Using Home Improvement Loans: How to Budget and Plan Your Project

Home with a dollar sign on it indicating a home loan

If you’ve watched even one episode of a home renovation show, you know that it’s common for renovation projects to go over budget. For homeowners with unlimited funds, going over budget isn’t much of a problem. They simply spend the extra money to finish the project as planned. However, going over budget can hurt your finances if you don’t have extra money in a savings account.

It’s especially concerning if you used a home improvement loan to fund your project. When you take out a loan, you receive a fixed amount of money, so you have to plan your project carefully. Otherwise, it’s possible to run out of funds before you put the finishing touches on your home. To avoid complications, use these tips for budgeting and planning your renovation project.

What Is a Home Improvement Loan?

A home improvement loan is a type of personal loan used to fund a renovation project. This type of loan is unsecured, which means you don’t have to put up any collateral. As a result, home improvement loans are less risky than home equity loans, which require you to borrow against the equity in your property.

If you don’t repay a home equity loan, the bank can seize your home, sell it and use the proceeds to pay off your loan balance. Since home improvement loans require no collateral, there’s nothing for the bank to seize. You still have to pay back the loan, but you won’t be at risk of losing your home or another valuable asset.

Home improvement loans cover both materials and labor, making them one of the best ways to fund home renovations. If you don’t want to take out a loan, you can save up for your renovation project, or you can buy materials on a credit card and do the work yourself. This is only a good option if you have extensive experience with home repairs.

Tips on Budgeting for Home Improvements

Home with dollar signs over the top for a loan

One of the best ways to use a home improvement loan wisely is to make a budget well before you begin your project. Follow these tips to come up with an accurate budget.

1. Make a List of Tasks

Before you can create a budget, you need to know exactly what you want to accomplish. “Renovate the bathroom” is a vague goal that makes it difficult to determine how many steps you need to complete and how much money each step is likely to cost. It’s better to make a list of specific tasks, such as “replace the bathroom countertop” and “install a new faucet and a new shower head in the bathroom.” 

Once you have a complete list of tasks, creating a project timeline is easier. You can also use your list to determine what supplies you need to complete the project successfully. For example, to replace the tile in your bathroom, you may need to purchase tile, grout, tile spacers, a tile trowel and thin-set mortar.

2. Get Multiple Estimates

To save money, don’t hire the first contractor you meet. Instead, get multiple estimates from contractors in your area. Each contractor should provide a written estimate with the project scope, the materials needed, the expected completion date and the price. Once you have all the estimates, review them carefully. Just because a contractor offers a lower price doesn’t mean they’re the right choice for your project.

For example, the contractor who gives you the lowest estimate may not have the right insurance or licenses to operate in your area. In that case, it’s better to go with a higher bid, provided the other contractors are well-qualified to complete your renovation project.

It’s also important to review the list of materials carefully. The lowest estimate may be low because the contractor plans to use basic materials that are likely to wear out within a few years, while the highest estimate may use high-end materials designed to last for decades. Price is important, but you also need to choose a contractor based on skill, experience and approach to your project.

3. Start Your Project at the Right Time

The cost of a renovation project depends partly on when you schedule the work to begin. Contractors are usually busiest during the summer, so you can expect to pay more if you want to begin your renovation project in June, July, August or early September. During the winter, contractors can’t work on most outdoor projects, so they tend to have more time for indoor renovations. You can save money by starting your renovation project in January or February.

4. Anticipate Cost Overruns

It’s common for renovation projects to go over budget, partly because the cost of materials fluctuates based on market conditions. For example, the COVID-19 pandemic drove up the cost of materials by making it difficult for contractors to obtain supplies. It’s also possible for a supplier to stop making one of its products in the middle of your project, forcing you to adjust your plan. To account for these problems, add at least 10% to your initial budget for unexpected expenses.

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