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Your Home and Your Finances: Planning for the Financial Impact of Home Renovations

With spring on the way, you might be thinking about making some updates to your home. Home renovations became especially popular during the pandemic when there was an 82% increase in home repair and improvement activity.

Demand for home improvement and repair trades soared during the pandemic. For example, the demand for roofers rose by 82%, for electricians by 104%, for plumbers by 139% and for house painters by 143% — according to It’s no wonder many homeowners have had so much trouble getting contractors out to do work for them!


Start with a Budget

Before you start reaching out to contractors, it’s a good idea to plan for the financial aspects of home renovations. Start by setting an overall budget for your project. As you do this, keep in mind that up to half of all home renovation projects eventually go over budget so you might want to pad your budget a little bit, such as 10% or 20%, just to be safe.

You can find lots of statistics on the average cost of different types of home renovation projects, but these costs vary widely depending on many different factors — especially where you live. For example, while the average cost of a kitchen remodel in the U.S. is about $23,000, this soars to as high as $80,000 in California. So take these averages with a grain of salt and be prepared to crunch some numbers to create your own budget.


Paying for Home Renovations

Once you have a pretty good idea of your budget, you can start thinking about how you’re going to pay for your renovation project. The main options for most homeowners are:

  1. Withdraw money from a liquid savings account. This is usually the best option because you don’t incur any interest expense or jeopardize long-term financial goals like retirement. However, it usually requires discipline over many months or even years in order to save up the money. One strategy is to open a money market savings account and designate this as your home improvement account. Stash extra funds in the account whenever you have a chance and wait until it is big enough to pay for your project in full before getting started.
  2. Tap into your home equity. Home equity loans and home equity lines of credit (HELOCs) are often the best way to finance a home renovation project. A bank will lend you money based on the amount of equity you have in your home. With a HELOC, you’ll be approved for a line of credit and you can borrow up to your credit limit to pay for renovations. Best of all, the interest you pay may be tax-deductible as long as the funds are used to “substantially improve” your home.
  3. Perform a cash-out refinance. This is essentially another way of tapping into your home’s equity by borrowing more than your home’s current principal balance and then using the extra money to pay for your home renovations. With a 125% cash-out refi, for example, you would borrow 25% more than your home’s appraised value and use this extra cash for your project. However, there are usually costs and fees associated with the refi, which might make a home equity loan a better alternative.
  4. Borrow money from a retirement account. Many 401(k) retirement plans allow participants to borrow from their account balance and use the money for any purpose, including home renovations. One of the benefits is that when you pay interest on the loan, you’re essentially paying interest to yourself. Unlike 401(k) withdrawals, you don’t have to pay taxes and penalties when you take a 401(k) loan. A big drawback, however, is that while withdrawn, the money isn’t growing on a tax-deferred basis to help provide financial security in retirement. Another crucial factor is that every employer’s plan has different rules for 401(k) withdrawals and loans, so it’s important to find out what your plan allows.
  5. Withdraw funds early from a retirement account. This is usually the least-attraction option to pay for home renovations. For starters, you’ll probably pay a 10% penalty if you withdraw retirement funds before age 59½, on top of ordinary income taxes. Also, the withdrawals could bump you into a higher tax bracket, increasing the amount of taxes you owe. In addition, early retirement account withdrawals could jeopardize your financial security during your retirement years.


Be Realistic About ROI

Homeowners sometimes rationalize spending big on home renovations as an “investment” in their home that they will eventually recoup. While certain renovations and upgrades may add to the value of your home and make it more attractive to potential buyers, you should be realistic about any potential return on investment.

According to data compiled by  , the highest ROI is realized from a minor kitchen remodel, which nationally returns 87% of the cost on average in resale one year later. This is followed by a two-story addition (83%), bathroom addition (81%), major kitchen remodel (80%), family room addition (78%) and deck (75%).

Another way of looking at this is that none of the most popular home renovations has an ROI greater than 100%. So they aren’t really “investments,” or at least they aren’t profitable ones. Therefore, you should view home renovations as more of a lifestyle choice that will help you enjoy your home more and might make your home more saleable down the road one day.

We can help you plan for the impact of home renovations on your family finances. Give us a call to schedule a meeting at your convenience.








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