8 Tips For Creating A Renovation Budget

When you’re starting a home renovation project, one of the most important items to address upfront is your budget. Without a budget in place, homeowners can easily underestimate their renovation costs or spend more than they intend to. Having a smart and feasible budget in place before you begin can save you money as well as a headache in the future.

In this article, we’ll review how to create a budget for home renovation, and look at some financing options to help pay for your home improvement project.

How To Create A Renovation Budget

The average cost to renovate your home is $10 – $60 per square foot. Creating a renovation budget can be easier if you first prioritize your projects and spaces and plan your costs.

Just how much planning should go into a renovation budget, though? We’ll walk you through a few quick steps to establish a proper budget for a renovation project.

1. Set Renovation Priorities

One of the first places you should start is prioritizing your space. Not every project has to be done right away, so to find out what needs to get done, ask yourself what your main goal is.

For instance, some people create renovation projects to increase their home value. If that’s your goal, you might tackle a kitchen renovation or a bathroom update early on. If your goal is to add more space, you might change your garage into a home office, gym or extra bedroom.

Your renovation priorities will help you stay the course and avoid getting overwhelmed by other projects that you might not be ready for.

2. Outline Cost Estimates

Before you get started, you'll need to know how much a renovation project will cost you. This step will also let you know if you can actually afford the project.

Kitchen remodels are one of the biggest updates and also one of the most costly. Sometimes you’re updating for looks, other times you’re updating for function. Your needs will directly impact your costs. So if you have the time to explore many different contractors, materials and hardware, you should. If you’re looking to sell the home relatively soon, you might have to pay more to expedite the process.

If you’re unsure how much to pay for a certain project, ask some general contractors for an estimate. You can also use remodeling calculators or check HomeAdvisor.com to get a general idea of how much a project will cost.

3. Shop Around For Contractor Bids

Unless you’re planning to do the renovations yourself, the next step is hiring a contractor.

One of the best ways to save is to compare prices among many different contractors. Not all contractors charge the same or set the same expectations for a project timeline. Make sure to get a free estimate and verify they’re legitimate by checking if they are licensed and insured (many will gladly share these details with you if they have them).

This is also a good time to talk about payment with your potential contractor. Some require upfront payment while others are a bit more flexible. If you want to avoid a large payment, see if your potential contract will work out a payment plan. Not all of them do, but it’s worth asking about. It also gives you an idea of how flexible a potential contractor will be, which helps when things don’t always go according to plan.

4. Account For Taxes And Shipping Fees

When you’re paying for a local contractor who is buying local materials, you probably aren’t thinking about shipping costs. But if you or your contractor are buying materials that aren’t locally available, you’ll need to factor in shipping and taxes into your budget.

For instance, a specialty-ordered countertop might get shipped in from another state or even another country, possibly eating up your budget. The cost of material along with the shipping to get there could be more costly than what you originally planned to pay for those materials. Be mindful not only of the cost of the supplies, but what you could pay to get them into your home.

5. Beware Of Custom Finishes

Other budget-eaters are high-end or specialty finishes. While it’s nice to have unique finishes, you’ll end up paying more for the materials, labor and overall time compared to having a less-expensive piece.

If you’re renovating to move, the nicest finishes won’t be a dealbreaker in your negotiations with potential buyers. But they will notice if you've put quality work into your renovation overall. While nice, custom finishes aren’t a requirement and you don’t need to get them.

6. Factor In Changes And Mistakes

Even the most well-crafted plan is bound to have some hiccups. Remember that not everything will go the way you thought it would, so it’s a good idea to add the cost of changes, mistakes and holdups to your renovation project.

For instance, if you’re building an addition to your home, bad weather might shed a few days off the final deadline. There’s a chance there isn’t enough of your desired material to go around and you’ll need to agree on another (possibly more expensive) one. Give your budget a good amount of leeway so any unforeseen hiccups won’t put you over.

7. Cut Costs Whenever Possible

It’s a good idea to hire a professional whenever you need expert help, but that doesn’t mean you always need a contractor to handle your work. If you have the means and the time, consider some do-it-yourself work, like painting or changing out cabinetry hardware.

