Before approaching lenders, draw up a detailed budget for your remodeling plans. To calculate an accurate estimate, first decide what projects you’ll need to hire a contractor for and which ones you’ll do yourself. On contracted work, start with a firm bid and add 10% for "surprises." On work you’ll do yourself, draw up a detailed list of materials and costs (including equipment rental) and add 15-20% for "surprises."

How much you can borrow depends on your credit rating, income, and the loan-to-value ratio of your remodeling plans. The LTV ratio is a percentage of the appraisal value of your home and is normally capped at 80%, minus the balance of your mortgage.

Now you’re ready to start thinking about the type of loan you want. You can refinance your existing mortgage, or take on an entirely new loan. Consider these various possibilities.

Home Equity Loan As with regular mortgages, the interest on these is deductible. Terms are normally 15-30 years, with a fixed interest rate. However, interest rates tend to be a little higher than with regular mortgages.

Home Equity Line of Credit This type of mortgage is similar to a credit card. Your lender will give you a set amount which you can borrow, and you can draw funds when you need them and pay interest only on the amount of money you have used. Some programs have a minimum withdrawal amount and most have variable interest rates. Most require repayment in full within ten years. If you decide on this type of loan shop carefully – some lenders will grab your attention with low initial interest rates and then increase it substantially later on.

FHA 203(k) Mortgage These are FHA-insured loans which let you refinance your first mortgage and combine it with your remodeling costs into a new mortgage. This type of mortgage bases the loan on the value of your home after improvements are made, which increases the amount you can borrow.

Energy-Efficient Mortgage (EEM) An EEM is a special type of mortgage which allows you to finance remodeling work that increases your home’s energy efficiency. If you decide to finance some of your remodeling with an EEM, your monthly energy savings are used to finance the energy upgrades. To qualify, your improvements must be cost-effective. This means the monthly savings on your utility bills as a result of the improvements must be greater than the monthly repayment of the energy mortgage, and also that your total savings must be greater than your total costs, including maintenance costs. If you decide to finance part of your remodeling with an EEM, you must apply for both loans at the same time, as you cannot add an EEM after the regular loan has been granted. Once your EEM has been approved, you have between 90 and 180 days to make the improvements.

Money-saving Tips

  • Set your priorities and decide what you’re willing to compromise on. Plan ahead and research materials online and in stores.
  • Instead of increasing the size of rooms, use your existing space more efficiently.
  • Throwing out large fixtures costs money. Instead, donate your old items to Habitat for Humanity. Your donation is tax-deductible and you’ll pay nothing for the removal.
  • Consider recycled fixtures or building materials. Habitat for Humanity offers salvaged goods for 50% of retail value.
  • Auctions are another cheap supply of building materials and fixtures.
  • Do the cleanup each day instead of letting the construction crew do it. They can spend more time on remodeling and you’ll get the work done sooner and save money too.

Selecting a Contractor

  • Talk to friends and relatives who have had improvements made. Find out if they’re satisfied with the contractor’s service and ask to see the work that was done.
  • Ask for recommendations from people who have done work for you in the past, such as your gardener or plumber.
  • Check your local newspapers for advertisements
  • Talk with prospective contractors on the phone. Ask them about their work experience, licenses and certifications and references.
  • Check their references. Find out if previous clients were happy with the work done, if the project was completed on time and how well the contractor stayed within the budget.
  • Before making a final decision, check with the appropriate government office to see if there are any unresolved complaints against the contractor.