You know you want to remodel your home, but do you know how much you can reasonably spend? Developing your remodeling budget is one of the biggest tasks in remodeling — next to selecting the right person for the job. Forget clipping pictures from interior design magazines for a minute and focus on money. There are some simple calculations that can help you determine whether you can do what you want or not.
How much can you afford? Most homeowners are daunted by the very idea of developing a budget for their project. They hem and haw about not knowing how much remodeling costs and decide it isn’t their job to figure out what is reasonable for them to spend … then they call a remodeler and ask him to figure out the budget for them. Wrong! The worst thing you can do when contemplating a remodeling job is to leave the financing up to someone else. It’s your money. It’s your call.
If you don’t know your own ballpark figure, you are already starting off on the wrong foot.
Here are some easy steps to figure out your base budget numbers:
Step One: Decide How Long You Are Staying In Your Home
Most financial advisors don’t recommend refinancing your home if you intend to sell within five years. The same type of logic applies to remodeling — don’t invest a ton of money into a home if you are planning on selling within five years. Yes, you may want to update rooms to assist in the selling process, but don’t try to create the dream home, as it is unlikely you will be able to recoup your money. If you are planning on staying in the home for the long run, on the other hand, go for it. Spend as much as you can afford to make it your dream home. The investment is for you at that point and resale value plays a very small part in the decision-making process.
Step Two: Make a List of Debts
This list should contain all monthly expenses, such as mortgage payments, car, loans, credit cards, etc. Do not include incidental expenses such as groceries, utilities, telephone, cable or general expenses though. This list is for pre-determined debt — those bills you pay each month at a set amount.
Step Three: Calculate Your Gross Monthly Earning.
This includes all of your monthly income, regardless of source.
Step One: The Debt to Income Ratio (DTI)
This is a simple calculation lenders use to determine whether a homeowner can afford the additional debt of a remodeling loan.
Enter your monthly expenses ________
Add the estimated monthly cost of remodeling _________
Total Amount __________
Divide the total by your gross monthly income __________
This equals your DTI.
Most lenders will have a set DTI amount that is acceptable for loans — normally around 45 percent. This means that any amount that is lower than the lender’s DTI would be approved for the loan.
Step One: The Maximum Payment
This calculation helps you determine how much you can afford on a monthly basis and still stay beneath the lender’s pre-determined DTI ratio.
List gross monthly income ________
Multiply by the lender’s DTI percentage _________
Subtract total monthly expenses ______
This equals your maximum monthly payment. If the last line is negative, you will have trouble obtaining a loan from that lender. You may be able to find another lender who has a higher DTI ratio if you look.
There are several lenders who offer home improvement loans. Be sure to check out a variety of financing options for the best deal.