How Much of a Remodel Can You Afford?
Determining what should be remodeled and how much to spend on it
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Knowing how much to spend on your renovation is as important as determining what to renovate.
Knowing "What" Should Be Remodeled
Tip - I've heard from multiple General Contractors that homeowners typically end up spending 25% more on a home remodel project than they had expected to. On my home renovation, we shot well past 25%.
~ Don Roberts
There are so many good reasons to remodel your home. In fact, renovations like fixing a leaky roof help solve a problem, while some renovations will add value to your existing home.
Jumping straight into remodeling project - without setting a budget - is not a wise decision. In fact, you may spend loads of cash on nice-to-have or unnecessary updates that you won't get paid back for on for many years to come. That's why you need to be cautious when planning to remodel your home. This article provides information on how much remodel can you afford.
Set a Budget
The first step is to set a budget for the remodeling project. You may have to decide from where you plan to raise the money for the project. Do you have money saved up or do you need a construction loan for the project? Whatever means you decide to use for the project, home remodeling can be quite expensive at times. Hence, the best way to start your project is to consider remodeling spaces that are functionally obsolete.
For example, changing the layout of a 10-year old perfectly functional kitchen just because one doesn't like the style choices of the previous owner may not be the best renovation project. In fact, it can't be considered an investment that will pay you back at a resale. But if the kitchen is about 20-30 years old, a renovation makes financial sense. So, how much should you spend on renovations?
Rule of Thumb
A rule of thumb here is to spend no more than the value of each room in the house as a percentage of the overall house value. Consider the following percentages:
Typical Remodeling Project Percentages
For my wife and me, we wanted a house with more room and having a more modern feel to it. At the time, our approximately 50-yr old ranch style home had become dated looking and crowded with big plastic toys for our little guy. We began looking in the area for a bigger, newer home.
But, we quickly found out that in the San Francisco Bay Area, getting a house in one of our target areas for meant we'd get an similarly older house that was typically in even more need of a remodel than our own home. That, or we would need to drive 45-min to an hour out of the Bay Area. We did find large, brand new homes. But, they were $1.2M (ours was valued at $425K at the time) and the commute would have been a draining experience on a daily basis.
We decided to remodel our current home, and that allowed us to dial-in exactly each remodeling element - with the help of an architect and a general contractor.
So, yes, we varied from the recommended percentages mentioned above. But, we did it on purpose because we knew that with California real estate market and consulting with our knowledgeable real estate agent, we had a comfortable feel that whatever we put into the house, we'd be able to more than recover if or when we sell the house years in the future.
Bottom-line - Whatever you choose to do, go into it with your eyes open by first doing some real estate market research in your area. Just be sure to make appropriate adjustments for your area.
If you haven't saved up enough money for your home renovation project, you may have to borrow the money from a lender. In fact, there are hundreds of remodeling loan options to choose from today. Mortgage brokers can offer more than 200 different loan programs for renovation projects. Check-out the six remodel financing strategies that home finance experts think you should consider.
You should begin with an accurate estimate of the cost of the project. In fact, a lender will insist on a specific figure before they decide to lend you the money. If you plan to hire a contractor for the job, request an estimate broken down into materials and labor. You should add a 10% margin for additional expenses on to this estimate.
The lender will use a loan-to-value ratio (LTV) to determine your loan amount. This is a percentage of the appraisal value of your home - which is around 80%. That means you can get a loan of $100,000 to renovate a $125,000 home. If you already have a mortgage on the property, you can apply for a second mortgage to renovate the house. The lender will subtract your mortgage balance from the eligible loan of $100,000 under such circumstances. Hence, if you have a mortgage balance of $60,000, you can get only $40,000 for the project. But the construction loan or second mortgage will depend on your monthly income and expenses.
A high income level doesn't mean a larger loan if you have a lot of monthly expenses. In fact, the lender will follow two basic rules to minimize their risk.
Lender Risk Mitigation
Do they ever make exceptions? From time to time, yes. But, that doesn't mean you should.
It is important that you get pre-approved for a construction loan at your bank or mortgage lender. Why? Because you'll know how much of a home remodel, kitchen remodel, or bathroom remodel you can afford before talking with an architect or general contractor.
There are many real estate websites where you can get an estimation of the renovation project in your area. Check these calculators to determine how much your remodeling project costs in your area.