On the surface, financing your remodel might seem simple: pick a loan, set a budget, and get started. But what many homeowners don’t realize is how small oversights in budgeting, loan terms, or planning can create costly mistakes down the line.
At Custom Built, we’ve helped families across Greater Lansing and Northern Michigan navigate the financial side of remodeling for over 15 years. We understand how stressful it can be to make big financial decisions while also trying to design your dream space, which is why we guide you through the design, budgeting, and build process with clarity and transparency.
In this article, we’ll cover the nine most common mistakes homeowners make when financing a remodel, and how to avoid them, so you can move forward with confidence, knowing your investment is well-planned and set up for success:
- Not Setting a Realistic Budget or Investment Goals
- Failing to Account for Hidden Costs
- Skipping a Contingency Fund
- Ignoring Your Credit Score
- Choosing the Wrong Financing Option
- Not Comparing Lenders
- Borrowing Too Much
- Not Researching Loan Terms
- Overlooking Long-Term Value
1. Not Setting a Realistic Budget or Investment Goals
The first step in any remodel is deciding how you’ll approach it. Are you hiring a full-service contractor or planning to manage the project yourself? Each approach affects how predictable your costs will be:
- Fixed-Price Contract: Provides a set cost for the project with the least number of variables. Great for families who want cost certainty.
- Allowance-Based Contract: Gives you a price upfront, but the total can shift depending on the finishes you select (like cabinets or tile).
- Time and Material Contract: Costs are based on actual hours worked and materials purchased. This can be difficult to predict and doesn’t work well with upfront financing.
- DIY or Self-Managed: You may save money on labor, but often face more risk with unexpected costs, delays, or mistakes.
Why It Matters:
- Prevents mid-project financial stress.
- Helps you choose the financing strategy that actually fits your situation.
- Allows you to compare contractor proposals more clearly.
How to Avoid This Mistake:
- Decide early if you want a fixed-price or flexible contract.
- Be honest about how much risk you’re comfortable with.
- Work with a contractor who clearly explains their pricing approach.
2. Failing to Account for Hidden Costs
Even with careful planning, some costs won’t reveal themselves until construction begins. Opening up a wall may uncover a rotted beam or outdated wiring that needs replacement.
Why It Matters:
- Unexpected repairs can push you past your loan amount.
- Without a plan, these surprises delay your project.
- Can force tough decisions about cutting finishes or upgrades.
How to Avoid This Mistake:
- Ask your contractor about common hidden issues for your project type.
- Set aside extra money for potential surprises.
- Build inspections and contingency funds into your financing plan.
3. Skipping a Contingency Fund
Every remodeling budget should include a contingency fund, typically 10-20% of your total investment. This money covers the “unknowns” that come with any major project.
Why It Matters:
- Keeps projects moving forward without financial panic.
- Lets you handle surprises without sacrificing quality.
- Gives you peace of mind that you’re covered.
How to Avoid This Mistake:
- Add a line item for contingency in your budget.
- If you don’t use it, you can put it toward upgrades or pay down your loan faster.
- Discuss contingency needs with your contractor before finalizing financing.
4. Ignoring Your Credit Score
Your credit score plays a major role in the financing options available to you. Higher scores usually mean better loan terms, while lower scores may limit your choices.
This is important to understand, but it doesn’t mean you shouldn’t apply for a loan if your score is on the lower side. Many lenders offer options for a wide range of credit profiles, and securing a loan can actually support your financial growth when managed responsibly, helping you build equity and improve your credit over time.
Why It Matters:
- Determines your access to low-interest loans.
- Affects your monthly payments and long-term cost.
- Can exclude you from certain financing programs.
How to Avoid This Mistake:
- Check your credit score before applying for financing.
- Take steps to improve your score (pay down debt, avoid late payments).
- Talk with your bank or contractor’s financing partners about available options.
5. Choosing the Wrong Financing Option
Not all financing options are a good fit. A HELOC works best if you’ve built equity, while third-party financing may be better for newer homeowners.
Why It Matters:
- The wrong loan type can cost you thousands over time.