Use your contractor’s estimate to see what you can handle compared to what they should handle. That way you can negotiate the price down to something more reasonable. While it’s not likely you’ll handle the entire project yourself, you might find there are some parts of the project you’re capable of tackling.

8. Be Clear About Financial Limitations

Most people don’t have an unlimited budget to tackle home renovation projects. It’s important to be upfront with your contractor and project team about your budget. Even with wiggle room, you can’t be expected to fund every change on a whim. That’s why it's important to cut costs where you can but also come with a fluid mindset. Not everything is set in stone but be firm about what you can afford.

How To Pay For The Renovation Budget

Not every project will have the same budget, and how you pay for your project matters. You have a few different options, including:

Cash-Out Refinance

The cash-out refinance is one of most popular ways to pay for home renovations. Like other types of mortgage refinance, a cash-out refinance can be a way to secure a lower mortgage rate if rates are currently down. Unlike other types of mortgage refinance, however, the cash-out refi also lets you turn some of the equity that you’ve built up in your home into cash.

Although you will still be paying interest on the cash you take out, the fact that it is a secured loan and that you may have been able to refinance your mortgage to a lower rate in the process means that it is typically a highly competitive rate. There’s also the fact that many home renovations end up increasing your home equity by way of added value to your home, so you can often end up “paying yourself back” for the equity you’ve taken out for upgrades. 

Paying In Cash

If you’ve saved up enough money, you can pay for your renovation project out of your own pocket. This is the most cost-effective method but doesn't give you much room for mistakes. You may want to consider setting your budget much lower than the full amount you've saved up. That way, if there are any mistakes or bumps in the course of renovations, you don't have to take out a loan or put expenses on a credit card.

Home Improvement Loan

A home improvement loan is a loan specifically for home renovation projects. There are a few different home improvement loans offered by the government, and others from private lenders. Some government loans, like an FHA 203(k) loan, let you borrow up to $35,000 for home improvement or renovations. The amount you borrow gets added back onto your mortgage that you can pay back over time.

Each loan has different limitations and you’ll need to check with the individual lender to see if you qualify.

Home Equity Loan

A home equity loan is a lump-sum amount that comes from your home’s equity. You can usually borrow about 85% of your home’s total equity. These types of loans are like a second mortgage, and you make payments like you would a mortgage payment. If you don't make payments, you could face foreclosure. Rates are usually determined by your credit history, how much you want to borrow, your income and the market value of your home.

Home Equity Line Of Credit

A home equity line of credit, or HELOC, is similar to a home equity loan. Instead of a lump-sum amount, though, you have a revolving credit line, similar to how a credit card works. You can borrow as much as you need as often as you need to, as long as you don’t go over your limit. You'll still need to make regular payments or else you could lose your home.

Personal Loan

If you don’t want to take out a second mortgage or possibly face foreclosure by failing to pay back a home equity loan, you can borrow a personal loan. Personal loans are unsecured, meaning there’s no collateral attached. Because of this, interest rates tend to be higher compared to home equity loans or HELOCs. You may want a personal loan if you don't have enough equity in your home or you need to borrow more than a home equity loan or HELOC would offer. To borrow a personal loan with the lowest interest rate available, you'll need to have excellent credit.

The Bottom Line

If you’re considering a home renovation, make sure your budget reflects your project. Take a good amount of time to set your expectations and priorities before getting started. The more prepared you are for your project, the less worried or surprised you’ll be if something unexpected comes up.

Make sure to do as much research as possible into contractors, project costs, and potential timelines. Remember to factor in extenuating circumstances, especially when it comes to weather-related projects.

It’s also worth keeping in mind that if you’re going to need financing, options that typically require planning ahead, like a cash-out refinance, generally come with lower interest rates than more last-minute paths to financing, like using a credit card. If it looks like your projects are going to require more cash than you have on hand, it’s better to plan for that right off the bat so that you can get the most favorable loan terms possible. So, if you’re looking into a high-end renovation, why not start the process to get a cash-out-refinance today?