Finn is the financial whiz in our family and I’m grateful that he leads the charge to keep our finances in order. Last year, right around this time, I had Finn share his best tips to become financially healthy. He even shared a free Excel file that you can download to track your monthly expenses. You guys went pretty wild for that post, so I figured it was time to get him back on here with even more tips!
Today, let’s dive into creating a home renovation budget. We are constantly doing projects, both big and small, and those all come with a price tag. Before we ever officially start any renovation, we always sit down and try our best to figure out a realistic budget for the project. How much do we need to save to make this project a reality? I’m often asked how we finance all of the work we do around here and I figured it was time to break it all down for you!
Take It Away, Finn
I am very thankful that Casey always asks me to write about simple topics like personal finances, parenthood, and marriage. Just once I would like for her to give me a challenge…
As you can guess, I am being sarcastic! These personal topics are very difficult to discuss because the circumstances are so different for all of us. However, I will do my best to walk through the general options you have when trying to budget and finance sizable home renovations.
Home Renovation Budgets
Before determining how you will fund the project, it is best to understand what you can afford and the potential cost of the project. First things first, let’s assume this is not an emergency, like a broken HVAC, flooded shower, etc., and it’s something you want to do to improve your home so you can enjoy it more.
To figure out the cost of a project, it’s best to start writing down all of the supplies and products that you’ll need to make it happen. Then, if you’re hiring professionals, getting a few estimates upfront is always a good idea. We always bring our trusty contractor in during the very early stages of a project so we can get a general idea of the labor. From there, we itemize out the rest of the supplies. We then have a ballpark number to work with.
I should also note that you want to make sure you’re investing wisely in your home. Casey wrote a blog post all about adding value to your home and you might want to give that a read before planning out any large projects. And this blog post dives into the saga of buying our home and using a lot of cash upfront to pay for some major renovations.
General Guidelines for Budgeting
Here are a few general guidelines to follow when it comes to budgeting for these projects…
Smaller Renovations (<$5k): If your project is on the smaller side, I would try not to find special ways to fund this. Instead, I would treat it like any other purchase of this size. If you feel you cannot afford it right now, then I would advise against doing the project. Instead, save your money and do the project when you can afford it.
Avoid Credit Cards: I always feel like credit card debt should be your last resort, or no resort at all, when financing projects. I would only use a credit card for emergency repairs. Otherwise, the extreme interest rates can hike up the cost of the project and mess with your finances. It’s really not a wise way to fund a larger investment in your home.
We use our credit cards to buy supplies for projects, but we always pay them in full each month to avoid paying any interest rates. We then make sure we have enough cash to pay for any labor involved in a project.
Add 5-10% to Budget: Whatever you thought the cost of a project was going to be, it will most likely come with some surprises or changes you did not plan for. (Remember this $25,000 setback we ran into? Yeesh!) Add 5-10% to make sure you are prepared for anything.
Refinance & Loan Hidden Costs: If you’re going to use a loan or refinance your home to pay for a project, make sure you read through the fine print. Pay attention to any costs for refinancing and be aware of flexible interest rates, penalties for early payoff, or other potential long-term issues. While sometimes this is a necessary evil, it is important to fully understand all the ins and outs of your new loan.
Potential Financing Options by Project Size
Okay, now that some of those general tips are out of the way, let’s discuss a few options to finance a project based on the scope of the project.
1. Cash or Saving Plan (Projects $5k – $25k)
The least risky method would be to plan out your project and create a savings timeline before you even begin. This would allow you to fund the project with your own earnings ahead of time. This will be simple and debt-free, but it does take time. Last year, I shared some tips to become financially healthy and budget each month. I’d give that a read and try to implement a few tips so you can start saving your hard-earned dollars.
This is usually our approach when it comes to projects. For example, we knew our kitchen renovation was going to come with a big price tag and you can read all about the budget here. We saved our pennies ahead of time until we had enough in our kitchen budget to do the project.
Best Fit: Individuals with a strong emergency fund and disposable liquidity. Or those with very low-risk tolerance and a tendency to save before buying.
2. Home Equity Line of Credit – HELOC (Projects $5k – $25k)
A HELOC is a hybrid of a home equity loan and a credit card. You open a line of credit through your current lender and have the option to withdraw funds and use them, creating a balance owed. You only pay interest on the outstanding amount owed, so if you use $5,000 and pay it back within two months, then it is closed out and you no longer owe interest, but the balance is still available for the next project.
The flexibility and reduced interest rate, compared to a credit card, are very appealing. However, keep in mind this is also another loan and the interest rates can be variable over time. This is a great choice for those working on moderate projects, but not wise for larger home renovation projects.
Best Fit: Homeowners who are working on smaller projects or working through a series of home renovations one room at a time because you can withdraw money and pay it back on your own time. It makes sense for those with a more manageable cost timeline.
3. Refinance Home (Projects $25k+)
This one is tricky as it is very reliant on your personal mortgage situation, but it could be the ideal solution for some individuals. If you have over 20% equity in your home and are able to secure an equal or better interest rate, this is a tremendous way to “cash-out” the equity you built in your home.
Allow me to explain. Over time you pay down your mortgage and increase the principal equity in your home. Through a refinance, you can extract some of that value to fund the project. However, this will reset your mortgage balance to a higher total and reset the time to pay it down, since it’s a new mortgage. This is a personal choice and best to discuss with your lender, but it is a great option if available.
Best Fit: People looking to do higher-cost renovations who have owned their home for a longer period. This would assume they have a higher amount of equity in the home and can leverage newer rates to maximize the outcome. ( You could end up with a lower mortgage payment, better rate, and cash to fund the project!)
4. Home Equity Loan (Projects $25k+)
This is another way for you to maximize the value of your existing home equity without having to refinance the mortgage if you already have a great interest rate. Like refinancing, it is imperative that you have over 20% of the equity to avoid a higher interest rate becomes it comes with its own fees and lender process.
The home equity loan is essentially a second mortgage on the home and comes with a slightly higher interest rate. It also has the same inherent risks of a mortgage, where defaulting can lead to foreclosure, so be careful that you are wisely investing in the home.
Best Fit: People looking to undertake higher-cost renovations who have owned their home for a longer period, but would not see an advantage from refinancing. This adds a second mortgage to the home but it gives you a lump sum to spend on a major renovation at a much lower interest rate than other options.
What’s Right For You?
At the end of the day, everyone’s home and financial situation are different and it’s important to take time to figure out which route is the best for you. Understanding what you can afford will really help you plan confidently so you can enjoy the process of improving your home.
Personally, when we plan and make a home renovation budget, we tend to feel less stressed and more excited about the major changes we’re making to our home. So do some homework ahead of time, save your money when possible, and enjoy creating the home of your dreams!
Happy Birthday, Finn!
A big thanks to that husband of mine for sharing his wisdom here on the blog. And an early Happy Birthday to Finn as well. He’ll be the big 34 tomorrow!Casey&Finn