How to Budget the Costs of Remodeling a Home

Remodeling a home adds equity.
i David Sacks/Lifesize/Getty Images

Remodeling is a task that can add to the value of your home. If you plan on living in your home for at least 10 years, you will reap more benefits than the investor who is looking for a quick profit. Much like budgeting for your spending habits, budgeting for your remodeling costs is just as important. Without the proper preparation, you can put yourself in a financial bind and may not be able to make the payments on the loan you took out to finish the project.

Step 1

Contact your lender to see what the set debt-to-income ratio is for approval. Most lenders will give you this information if you ask.

Step 2

Determine your debt-to-income ratio. This needs to be calculated since it is what lenders use to determine whether or not you are able to handle the additional expenses. Simply divide your gross monthly income into your monthly expenses. The decimal figure is your debt to income ratio. For instance, if you make $7,000 per month and your expenses equal $2,000 per month, you divide 7,000 into 2,000 to get your debt-to-income ratio of 0.2856, or 28.6 percent. Having this information ahead of time allows you to make any adjustments if needed.

Step 3

Calculate the amount of money you can afford to spend on paying back a home remodeling loan each month. Do this by multiplying your gross monthly income by the lender’s required debt-to-income ratio and subtracting your total monthly expenses. The amount that you are left with is what you can afford to spend on repayment of a home remodeling project. If the lender has a set ratio requirement of 40 percent, for example, you would multiply 7,000 by .40 to get 2,800. You then subtract your monthly expenses from this figure, which leaves you with $800 per month as the amount you have available to spend on your remodeling project.

Step 4

Inquire on the terms of a loan that you are approved for. If you are approved for a 15-year note with 7 percent interest, you can borrow a maximum of $89,000 with monthly payments of $799.96 per month.

Step 5

Decide which parts of your home you plan to remodel and obtain quotes for the materials, labor and time involved with the completion of the project. Also make sure to take into consideration if you will need to live at another location while the remodeling is taking place. If this is the case, include these expenses as part of the project.

the nest