Renovating Your Home? Prepare for This Hidden Cost

Your home improvement project could end up being costlier than you might expect.

Over the past 20 months, many people have been spending more time at home due to working remotely during the pandemic. That's prompted many homeowners to improve their properties and make them more comfortable to live in.

If you're about to embark on a home improvement project, it's important you set a budget so you know what you'll be spending -- and so you don't end up in over your head, financially speaking. You probably already know to budget for things like the cost of materials and labor. But there's one less-obvious expense you don't want to forget.

Does your home renovation require a permit?

Some home improvement projects can be done without approval from a local town or city authority. For example, if you're ripping out old carpet and putting in new carpet, that's a project you generally don't need a permit for.

In most cases, when you're doing work that's structural or that has a plumbing or electrical component, a permit is required. Furthermore, most outdoor projects require a permit. These include putting in a deck, putting up a fence, and installing a hot tub.

Now, depending on where you live, a permit can be a minor expense. But in some places, the cost of your permit will hinge on the cost of your renovation. The more expensive your home improvement project is, the more your permit will cost you.

A few years back, my husband and I decided to finish our basement. It was a big project that involved putting in a bathroom.

We knew from the start that we'd need a permit for that sort of undertaking. What we weren't prepared for was the fact that our permit would cost many hundreds of dollars.

The reason? The renovation itself had a roughly $30,000 price tag attached to it. While we had crunched the numbers and determined we could swing that, the high cost of our permit put us several hundred dollars over budget.

Don't skip the permit

If the idea of having to spend a lot of money on a permit for home renovations doesn't sit well with you, you may be thinking, "Well hey, I'll just skip the permit, then." But that's a bad idea.

If your town or city finds out you renovated and didn't get the required permit, you could face a costly fine (the extent of which will depend on where you live). You could also run into trouble when you go to sell your home.

When you sell a home, it's generally on you to provide your buyer with a certificate of occupancy, which states the home is habitable. Your town or city won't issue you that certificate once it discovers you made updates to your home without obtaining the proper permits. As such, it's a better idea to go through the permit process and fork over the money.

Usually, when a permit is required for a home renovation, someone from your town or city comes out to inspect the work once it's done to ensure it's up to code. Having a permit for your renovation actually protects you as a homeowner, because if your improvement doesn't pass that inspection, you'll know to address the issue by either fixing it yourself (if you did the work) or having your contractor fix it.

Paying for home renovations

Some people tap their savings accounts to pay for home improvements. Others finance those projects via renovation loans or home equity loans. No matter how you decide to pay for your next renovation, be sure to factor permit costs into that equation. If you're borrowing money, you may need to take out a slightly higher loan to ensure that all of your expenses are covered.