Budgets and Your Renovation Project
Oftentimes the number one concern a homeowner carries is affordability and budget. How much can you afford? What if the estimates are off and you owe more than originally projected? What if the materials you really want are too expensive? There are a few ways to help shape your budget when considering home renovation projects. Follow some of these helpful hints to make your budgetary process easier. If you have a budget, your contractor will be able to help you stick to it.
- How long do you plan to live in your house? If you can only see the short-term, invest less money in your project. If you can see yourself spending a decade or more in this home, feel better about making a larger investment in the home. Remember though, that home renovations increase property value. Neighborhood real estate values may dictate how much your home sells for in the future—so don’t over-invest if you want to make your money back in the long run.
- How much are you in debt right now? What debts do you incur on a regular basis—mortgages, car loans, credit cards, insurance payments?
- What is your total gross monthly income?
- If you plan on taking out a loan to fund your home’s remodel: Determine your Debt-to-income ratio by using this simple worksheet:
- Total Monthly Expenses:
- Add the estimated monthly payment for the remodeling:
- Take the total and divide by your gross monthly income. The answer you get is your debt-to-income ratio.
- Determine the maximum monthly payment you can afford for your project using this equation:
- Gross Monthly Income:
- Multiply it by your Lender’s Debt-to-income ratio. The answer to this is your subtotal.
- Subtract your total monthly expenses (not including the estimated remodeling payment).
- The answer to this is your maximum affordable payment.
- Your lender approves loans at certain debt-to-income percentages and most will tell you the acceptable rate if you ask. If your debt-to-income ratio is higher than their acceptable ratio, you may have to find alternate financing.
- If your debt-to-income ratio was higher than your lender’s accepted percentage, or your maximum affordable payment ended up being too low, you could consolidate your debts using a debt consolidation loan. This incorporates your current debt into the home improvement loan. One loan equals one simple payment, a lower interest rate and may allow you to incorporate your debts into a tax-deductible loan.
Take into account your expendable income and wiggle room you have in your budget. One you decide on a budget—stick to it. Making any alterations during the process may run your debt higher. Work with your contractor to draw up a contract that fits within your financial confines.
