By Paul F. P. Pogue, Angieâ€™s List
Budgeting may be less exciting than creating plans and dreaming up remodeling schemes, but paying for major work is just as important a part of the process â€” not only what you pay, but how you pay for it. Keep these tips in mind when creating a financial plan for a big remodeling job.
Get everything in writing up front
Nail down payment terms in writing and be firm about enforcing them. A good contractor will accept a reasonable payment schedule that includes a fair down payment and periodic payments tied to progress. You might also negotiate a provision in the contract that allows you to withhold a final segment of payment, perhaps 10 percent, until you are completely satisfied with the job.
If you canâ€™t pay for the remodel up front, you can tap into a number of financing options using your home equity. A home equity line of credit, home equity loan and cash-out refinance are three of the most common options.
A home equity loan, or second mortgage, is typically a fixed-rate, fixed-term loan based on the equity in your house, which you pay in monthly installments.
A home equity line of credit is a revolving line of credit, similar to a credit card, which typically requires at least 20 percent equity. You can borrow as much as you need against your equity and make payments only on the amount you borrow.
A cash-out refinance typically requires at least 15 percent equity. This is a refinancing of an existing mortgage loan, where the new loan is for a larger amount than the current amount due, and the homeowner gets the difference in cash.
Try several different lenders to see who can give you the best terms. You donâ€™t necessarily have to go with the bank that holds your primary mortgage to access equity credit. Pay close attention to the interest terms, which will play a big role over the life of the loan.
Carefully consider the prospects when financing a remodel. Home equity credit is a powerful tool, but wield it wisely. If you get too aggressive in spending money to keep up with the Joneses, you can find yourself underwater on your mortgage in a hurry. Strongly consider speaking with a financial advisor to guide you through the best options.
Expect the unexpected and donâ€™t overthink the return on your investment
You should always assume a 10 percent buffer zone for unexpected costs. (Because there WILL be unexpected costs.) A contingency budget for unforeseen problems will save you a
lot of headaches. And if youâ€™re lucky and donâ€™t have emergency costs? Then you can be pleasantly surprised.
When it comes to big-deal projects, you want a good return on your investment, but you also should be looking at the improvement for its own sake. If you pour money into a kitchen remodel just to raise the value of your home, youâ€™re setting yourself up for disappointment when you decide to sell. But if you pay for a big remodeling job that enhances your enjoyment of the home and improves your experience, itâ€™s money well spent.