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How Should You Pay for Your Remodeling Project?

by Michele Dawson

As you ponder renovating your bathroom or giving your kitchen a facelift, one of the first things you'll need to consider is how you'll pay for it. While a good chunk of the costs of many remodeling projects are often recouped when you sell your home, you'll still need to gather the funds to pay for your project up front.

Coughing up the money now may come easier knowing that, if you're doing a minor kitchen remodel costing about $13,000, you'll get about 87 percent of that back when you sell, according to the 2000-2001 Cost vs. Value Report, published by Hanley Wood and Remodeling magazine. Likewise, for a $9,700 bathroom remodel, you'll recoup about 80 percent of your investment, based on national averages.

The National Association of Home Builders outlines several funding options, including:

Good old cash. If you have money in savings, this is an option. However, you'll want to think about the interest that the money could be earning in other investments. Compare that to the interest rate you'd be paying on a home improvement or other type of consumer loan. Also, keep in mind that interest paid on home improvement loans are usually tax deductible. Look and compare the numbers carefully.

Home improvement loans. A Title 1 loan, administered through the Federal Housing Administration, lets you borrow up to $25,000. It offers a fixed rate. A 203(k) loan, also administered by the FHA, is geared toward those who purchase a fixer-upper. It allows for a single, long-term, fixed or adjustable rate loan to cover buying and fixing up the property.

Home equity line of credit. This is a line of credit in which your house is the collateral. The credit line is usually set at 75 to 80 percent of the appraised value minus the mortgage balance. Lenders will also consider your credit history and ability to pay.

Second mortgage. If you prefer not to have an open line of credit through a home equity line of credit, you could consider a home equity loan, a fixed-rate, fixed-term loan based on the equity in your home. Monthly payments are set over a fixed period of time.

Cash-out refinancing. If interest rates are quite a bit less than when you bought your house, you may want to refinance your mortgage, that is take out a new loan to pay off your mortgage and use the remaining money for your project.

Once you've determined your financing method, staying within your budget is key. Three ways to keep your spending under control are:

Plan on spending 80 percent of what you can afford. Let the other 20 percent act as a reserve to cover any unexpected expenses that come up.

Carefully consider everything in your contract. Anything not included will cost more. Every time a change order is written up, your pocketbook will take the hit.

Stay focused on the project at hand. As you remodel your kitchen, don't try to undertake the bathroom, too.

In addition, you'll want to be sure the contractor you choose has good references and a good reputation. A botched job or a contractor with a shady past could end up costing you more if you have to compensate for errors down the road.

The National Association of the Remodeling Industry advises you to be cautious if the salesperson tries to pressure you into a contract, asks for full payment in advance, requests payment in cash, or tells you a special low rate is available "today only."

Published: April 15, 2002

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