Planning Your Remodeling Budget

If you’re looking to turn that stale bathroom or kitchen into that new oasis you’ve been dreaming about, but the thought of how much a remodeling project is going to affect your wallet is causing you an anxiety attack, take heart. Determining the financials for a remodel and coming up with a financially sound game plan doesn’t have to be a stressful experience. We’ve put together some guidelines to help budget for that dream remodel that will help you avoid breaking the bank and get the most value for your dollar.

First, crunch the numbers

The national average cost for an upscale bathroom remodel is runs about $26,000, according to Remodeling Magazine’s 2005 Cost vs. Value report, but how much a homeowner actually spends will vary, depending on a number of factors, including materials used, size of the space, and fixtures or appliances. To get at a reasonable estimate of your costs, you must first take an honest look at your financial landscape to determine what your maximum budget will be. This will include out-of-pocket expenses as well as any additional sources of financing, like a home equity loan or credit card. The National Association of the Remodeling Industry (NARI) offers a budgeting worksheet that makes this easy to do.

Determine how long you’ll continue to live in your home

There is a rule of thumb that says that if you plan to live in your current residence for less than five years, your remodel should be viewed as an investment. If you plan on staying for a longer period of time, you need to look at your remodeling project from the standpoint of what makes the most sense for you and your family.

If you’ll be selling eventually, you should consider what a remodeled room will do to a home’s value, and then compare that figure to prices of other homes in your neighborhood. This will help you determine what your spending limit and should be and prevent you from “over-improving” your property.

Don’t forget! Be sure to factor in labor costs, which in general, account for about one-third of a project’s total cost.

If you find that the budget exceeds your comfort level, it’s probably time to do a little trimming. The first things to consider cutting are the little extras that you can probably do without. For example, do you really need that towel warmer, steam shower, or second oven? Other areas ripe for pruning might be the brand name factor in your fixtures or appliances. There can often be a very significant price difference between the top-of-the-line products and the high end of middle-range products, often without a major reduction in quality, craftsmanship or functionality.

Plan for Murphy’s Law

Even if you have your plan mapped out to the smallest detail, you should plan for the unexpected, which has a habit of disrupting budgets, and it can throw a major monkey wrench in your overall plan. If you leave no wiggle room, you may find yourself exceeding your budget, and your remodel might come into jeopardy. Until you tear down (demo) the existing room to the point where you’ll start rebuilding again, you never know what surprises might lurk in the walls, within the plumbing, or under the floor. Be prepared, and allow for the unexpected.

It’s also advisable set a bit of money aside for potential problems that might arise. Last minute changes, called “change orders,” cost time and break budgets too, so give careful consideration to any mid-project revisions. To cover potential problems like change orders, we recommend setting aside 10 percent of whatever number has been budgeted for labor costs.

The upshot? The good news is, if the financial cushion isn’t needed, or you aren’t presented with any nasty surprises, there will be money left over at the end of the project for towel warmers, fluffy towels or other luxuries.

Payment Options

There are many ways to foot the bill for a bathroom remodel, but a home equity loan may be the most popular because it can be tax deductible. Other options include refinancing, no-equity loans, FHA loans, personal loans, loans from retirement plans or borrowing against life insurance policies — and, of course, your own savings.

Whatever the type of financing, make sure to shop around for the best rate. Even if cash is in hand, oftentimes borrowing at a low-interest rate makes more financial sense than pulling your money out of an investment account that’s yielding a higher rate of return. “Sometimes it’s smarter to use someone else’s money than your money,” Cannata says.

Sticking to the plan

Once the financials have been finalized, don’t tuck the budget away in a file. Use it as a tool — whether it’s a computerized spreadsheet or two columns on a piece of paper — to track actual spending against budgeted amounts. You’ll be less likely to authorize expensive change orders when you can see the affect it would have on the project’s cost, and doing so will ensure your budget is in the black at the end of your remodeling project.

Lastly, work with your contractor or designer, and present your work to them for review. It will help them understand your financial parameters, and it will help them determine the best course of action for your remodel project. In many cases, because this is what they do for a living, they will be able to assist you in making your budget more bulletproof. They are a great source for recommending materials and products that will serve you best and fit within your budget.

By planning ahead, coming up with a game plan before you start work, you have a much higher chance of success, not only in terms of staying within your financial means, but also ending up with the best value remodel for your dollar.