Chicago Home Remodeling Guide

Step #2 Crunch The Numbers

One of the main concerns when remodeling a home is how much it's going to cost. For starters, you want to know you're not wasting money. And, it is also smart to think ahead to how the renovations will affect the future resale value of your home. Sometimes you have to look beyond the immediate bill to see the full return on investment.

Return On Investment (ROI)

Return On Investment (ROI) is important when deciding to remodel your existing home versus buying a new place or building one from scratch. It's impossible to predict whether the ROI will be positive or negative, but you can educate yourself on what to anticipate given your specific situation and remodeling goals.

Factors that impact ROI:

  • Renovation Type and Cost - Is it a small project like redoing the floors or something major such as adding a room or remodeling the kitchen? Weigh the expense of the project with how much additional value it will bring your home.
  • Housing Market Assessment - Are prices in your neighborhood stable, appreciating, or depreciating? The state of the local housing market does impact your ROI and is something you should consider.
  • Property Comparison - With the new renovations, how will your home compare to other properties in the area? Does it “go” with the neighborhood aesthetics or congruency of your condo complex? Or does it make your home stand out in a way that could potentially hurt your home's selling power?
  • Neighborhood Review - Scope out your neighborhood for pluses and minuses that could indirectly affect the ROI of your renovations. Quality schools and nearby amenities are typically deemed pros, while noisy highway traffic and unattractive industrial sites are cons in the average home buyer's book.
  • Future Development - Also, bear in mind that future development (both residential and municipal) could influence your ROI later on. Check with Chicago's city planning department for upcoming projects and zoning designations or changes.

Cost of Remodeling

Cost of Remodeling is a huge variable in the renovation equation. It fluctuates depending on the contractor, market conditions, and season. The type of materials you choose, permits needed, and extent of the renovations are also factors that modify the bottom line. And we're not just talking about money - time is a factor here, too.

  • 30% Rule - As a general rule of thumb, the cost of your home renovations should not exceed 30 percent of the property's value. At that point it may be better to spend the money on a new home as opposed to redoing the old one. So, if you have a $300,000 house, your max renovation amount would be $90,000. Of course, the decision to remodel is yours to make and depends on your individual situation.
  • Shop Around to Save:
    Contractors - Bids can be very different from one contractor to the next. So do your homework and shop around for the price and timeframe that works best with your budget and schedule. Be wary of estimates that are substantially lower than the rest and ask every contractor for references to inquire about past jobs and client satisfaction.

    Finishes/Materials - You can trim down the bottom line by watching for sales on materials you know you need and substituting pricey décor elements with alternates that still offer the style you want. But keep in mind the return on investment may drop if you go with appointments that are too low-end. And don't skimp on infrastructural components such as insulation, electrical, windows, plumbing, etc or you may end up paying more in the long run.
  • Costs Included in the Bid:
    • Labor
    • Permit Fees
    • Construction Materials
    • Subcontractor Payments
    • Finishes and Decorative Elements
    • Cleanup
    • Incidental Repairs

Borrowing Power

Borrowing Power can greatly impact the amount of money you have available to pay for your home renovations. As a homeowner, you have the benefit of using your existing home equity to help pay for remodeling. You can borrow against your home equity (which is like cash) by establishing a line of credit with your bank, basically using your home as collateral. The line of credit acts as a checking account, allowing you to take out money whenever you need it - like for that kitchen remodeling project you want to do.

Calculate Your Borrowing Power:

  • Home Equity - Subtract the amount you owe on your mortgage from the current market value of your property. Your property value has probably changed since you bought the place, so the bank may require a professional appraisal. Most banks arrange for an appraisal for you, or have an in-house evaluator on staff.

    Example: Your home is appraised at $300,000 and you still owe $220,000 on your mortgage.

    $300,000 - $220,000 = $80,000 (You have $80,000 in home equity)

    Banks will typically only lend you a percentage of your total home equity. This can still amount to a large portion of your home equity and is determined by the bank. Much like getting a mortgage, the lender will review your income and debts to assess your ability to repay the loan.
  • Home Equity Line of Credit - This is basically a loan that uses your home as collateral. It acts as a revolving pool of available money (line of credit) where you can take out money (up to a maximum credit limit) whenever you need it, instead of receiving a lump sum all at once.

    Similar to a conventional mortgage, there are fees associated with home equity lines of credit. Expect to pay an application fee, possible appraisal fee, attorney fee, title insurance, processing fee or points. On the upside, you can deduct the interest paid on your home equity line of credit, just like you would the interest on your mortgage.
  • Contact Your Bank - To establish a home equity line of credit you'll need to contact a bank. Lenders may offer different interest rates and varying credit limits on your home equity amount, so it pays to shop around. Home equity lines of credit are very common, and the funds are available to pay for all kinds of things, from children's college education to credit card consolidation to home remodeling jobs.

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