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. 

Whether you’re looking to redo your kitchen to add to its aesthetic value or want to upgrade your kitchen appliances, it’s important to pick the right option for your kitchen remodel financing.

How much should I budget for a kitchen remodel?

The average kitchen remodel costs around $12,600 to $35,000 — depending on the scope of renovation and kitchen size. A small kitchen remodel can cost as little as $4,000 while a high-end kitchen remodel can go as high as $50,000, or more. 

According to Remodeling magazine’s Cost Vs. Value Report, homeowners can recoup up to 53.9 percent to 58.6 percent ROI in the case of a large-scale kitchen renovation.

Is a kitchen renovation loan a good idea?

It’s best to finance your kitchen renovation if you don’t have time to save cash. Remodeling the kitchen through finance is probably one of the best ideas you’ve had. After all, renovating a kitchen can be an expensive undertaking. Fortunately, there are many easy kitchen finance options to help make your remodeling dreams a reality.

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

Pros and cons of getting kitchen remodel loans 

Securing the right kitchen remodel financing option gives you several benefits, including:

  • Offering you favorable interest rates and loan fees.
  • Helping you save you hundreds of dollars.
  • Offering you manageable monthly payments for your kitchen renovation.
  • Allowing you to spread out your kitchen’s costs, instead of a one-time hit to your bank account.

Some disadvantages of a kitchen remodel loan may include:

  • You need to have everything planned before the value appraisal of your home — including selecting a licensed contractor, your renovation plans, specs, and work schedules. You cannot make major changes that could affect the appraised value, which could in turn affect the loan.
  • The process of a loan application to the receipt of the loan amount is a bit strenuous. 

How do I finance a kitchen remodel?

To pay for a large-scale remodeling project such as a kitchen remodeling, homeowners often take out a construction loan or a home renovation loan, whereby they refinance with a mortgage that reflects the house’s value after the remodel. Apart from these, there are many finance options available such as the different types of secured loans as well as unsecured loans. Whichever kitchen loan you select, do look at your existing debt (including your mortgage) and decide whether you can afford to tack on another monthly payment.

What are the different kitchen remodel financing options?

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 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.

Under this umbrella, there are different loan options available. Let’s go deeper into the most popular ones below. 

Read more: Easy kitchen cabinet financing for good & bad credit

Unsecured home improvement loans

Since these loans are without collateral, the lender is at greater risk and hence offers smaller loan amounts with higher interest rates, and shorter loan terms.

Credit cards

If you have an excellent credit score, you probably qualify for $10,000 of credit at a favorable interest. This amount is good enough for a small kitchen remodel such as new kitchen countertops, kitchen floors, and kitchen lighting.

Pros: It’s an easy way to get a low-interest loan.

Cons: If you go past the repayment period, you may end up owing a lot of interest on the principal amount. Plus, the interest is not tax-deductible.

Personal loans

An unsecured personal loan is a great option if you want to spend $10,000 to $30,000 on a kitchen remodel. In comparison to a credit card, the APR will likely be much more, but the repayment period will be longer.

Having said that, the interest rates and terms on personal loans vary at different banks and credit unions.

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. 

Having said that, the interest rates and terms on personal loans vary at different banks and credit unions.

Pros: It has an easy loan application process. It doesn’t have processing fees, origination fees, or closing costs.

Cons: The loan comes with higher interest rates and no tax benefit.

Secured home improvement loans

Secured loans are great if you’re planning to spend more than $30,000 on your kitchen upgrades. Since the loan utilizes your home equity, you can get a higher amount at a lower interest rate, longer payoff terms, and tax-deductible interest (if you’re using the funds for improving your house).

Cash-out refinance

A cash-out refinance is beneficial if you take out a new loan at a better rate and use it to pay off your old mortgage. That way, you can pocket the balance amount of money and invest it in your kitchen renovation. 

Pros: You can pay back the loan over 30 years or more if you choose to. 

Cons: This financing option is good only as long as you can get a substantially lower interest rate than your current mortgage rate. 

Home equity loans

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.

Pros: The loan has better interest rates than unsecured loans, especially if you have good credit and a flawless credit report.

Cons: If you fail to pay back the loan, the bank has the right to foreclose on you in order to get their money back.

Read more: Using loans for paying for home remodel

Home equity line of credit (HELOC)

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.

Pros: There are no closing costs. You only pay interest on the amount you borrow. 

Cons: It’s a riskier option as rates fluctuate. Plus, the loan lender may foreclose your property if you default on the repayments. It’s difficult to get if you do not have a solid credit history or score. 

So, which loan is the best type for a kitchen renovation? Well, it depends on your requirement and eligibility. For example, if you know the total cost of your value-enhancing remodel and prefer to get a lump sum, then a home equity loan is a good option. But if you need the money on short notice or without putting up collateral, then a personal loan is a safe bet.

Read more: Flooring financing for good & bad credit

In what order should you remodel your kitchen?

Whether you’re planning to redo the kitchen yourself or hire licensed and insured contractors, here are the order of steps to follow.