- Some loans are better for short-term homeowners; others are for long-term homeowners.
- It can impact your ability to invest in future projects.
How to Avoid This Mistake:
- Review different loan types (HELOC, contractor financing loan, personal loan, construction loan).
- Match the funding to your project scope and future plans.
- Ask your contractor what financing solutions they recommend for families like yours.
6. Not Comparing Lenders
Just like with a mortgage, you’ll want to shop around for loan terms. Two similar-looking loans can have very different long-term costs, especially when we’re talking about a larger loan.
Taking time to compare lenders not only helps you find the best fit but also educates you on what to expect, giving you a clearer understanding of the loan you’re getting into.
Why It Matters:
- Even a slight interest rate difference saves thousands over time.
- Helps you better understand your financing options.
- Puts you in control, not just at the mercy of the first lender.
How to Avoid This Mistake:
- Get quotes from at least three lenders.
- Compare not just interest rates, but fees and loan terms.
- Use lender conversations as an opportunity to educate yourself.
7. Borrowing Too Much
It’s tempting to finance more than you need, but overextending yourself can create long-term financial strain.
Owning a home is a long-term investment, and your loan should be viewed the same way. Make sure your monthly payments stay within your financial comfort zone. When loan strain is combined with the challenges of remodeling, it can create unnecessary stress.
Why It Matters:
- Keeps monthly housing costs within a safe percentage of your income.
- Prevents stress from oversized loan payments.
- Makes sure your remodel remains an investment, not a burden.
How to Avoid This Mistake:
- Follow the rule of keeping housing costs around 30% of income.
- Talk to a financial advisor if you’re unsure of your borrowing limits.
- Borrow only what you realistically need, not the maximum offered.
8. Not Researching Loan Terms
Each loan has unique terms, and it’s important to take time to find the best one for your situation.
Why It Matters:
- Long-term loans lower payments but increase interest paid.
- Shorter loans save on interest, but they may strain monthly budgets.
- Matching loan terms to your family’s plans keeps finances stable.
How to Avoid This Mistake:
- Consider how long you plan to stay in your home.
- Review both short-term and long-term loan options.
- Ask a trusted advisor to review your loan terms before signing.
9. Overlooking Long-Term Value
Financing your remodel isn’t just about covering costs; it’s also about building value. When done right, a remodel increases your home’s worth and your family’s quality of life.
Why It Matters:
- Boosts your home’s resale value.
- Enhances your family’s day-to-day living experience.
- Strengthens property values across your neighborhood.
How to Avoid This Mistake:
- Focus on projects with proven ROI (like kitchens, bathrooms, or decks).
- Choose durable materials that last.
- Work with a contractor who designs with long-term value in mind.
Next Steps to Remodeling Your Home
It’s easy to feel stuck when planning a remodel: uncertain budgets, loan options, and hidden costs can create stress before the project even begins. Taking the time to clarify your finances and set realistic goals gives you control and confidence as you move forward.
By understanding budgeting approaches, loan options, and hidden costs, you can avoid common pitfalls and make smarter financial decisions for your remodel.
At Custom Built, we help homeowners navigate every step of the remodeling process, including planning and financing, so projects stay on track and stress-free.
Connect with us early in your planning process, discuss your financing options with our experts, and work together to set a realistic budget before your remodel begins.
Now that you know more about mistakes to avoid while financing your home remodel, let’s take a look at whether a design-build firm like Custom Built is right for you, how we will approach your project, and other ways to vet your remodeling partner options:
- Top 4 Differences Between a Design-Build Firm and a General Contractor - A comparison between design-build firms and general contractors that highlights the pros and cons that each brings to the table.
- Dream, Design, and Build: Our Remodeling Process - This guide details how we at Custom Built will approach your remodeling project, including who you will work with and when to expect each crucial step of your renovation to occur.
- Top 8 Questions to Ask Before Hiring a Remodeling Contractor - A list of essential questions to ask your prospective remodeling contractor before hiring them for your project; additional questions are included in each section.
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