Home Remodeling Done Right

Line up the money and a good contractor. Then turn your wish list into reality.

If you’ve been thinking about remodeling, you’ve probably found plenty of inspiration—other people’s projects, Web sites such as Houzz.com and Pinterest.com, HGTV, and design magazines. Knowing what you like is a great first step. But when you’re ready to make a move, careful planning with the right contractor will help you match your wish list with your budget.

See Our Slide Show: Small Remodeling Budgets, Big Upgrades

With the economy improving and home values on the rise, homeowners increased their spending on home improvements by almost one-third from recession-era lows, according to the National Association of Home Builders (NAHB) and the U.S. Census. Through the recession, many homeowners repaired and maintained their homes but put off major projects for better times. Others had anticipated selling and moving on but, given the limited selection of homes for sale, are fixing up their homes instead.

The best contractors are busy now, so you’ll need to book your job well in advance of the start date. That means lining up the funds as soon as possible, too.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Plan Your Project

Write up your wish list, then prioritize it from the “must haves” to the “it would be nice to haves.” Choose materials, fixtures and products. The more specific your project description, the more accurate the cost estimates remodelers will provide.

For a rough idea of how much your project will cost, go to Remodeling magazine’s Cost-Versus-Value Report. You’ll find descriptions and costs for 35 projects by region and in 81 cities. Houzz.com and Zillow Digs also give costs for sample projects. Whatever your budget, reserve 10% to 20% of it to cover the unforeseen (but almost inevitable) problems that will arise and changes that you are likely to want along the way.

If you want to finance your project, get prequalified for the amount you can borrow at a mortgage lender, bank or credit union. A home-equity line of credit (HELOC) is well suited to remodeling because you can withdraw funds as the project progresses. Including your first mortgage and the HELOC, you can typically borrow up to 75% or 80% of your home’s appraised market value, although some lenders will stretch the limit to 90%. You’ll pay a variable rate—recently an average of 5.2%, according to HSH.com, a rate-tracking service—on the outstanding balance. (For more information on home-equity borrowing, see Cash In on the Housing Rebound.)

See Our Slide Show: 5 Affordable Bathroom Renovations

If you can’t get a HELOC large enough to fund your remodel, try a construction loan. In that case, you refinance your first mortgage to an amount equal to the future value of your home, based on an appraisal of its current market value and your project’s plans and specifications. Most such loans allow a loan-to-value ratio of 95% or more. At predetermined points during the work, you submit “draw requests” to the lender to pay the remodeler. Before it pays, the lender will send its inspector to your home to verify that the work has been satisfactorily completed.

Two popular versions of construction loans are Section 203(k) loans, backed by the Federal Housing Administration (FHA), and HomeStyle mortgages, backed by Fannie Mae. In most cities, the maximum loan amount is $271,050 for 203(k) loans and $417,000 for HomeStyle loans. In higher-cost cities, the limit is $729,750 for 203(k) loans and $625,500 for HomeStyle loans.

The 30-year fixed rate will typically run one-fourth percentage point higher than for other loan programs (or you can take an adjustable rate), and closing costs will reflect higher administrative costs for draws, appraisals and inspections, says Josh Moffitt, president of Silverton Mortgage Specialists, in Atlanta.

Find a Great Contractor

For a large, complex project that requires major changes to your home’s structure and to the heating, cooling, electrical or plumbing systems, you’ll need a design-builder who will draw up plans for the project and act as general contractor to supervise the work. You could use an architect to design the project, or you could hire a kitchen or bath designer who runs his own remodeling business or works for a showroom that provides one-stop services for design, fixtures and remodeling.

Ask for the names of contractors from friends and neighbors whose projects you have admired (your arch­itect can recommend contractors, too). Search for remodelers at the Web sites of the National Association of Home Builders, the National Association of the Remodeling Industry and the National Kitchen & Bath Association. Those sites provide abundant guidance, including questions you should ask prospective contractors and their references (see Hire a Contractor Who Measures Up).

See Our Slide Show: 5 Kitchen Renovations for $25,000 or Less

Remodelers will point out cost-effective improvements to tackle now, while the walls are opened up and the contractor has workers on site. “If you can’t do it all now, then focus on size and functionality first, and worry about upgrading fixtures or finishes later,” says Bill Shaw, a Houston design-builder.

Get three detailed bids. The more complex the project, the more likely the contractor will charge you to prepare a bid. “If you get a free, one-page bid and the contractor says he can start next week, run the other way,” says Shaw. (He charges $90 an hour to prepare a bid that’s good for 30 days.) The lowest bid may not be the best, and an unusually low one may reflect an inexperienced contractor who either underestimates the project’s scope or plans to cut corners.

Sign a Good Contract

You shouldn’t need a lawyer to read a remodeling contract. It should include start and completion dates (allowing for “reasonable delays”); state that the contractor will obtain necessary permits; and describe the scope of work (the work to be done and the materials or fixtures to be used). The contract should also include a change-order clause, which requires that any change to the contract be mutually agreed upon in writing; name subcontractors and material suppliers; provide a schedule of payments based on benchmarks, such as completion of a foundation or framing or installation of drywall; and have a holdback clause that allows you to withhold a final payment—say, 10% of the total bill—for some time after the job is completed. That allows you to make sure the punch list is complete, debris is hauled away, and cleanup is performed per your contract.

Remodelers typically ask for a down payment before they begin work, often to cover the cost of materials to get started. Your state may limit the amount. For example, in California contractors may ask for 10% of the job cost or $1,000, whichever is lower. In Texas, which has no requirement, Shaw typically asks for one-third upfront, one-third at the midpoint and one-third upon completion for projects less than $25,000. He asks for 10% upfront and specifies a more frequent “draw” schedule for more-expensive projects. Paying in stages gives you leverage to ensure that the job is done right.

Some builders include an escalation clause to account for costs that have risen by a certain amount—say, 5% or more—prior to the start date. The contract should give you an out if the additional costs break your budget (you must pay for completed work). The federal “cooling-off rule” requires the contract to state that you may cancel within three business days if you signed the contract anywhere other than the contractor’s office.

Expect your remodeler to hold a brief weekly meeting with you and to communicate immediately about problems that arise. Before you make the final payment, you should receive an affidavit of final release from the contractor, which certifies that it has paid all subcontractors and suppliers. That protects you from “mechanic’s liens” on the title of your home.

Many remodelers warranty their work against defects for at least a year, and your state may provide some form of protection. For example, Minnesota requires a one-year warranty against defects caused by faulty workmanship and defective materials, two years for faulty installation of systems, and ten years for major construction defects. The contractor should pass along any product or material warranties to you.

Patricia Mertz Esswein
Contributing Writer, Kiplinger's Personal Finance
Esswein joined Kiplinger in May 1984 as director of special publications and managing editor of Kiplinger Books. In 2004, she began covering real estate for Kiplinger's Personal Finance, writing about the housing market, buying and selling a home, getting a mortgage, and home improvement. Prior to joining Kiplinger, Esswein wrote and edited for Empire Sports, a monthly magazine covering sports and recreation in upstate New York. She holds a BA degree from Gustavus Adolphus College, in St. Peter, Minn., and an MA in magazine journalism from the S.I. Newhouse School at Syracuse University.