Four Ways to Finance a Kitchen Remodel

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There aren’t many investments you can make in your home that are better than a kitchen remodel. In fact, a kitchen remodel can recoup 65-80% of your initial investment when you sell your home, according to remodeling magazine. That’s a big deal when you figure that even a minor kitchen remodel averages around $22,000 nationally.

When it comes to funding your kitchen remodel, nothing beats personal savings. Having liquid cash on hand to cover the entire expense is the ideal scenario when it comes to any home remodel. Unfortunately, most of us don’t have that kind of cash on hand to throw into a home update. A Major kitchen renovation can exceed $100,000 for a large, luxuriously appointed kitchen. If you have that kind of cash sitting around collecting dust, let us in on your secret!

For the rest of us who depend on affordable kitchen remodel financing, though, we have to weigh the options that fit our needs best. Luckily, there are several different ways to finance a home improvement project. Some are just okay, but other options can be an excellent deal.

We’ve compiled a list of the four best ways to finance a kitchen remodel. By no means is this list exhaustive, but it should put you on the right track to finding suitable kitchen remodel financing.

Home Equity Loan (HEL)

A home equity loan is a loan you take out using your home’s equity as collateral.

Current Market Value – Mortgage Outstanding = Equity

Typically, a home equity loan will have a lower interest rate than more traditional personal loans. That’s because your lender is balancing their risk with the potential to foreclose on your home if you don’t pay them back. That gives them an incentive to loan you money, and lowers their fear that you will default on the loan.

Since a home equity loan is tied to your home, you could potentially be upside down (negative equity) when you try to sell the home if you haven’t fulfilled your obligation to repay the loan in full when you sell.

To qualify for a home equity loan, you’ll typically need positive equity around 15-20% of your home’s current value. For example, your home’s current market value is $200,000. You’d need to have at least $30,000 in positive equity, or owe no more than $170,000 on your home. You’d also need a debt-to-income ratio of 40-50% and a credit score in the low to mid-600s or better.

Home Equity Line of Credit (HELOC)

A home equity line of credit sounds similar to a home equity loan, but they’re actually quite different. Unlike an HEL, a HELOC is a revolving credit loan. That means that, as you pay down the balance of the loan, you can continue to borrow up to the maximum loan amount.

Think of it as similar to a credit card, except that your home is collateral here. You get the benefit of being able to cover unforeseen issues or if you want to remodel another area of your home, you still have that line of credit available to borrow against without having to reapply for a new loan which could lower your credit score.

Here’s an example: You’re approved for a $30,000 HELOC and spend every cent on your remodel. Over the course of the following months, you’ve paid your balance down to $20,000 and now you want to remodel your master bathroom. Instead of applying for a new loan, you can use the $10,000 available in your current HELOC.

You can borrow as little or as much as you like (up to your approval amount) during your draw period. Typically, a draw period lasts about 10 years so you could potentially only remodel a section of your home every few years and still reuse the same HELOC without applying for anything else. This can save you a lot of time, stress, and save your FICO score.

Usually you’ll have two different types of HELOC loans – a variable interest HELOC (the interest rate can change from month to month) or a fixed-rate HELOC (the interest rate is set in the beginning and does not change). You’ll also need to have the same qualifications as a HEL, such as at least 15% equity and a good credit score.

Personal Loan

A personal loan is often one of the best ways to finance a home remodel. Since it’s based on your personal credit history and does not require collateral, you won’t have to put your home up as security. Generally, a personal loan is also easier to qualify for and, once approved, the funds are available almost immediately.

The kicker here is your FICO importance. If you don’t have excellent credit history and a stellar FICO, your interest rate could be astronomical.

Contractor Financing

Many home improvement contractors offer third-party kitchen remodel financing options to help you fund part or all of your project. This is a very convenient option as everything is handled by the contractor and the financing institution. All you have to do is complete a quick application and everything else is handled directly through the contractor.

Usually, contractors will offer a few different financing options depending on your credit history and amount you need to borrow. These can range from 0% APR loans that you repay the entire loan amount over a set number of months with equal payments each month. There are also more traditionally styled financing options that work similar to a credit card with a revolving credit limit.

Ultimately, it’s your decision to decide which financing option works best for your particular situation. Weighing the options to figure out what you qualify for, which option is best for your financial situation, how much you should request your loan to cover, and how much money you can contribute to the overall project in cash are all things you should spend some time mapping out so that you make the best financial decision for your family.