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Thinking of remodeling your kitchen? It’s a superb idea! A well-planned kitchen remodel provides a good return on investment and adds to your house’s value. But, do keep in mind that this kind of home improvement comes at a high price. The average cost of a kitchen remodel runs about $22,000. It’s one of the more expensive projects that you can undertake. So, the next question you’ll probably have is, how to finance a kitchen remodel?

The good news is that financing your kitchen remodel is now easier than it was a few years ago. There are many affordable loan options on the market to help you finance your kitchen upgrades. In fact, the right kind of funding to pay for your kitchen remodeling is the most important step. Once you get the money, only then can you start looking for good prices on kitchen remodeling materials and labor. 

Planning a renovation for your kitchen? Try our free kitchen remodel cost estimator; it’s easy and convenient to use!

Home improvement loan options

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You can choose from various financing methods, depending on the scope of the project and your remodeling budget. Keep in mind that no two home improvement loans are alike. 

If you see the larger picture, there are two basic ways to finance your renovation project: unsecured loans and secured loans

Secured loans, such as home equity loans (HEL) or home equity line of credit loans (aka HELOC) have lower interest rates because you put your house as a guarantee against the debt. The only downside is the risk involved. If for any reason you can’t pay back the loan, the lender could foreclose on your home. 

Moreover, if house prices fall, it might put you in a quandary. You might owe more than what your home is worth and won’t be able to sell the property at a profitable selling price. 

It’s also more difficult to qualify for this kind of loan. You need enough equity. If your other loans exceed 80% of your home’s value, there’s a chance that you would be denied a loan. Or, might have to pay a high-interest rate.

If you want to finance a remodel without equity, an unsecured home improvement loan, such as a personal loan, is right for you. Here, you don’t have to use your home as a collateral. But, that also means that it puts the lender at a greater risk. And hence, such loans are typically for a smaller amount, they have a higher interest rate, and must be repaid within a 10-year window. Or, less. 

Interestingly, qualifying for a personal loan can be faster and easier than a HEL or a HELOC.

How to finance a kitchen remodel?

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If you’re wondering how to finance a kitchen remodel, there are some good financing options for you. Here are the best ways to finance a kitchen remodel:

  • Home equity loan (HEL loan)

A home equity loan is like a second mortgage. This type of loan works on the principle that you get to borrow against the equity in your home and receive a lump sum of cash. 

Usually, it comes with a medium to long loan term, has fixed rates, and has an amortization schedule for a smooth monthly repayment plan. Moreover, the interest you pay could be tax-deductible.

Keep in mind that if you decide on this loan, your original mortgage will stay intact. But, you’ll be paying two monthly payments —  one each for your original mortgage and the home equity loan.

Read more: 5 Financing Tips to Consider Prior to a Home Remodeling

Home Equity Loan

Pros Cons
Availability of lump sum money upfront Your home is a collateral
Lower interest rates Possibility of closing costs and high fees
Tax-deductible interest In case of an issue with repayment, the lender can even foreclose on your home
Great for funding big projects like kitchen remodel It’s easier to overspend the large sum of money
Fixed interest rates
  • Home equity line of credit (HELOC loan)

 A HELOC loan is a flexible way to finance your kitchen remodeling. Similar to using a credit card, this revolving line of credit uses your home to secure the loan. Instead of receiving a lump sum amount, you get a line of credit that you can tap into overtime. And, you only pay interest on the amount of money you use up. That way, a HELOC can be quite cost-effective. 

However, a HELOC offers an adjustable or variable interest rate that can rise according to market rates. But thankfully, there are no closing costs. 

A HELOC loan works on the principle that you pay interest on what you borrowed during a ‘draw period’. Once this period ends, you get a specified number of years to pay back your loan. Usually it’s 10 to 15 years depending on your loan agreement.

Qualifying for a HELOC loan is not as easy as other loans. You’ll need an excellent credit score and also enough equity in your home. It would require you to give a statement of your home appraisal and credit report. Usually, a HELOC lender will require a combined loan-to-value (LTV) ratio of 70% or lesser. 

How do you calculate your LTV ratio? Well, you divide your current mortgage loan amount (mortgage + the amount of money you want to borrow) by the appraised value of your home.

Home Equity Line of Credit

Pros Cons
Lower interest rates Qualifying is not easy
Long term source of credit You must have a good credit and enough home equity
Lets you withdraw the money as and when you require Variable interest rate
You can pay interest only on the borrowed amount You will need a home appraisal done
Interest can be tax deductible Involves a risk of losing your home in case of failed repayments
  • Personal loan

A personal loan is one of the best loan options for a kitchen remodel. This type of loan is especially beneficial if you don’t have enough home equity or you don’t want to use your home or assets as collateral.

A personal loan is also an ideal choice if you plan to spend up to $30,000 on your kitchen remodel. For this amount, such a loan is fairly easy to get and the repayments will be easier to handle on a month-to-month basis. But, be prepared for a higher interest rate and absolutely no tax benefits.

The lower your credit score is, the higher will be your loan interest rate. Moreover, this kind of unsecured loan is possible even with a bad credit score.

Just keep in mind that different lenders and banks offer different interest rates and loan terms on personal loans. So, it’s a good idea to do thorough research before applying for a loan. You can submit your loan application with a number of lenders before choosing the best one. 

Personal Loan

Pros Cons
Easy and quick loan approval process Higher interest rate, especially with a low credit
Quick funding Expensive pre-repayment and loan origination fees
Monthly payment with fixed interest rates
Flexible loan term
Many lenders to choose from

Apart from the above types of loans, sometimes, kitchen remodeling contractors also offer their own financing packages. Although such a loan may seem convenient for you, the main drawback is that you only have one potential loan lender to consider. If you do opt for a contractor financing, make sure the loan rates and terms are industry-competitive.

Last words

Remodeling your kitchen is a smart idea. There’s nothing like a new and improved cooking space to add aesthetic, functional, and monetary value to your house. 

Once you get the right funding for your project, things get easier to manage. We hope this article helped you get the answer to how to finance a kitchen remodel. Whichever type of loan you choose, be sure to read the fine print of your loan agreement as well as the terms and conditions. Do not shy away from consulting with a licensed professional if you have any concerns. 

Want to Know How to Finance a Kitchen Remodel? was last modified: December 1st, 2020 by Ramona Sinha

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