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The budget-friendly home renovation plan

With historically low interest rates, there are plenty of good reasons to remodel your home, from fixing a flaw to converting a room into a work-from-home office to potentially boosting its overall value.

But before you begin construction, consider costs, contractors, and just how long the work will last. This step-by-step guide can help you plan your home improvement project while keeping you right on budget.

1

Create a project plan

Before you begin, determine the extent of your home renovation. Does it require an architect? Will you hire a contractor or save on costs by doing the work yourself? Does your project qualify for tax deductions?

Consider these questions and whether the upgrades will add long-term value to your home. Keep in mind that when you sell your home, you might not recoup every penny you spent, particularly if the upgrade makes your home worth more than other homes in the area. In addition, some renovations could cost you more in the short term. If you build a new room—or remodel one into your remote office—that could lead to higher utility bills.

2

Build a budget

You may love a good fixer-upper, but you shouldn’t have to fix-up your finances after a renovation. As you set your budget, remember that it isn’t just about costs. Sure, you’ll need to calculate permit fees, labor, the cost of quality materials and temporary housing accommodations, but you will also want to figure out how much you can responsibly afford—and how much you’re willing to spend. Once you do, leave room for unexpected expenses, which often range from 10 percent to 25 percent, according to Houselogic.com.

You may love a good fixer-upper, but you shouldn’t have to fix-up your finances after a renovation.

3

Line up financing

Once you’ve set your budget, you can start shopping around for financing. Tapping into your home equity through a home equity loan or home equity line of credit (HELOC) could be your best bet. Why? Loans backed by your home come with lower interest rates than unsecured personal loans or credit cards.

One of the terms included in your HELOC is a “draw period,” which is typically five to 10 years. During a draw period, your loan will work like an open line of credit. You will have a set limit to borrow from, and you can borrow up to that limit, pay it back and then borrow it again as often as you’d like. Once that time is up, you enter the repayment phase.

If you decide to go this route, make sure you apply with time to spare—it can take up to four weeks to process a HELOC application. And remember, when your borrowing period ends, you must repay the loan in full. Although a HELOC interest rate is usually much lower than other types of credit, if you default on your payments, the lender could foreclose on your home.

4

Hire a contractor

Unless you’re a passionate DIYer, you’ll probably need to hire a general contractor. Before you do, check out reviews online, get input from friends and ask local realtors for recommendations. To make the best choice for your budget, try to obtain several cost estimates. And more importantly, always make sure they’re licensed and insured.

5

Get required permits

Permits are crucial to pulling off a hassle-free renovation. Don’t know where to start? Plan a trip to your town hall or local building department to find out what permits are required to meet building codes. From plumbing to electric, make sure you meet every requirement needed to give your home project the green light.

6

Agree on a payment schedule

First, set a payment timeline with your contractor and be sure to get it in writing. Typically, you’d secure plans with a down payment, then make additional payments as your project progresses.

7

Monitor progress

Check in on the status of your project frequently to ensure that the work is done right and efficiently. To hold everyone accountable, keep your contract on hand. It should contain important information such as your overall budget, start and completion dates, material costs and warranty information. There’s always a chance unforeseeable issues may blow up your budget. If that happens, most home remodeling experts recommend considering some alternatives: Are lower-priced fixtures and finishes an option? Are there portions of the project—like painting—you can complete on your own?

Home renovations are not always easy or cheap, but they can be worth it when you see the end result. Simply start with these steps, and you’ll be smooth sailing toward the home you’ve always wanted.
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The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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