Angie’s List: How should I budget for big projects?
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 — 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 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 can’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 don’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
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 you’re lucky and don’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, you’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, it’s money well spent.
Paul F. P. Pogue is a reporter for Angie’s List, a trusted provider of local consumer reviews and an online marketplace of services from top-rated providers. Visit AngiesList.com.