Personal Finance

How to remodel, without wrecking your finances

Key Points
  • More than a third of homeowners struggle to stay on budget for their remodeling project.
  • 91 percent of homeowners plan to pay for a renovation at least in part with cash.
  • Almost a quarter will pay for their home improvement with a credit card.
How to remodel without breaking the bank
How to remodel without breaking the bank

Improving your home shouldn't demolish your finances.

About half of homeowners are either starting or continuing a home remodeling project this spring, according to a new survey from design and remodeling site Houzz. The site polled 95,920 of its users (who, arguably, may be more inclined than the general population to undertake such projects).

How much you can expect to spend varies by project — last year, Houzz users spent an average $11,700 to remodel or add a master bathroom, for example, and $2,800 on laundry room improvements.

Fresh Meat Media LLC | Getty Images

Cost is a concern across the board. "Minimizing costs" tied with "increasing resale value" as homeowners' top renovation priority, Houzz found. "Staying on budget" was the top challenge, with more than a third of homeowners saying they struggled not to overspend.

Here's how to prepare your finances for a remodeling project:

Assess the investment

If you're planning to move within a few months or even a year or two, remodeling may not offer a great return on investment, said Angie Hicks, founder of consumer review site Angie's List. A dollar spent on a renovation doesn't necessarily translate into a dollar in added home value.

For example, a $62,158 major kitchen remodel recoups just 65.3 percent in resale value, according to the 2017 Cost vs Value report from Remodeling. Spending $71,115 to remodel the basement returns 70 percent.

You need to make sure you can afford paying off this debt without the house selling.
Odysseas Papadimitriou
Chief executive, WalletHub

Look for projects that keep you in line with the Joneses, said Hicks. For example, if your home is the only one in the neighborhood that doesn't have two bathrooms, adding one could pay off in added value when you sell. But a buyer may not be willing to pay a premium just because you picked granite countertops when your neighbors have laminate.

Save up

More than a third of homeowners told Houzz they waited to renovate until they had the savings to do so. More than nine in 10 are paying for their project at least in part with cash. (See charts.)

That's smart, said Mark La Spisa, a certified financial planner and the president of Vermillion Financial Advisors in South Barrington, Illinois. Unless that project is an emergency — say, you're replacing leaking windows — you're far better off saving up, which can help you spend less, and avoid compromising other goals.

"With financing, you're paying the full boat price and then interest on top of it," he said.

Financing can also be costly when it comes to your bigger financial picture, said La Spisa. Someone financing a renovation because they didn't have savings should consider where they will come up with the extra money to make payments on that debt, he said — and whether they can stay on track with other savings goals, with less money in their budget.

Budget for the unexpected

Once you're figured out how much you can afford to spend, total, prepare your budget to cover 90 percent of that amount, Hicks said. Shop for contractors based on that figure, too.

"Give at least a 10 percent cushion for the unexpected," she said — that way, if the project hits an unexpected snag, you aren't over-budget.

Compare financing options

If you have to borrow, weigh the costs and benefits of all the options available to you, La Spisa said. Then shop around to make sure you get the best terms possible for that kind of financing.

Tapping your home equity, in the form of a loan or a line of credit, can often be an attractive option because the interest paid is typically tax deductible, he said. But it's not always easy to borrow.

Borrowing from your 401(k), although the terms can be attractive, should be a last resort to avoid derailing your retirement plans, he said.

Charging the renovation to a credit card isn't the worst idea, if you can snare a zero-percent offer—and pay off the debt before that offer expires, said Odysseas Papadimitriou, chief executive of comparison site But be cautious about taking on debt if you're hoping the stars will align for you to sell your home — and sell it at a profit — before any promotional financing deals (like a zero-percent balance transfer offer) expire.

"You need to make sure you can afford paying off this debt without the house selling," he said.

Weigh payment perks

If you have the savings to pay for renovations out of pocket, think carefully about whether to pay via a check or credit. Both have potential advantages. (Skip cash, said Hicks. You should have a trail documenting payment.)

Routing renovation spending through a credit card gives purchases extra layers of protection from federal law and individual card perks. You could also earn enough rewards to cover say, your next vacation.

"Some of the best rewards cards get close to 2 percent, never mind the initial bonus," said Papadimitriou. "There's a ton of money to be saved."

Guido Mieth | Getty Images

But that strategy relies on you being able to pay off the balances in full, avoiding interest charges.

Paying with a check could ultimately leave more in your pocket, said La Spisa. Contractors may pass along the fees to process credit card charges, adding roughly 2 percent to 3 percent to your bill. You can avoid that with a check, he said — and you may find it easier to stay on budget.

"Studies show that a person using a credit card tends to spend more than they would using cash, which defeats the benefit of the points," he said.

Pay in installments

"Don't pay for everything up front," said Hicks — you could get burned if the work isn't up to par or the contractor disappears.

Contracts typically set out payment in installments. Tie those to completion of various tasks or stages of the project rather than dates, she said. That way if there's a delay, you won't have paid for 75 percent of the project when only 25 percent has been completed.