Are you planning to make home improvements in the next few months or years?  While some home makeovers are small, such as new paint or bathroom tile, others are large-scale, requiring large budgets and planning.  Make sure you do it right!  Here are some tips for planning and financing your next successful home improvement project.


Start by making a list

Start by making a list of all the projects you plan on doing.  Your list should include both small and large projects.  Then rank the projects according to whether they're a want, should, or need in your home.

Once you've created your list, determine which improvements are likely to add value to your home and which ones won't.  Projects such as a bathroom remodel, adding central air conditioning, or a new roof can recoup a significant percentage of their costs when it's time to sell your home.  But more personal updates, such as installing built-ins, may not add any value at all.  It depends on what potential buyers want in that market when you sell.  Remember that not every improvement adds value but be sure to consult real estate professionals for advice on what sells in your area.

Go over the list with an inspector

Have an inspector go over the list with you.  He or she can help you determine which projects are most urgent and which ones can wait until another time.  The inspector will also help you decide which projects require a professional, and which can be done as do-it-yourself (DIY) jobs.  In some cases, there may be aspects of your project that require the skill of an expert or workman, but other parts may be within reach for a DIYer like yourself.

Finally, the inspector might point out issues he sees on your list that aren't worth doing because they don't add much value to your home in terms of safety and comfort.

Look at the projects that earn a significant return on your investment and prioritize those.

Analyze the cost-to-value ratio of home improvement projects to help you decide which ones to do first.  Although it's generally a good idea to take on projects in order of importance, certain small projects you can do without much effort but still provide significant returns.

Stick with smaller, cheaper jobs if your goal is to recoup your investment.  Large-scale, expensive renovations, particularly in kitchens and bathrooms, don't always pay back what they cost when homeowners resell their homes.  But even if your motivation isn't increasing your home's value, there may still be some smaller jobs that give a higher return on investment simply because they're not as costly relative to their impact.


Now, let's look at ways to finance the home improvement projects you've determined are worth making.


Credit cards are an option if you use them wisely

Put things on your credit card if it's worth it to you.  When you charge expenses to your card, pay it off in full as soon as possible.  A zero-balance card can do wonders for your credit score.

If you're considering using your credit card to fund your project, ensure you have enough room on the card to cover your expenses to avoid raising your credit utilization ratio (which is a bad thing).  If possible, pay off the balance quickly because cards usually carry higher interest rates than personal loans or home equity loans.  Keep in mind that putting large purchases on a credit card can affect your credit score if the debt raises your utilization ratio above 30% of your available balance.

While it's essential to make regular payments, it's also important not to be late.  One of the worst things for your credit is missing the due date of payment.  So get automatic reminders set up for yourself, and ensure there are enough funds in your checking account on each monthly payment date.

Build up your savings so that you can pay cash for some costs

Save as much as possible for your home improvement project.  You can set up automatic payments from your paycheck or bank account to deposit a certain amount of money into a separate savings account each month.  Get creative and figure out a budget that works best for you.  The more you can put away now, the better.  Even if it's just a few bucks each week, every dollar counts.  If you have some extra time, try saving by cutting back on expenses, like eating out less often or streaming fewer movies online.  By putting away small amounts of money now, you can pay cash for part of your project, ultimately saving you thousands in interest and fees over time.

Get a personal loan

If you want to do some home improvements, but don't have the cash, you could a personal loan for home improvement.  Personal loans can be helpful when you need money for home improvements because they're more flexible than other types of loans.  However, they also come with higher interest rates and fees than other types of consumer credit, so it's important to understand all the terms before signing on the dotted line.

Cash-out refinance

Cash-out refinance is a type of home loan that allows you to refinance your existing mortgage and draw on your home equity as a source of capital for home improvements or other purposes.

Cash-out refinances can be used to:

  • Pay off credit card debt or other loans secured by your house.
  • Make home improvements, such as adding a deck or solar panels.
  • Buy another property, such as an investment property or vacation home.

You can use cash-out refinance for remodeling projects, adding an addition to your home, or making energy-efficient upgrades like installing solar panels.

The amount you can borrow for a cash-out refinance depends on your current loan's principal balance and interest rate, plus the value of your home and its location. You'll also need to pay closing costs on the new mortgage.  Therefore, it's best to speak with an experienced mortgage lender before applying for a cash-out refinance loan.

Home Equity Lines of Credit (HELOCs) 

Use the equity in your home to take out a home equity line of credit (HELOC). It's important not to borrow more money than you can afford.

HELOCs offer a variable interest rate, and the interest payments may be tax deductible (consult your tax advisor for advice on your specific situation).

If this sounds like something you might do, you should carefully investigate your options beforehand to make sure they are right for you.


The Bottom Line

Make sure you have a grip on your personal finances before starting costly home improvement. This knowledge will allow you to make the best decisions regarding your home improvement project. Remember that good planning and careful research are required elements of any home improvement project.