, a good plan is all but required. It will help you budget for home improvements and repairs, as well as help you communicate with contractors. You may want to create a spreadsheet that includes all the relevant numbers (estimated labor cost, materials cost, etc.). Here are some important considerations:
- Living expenses
You always want to create as detailed of a plan as possible. By doing so, you will have a much easier time talking to your contractors. Speaking of contractors, you will always want to request estimates from several different companies. You want at least three bids.
Always get a “hard” quote
Estimates from contractors are useful in approximating how much your home improvement/repairs will cost. However, you should not sign anything before you get a “hard” quote from at least two contractors. These quotes usually involve a fee, which is why we don’t recommend obtaining more than three or four. But they will provide you with exact details of the time and cost required. Going into a renovation project without a hard quote is inviting additional costs “down the line”.
Finalize all the details before any work is to be done
You will also want to make your decisions as “final” as they can get before you get an estimate or a hard quote. Examples include hardwood/laminate flooring, granite/polished concrete, insulation options, etc. It is very important to know in advance which of these options you want and how much you are willing to pay for them. Make sure to include the expenses for cleaning and maintaining kitchen appliances, as well as any other “miscellaneous” costs.
If you leave these things for “later”, you may be surprised when unexpected costs occur. It is always better to know exactly what you will be going for in advance than it is to be in a situation where you are not left with much choice. By finalizing all the details before the renovation project starts, you will be in a much better position to anticipate all the associated costs.
You may go over budget, might as well accept it
The thing with home improvements and repairs is that they seldom stay exactly on budget. No matter how much time and energy you invest into research, there will always be some additional costs. Once the work starts, all sorts of unforeseen issues may crop up. This is something that you need to keep in mind at all times. There will always be more things to pay for.
That is why, even if you have set your budget in stone, you may want to be a bit flexible. Understand that you will need additional resources and plan for them. The best-case scenario is that you will not need the extra money and can put it to good use elsewhere. But if you do end up needing more money and you haven’t budgeted for it, you may be in a bit more trouble.
Keep your end goal always in your thoughts
Undergoing a home improvement/repairs project is extremely tough. At times, it may feel like the effort, stress, and monetary loss is simply not worth it. That is why you always need to keep the end goal in mind, the reason why you have started improving/repairing your home.
The project will get delayed, it will cost more than anticipated, that is what home improvement is all about, unfortunately. You can budget for home improvements and repairs in a nigh-perfect way and still end up needing a bit more money to complete the project. But if you keep your sights on what it’s all about, it will get much easier to cope with it all.
Whether you are using a home warranty, HELOC, or even a credit card to pay for your home improvements/repairs, accurate information is always critical. If you are looking to find the best home warranty option, and the best home warranty providers, explore the rest of the Consumer Opinion Guide. We will provide you with all the information you might need to budget for home improvements and repairs!