Renovating your home provides you with the incredible opportunity to transform its style and to make it more functional for your current needs. More than that, you do not have to endure the hassle of moving to enjoy these benefits.
While you may have been dreaming about a home renovation for a while, you are now ready to seriously explore the options and to get the ball rolling on this major project.
A home renovation can be expensive, so you must carefully prepare your finances as a first step.
Define Your Renovation Budget
Before you firmly decide if a home renovation is feasible, you need to determine if you can afford to complete the various projects that you have in mind. Therefore, begin by creating a dream list.
Include essential projects that you need to get done, such as replacing the roof. List desired or optional projects separately, such as installing granite counters in the kitchen.
Consult with a contractor so that you can get a firm estimate for your project. Ideally, this estimate will be itemized so that you can pick and choose which projects you want to complete based on your available funds.
Review Your Cash Reserves
Depending on the scope of your project, you could easily spend tens of thousands of dollars or more on your home renovation. Understandably, it is unwise to take on that amount of debt if you do not need to.
Review your financial situation to determine how much cash you can afford to part with to cover renovation expenses. Generally, this money should not come from funds that you need for the future, such as for retirement.
If necessary, take the time to save more money that is earmarked specifically for this project. If you sell stocks or other investments to pay for renovation expenses, consider talking to your financial advisor or tax advisor so that you can properly prepare for the tax liability that may be due the following April.
Consider Tapping Into Home Equity
Many homeowners will borrow money to cover some of their home renovation costs. If you are exploring programs offered by online loan lenders and banks, understand that there are significant differences in the types of loans available and how they will affect your budget.
Generally, you should not use personal loans that are intended to be used for emergency expenses for home renovations, unless you come across unexpected-emergency repairs. A better idea for many homeowners is to apply for a home equity loan or line of credit. This draws money out of equity that you have accumulated in the home, which is treated like an asset.
In addition, when you renovate your home the property value may increase. This means that you could establish more equity in the home upon selling, replacing some of the equity you drew out of it. The loan limits and rules for a home equity loan differ from those for a purchase loan, so you may not be able to take out as large of a home equity loan or line of credit as you are anticipating.
Take time to research equity loan and line of credit options thoroughly so that make a well-informed decision.
Expect the Best, Plan for the Worst
Unexpected expenses are unfortunately common with home renovations. Just imagine what would happen if your construction crew discovered damaged support beams while removing the drywall. For this reason, contractors tend to build a contingency fund into their budget to account for some of these unexpected situations.
Nonetheless, you should have a backup plan available if the contingency fund is insufficient. If you find yourself facing unexpected—yet critical—costs to your home, applying for a short-term loan online may be an option to consider. This type of loan could provide you with extra funds quickly, and you can focus on repaying the borrowed money as soon as possible to minimize the impact that the loan may have on your finances.
Remember to only borrow what you need, and always make sure that the minimum monthly payment is manageable.
You may be eager to get started with your home renovation project. However, you should not jump in too soon. Take time to walk through these steps and to prepare your finances. By doing so, you may be able to complete your project to your specifications and with minimal financial stress.