  • Demolish the existing space: Clearing the existing space is important before beginning work on your kitchen remodel. Start with removing the cabinet doors first. Then, remove the doorway and window trim. Keep them aside if you plan to reuse them. Take out sheets of paneling from the walls with a crowbar. Shut off the power and remove all the kitchen appliances as well as directly wired light fixtures. Cover all the exposed wires.
  • Hire the right contractors: You can hire a general contractor who’ll oversee other workers and the entire renovation process. Make sure that the professional(s) you hire show you proof of being licensed, bonded, and insured. They should have the necessary permits and references too.
  • Get written details of the payment plans and contract: Make sure to pay no more than 10% upfront, 50% when the renovation is halfway, and the balance amount upon the project completion. 
  • Replace your dated plumbing: When your walls are open, it’s easier to replace your older plumbing — leaking pipes or faulty shutoff valves.
  • Replace kitchen wiring and install new lighting: It’s necessary that you replace any wiring or circuit box that doesn’t conform to code. Once you do, you may want to install recessed ceiling lighting, new pendant lights, or accent lighting. Check your city codes to determine any requirements/prohibitions for incandescent, fluorescent, or halogen bulbs.
  • Hang the drywall: Once the electrician and plumber have finished their jobs, you need to hang the drywall, but with the right tools. Make sure you apply the joint compound (through a process called mudding) properly.
  • Paint your kitchen walls and ceiling: Ensure that you use quality brand paint, paintbrushes, and the right finish — preferably a semi-gloss for the walls and ceiling. Such a finish is easy to wipe down and doesn’t retain any moisture.
  • Install kitchen flooring and baseboards: You might want to consider the old-fashioned hardwood flooring or some eco-friendly flooring options such as cork flooring, bamboo flooring, or recycled carpeting.
  • Hang the kitchen cabinets: Always let a professional installer hang your cabinets. They will ensure that the kitchen cabinets are level and correctly installed. 
  • Install the kitchen countertop: For custom-made countertops, the installers will want to measure the template with the cabinets in place. Whether you choose a quartz countertop or a marble one, keep your lifestyle and requirements in mind. 
  • Install the backsplash: A tile backsplash is a great way to incorporate a complementary color in your kitchen design. Make sure it’s installed properly — with no unwanted seam.
  • Get the right cabinet hardware: Ensure that the pulls and knobs you choose are in a style and finish that complement your cabinets as well as the look of your kitchen.
  • Install the kitchen appliances: It’s time to call your electrician and plumber and install your appliances. The range hood is usually the first item to be installed. Take care that every kitchen appliance is aligned and plumbed properly. Check for any leaks or breakage before paying the contractor.

Can you use extra mortgage money for renovations?

It is possible for you to finance repairs and renovations using your mortgage, but only if your lender allows it.

There are a few options that you can choose from with regards to mortgages that allow for renovations after you purchase the home.

203(k) Rehab mortgage insurance

This is a mortgage loan insured by the FHA, protecting both the borrower and the lender. This mortgage type finances the purchase of a home minus the down payment and absorbs the cost of repairs and renovations. This leaves the buyer with a single debt with a lower interest rate than a home improvement loan would charge.

To be able to qualify for this loan, the home being bought must be at least a year old, and the repairs and renovations must cost at least $5,000. Once you’ve paid off the seller, the amount needed for the rehabilitation of the home is deposited into an escrow account. The company holding the escrow then pays for the repairs as they happen.

The borrower is given six months to complete the project and can request as many as five payments in that period. The borrower also has to hire the services of a professional contractor to inspect and approve each payment after the work is done.

HomeStyle renovation mortgage

This is a Fannie Mae-backed mortgage, which, like the 203(k) rehab mortgage, allows the home buyer to take a single loan for both the purchase of the home as well as renovations.

Once again, the lender puts the amount set aside for renovations into an escrow account. The escrow company then pays for the renovations by writing checks out jointly to the borrower and the contractor. The escrow account accrues interest, and the borrower can use any leftover money to fund non-essential expenses.

Like the FHA, Fannie Mae requires a contractor to inspect and approve work before payments are made.

You can pay for up to 50% of the home’s value post-rehabilitation using a HomeStyle Renovation Mortgage.

What type of credit score do you need to get a kitchen remodel loan?

The average cost of a kitchen remodeling in our country is around $25,047. And while saving up money may be the best way to pay for a kitchen renovation, it isn’t always possible to do so. So if you find yourself in the market for a loan to renovate your kitchen, here’s what your credit scores ought to look like.

  1. If you’re looking at taking an unsecured loan, such as a personal loan to finance the kitchen renovation, you will need a minimum credit rating of between 600 and 680. Estimated APR can vary from an affordable 4.5% to an astounding 35.89%.
  2. Credit cards, especially those with 0% APR, are a great choice as long as you can repay what you spend in 12 to 18 months. However, to qualify for a 0% APR card, you will need a minimum credit score of between 670-739.
  3. If you’re planning in advance and have a month or so to wait for funds, a home equity loan will be a lot cheaper than a personal loan. You will need a minimum credit score of 620 to qualify.
  4. A home equity line of credit is a more flexible option. Your credit score will need to be at least 680 for you to be able to qualify for a HELOC.
  5. You can choose a cash-out to refinance even if your credit score is as low as 580, just as long as you plan on staying in your home long enough for your monthly savings to be more than the cost of refinancing and you have some equity in your home.

Some useful kitchen remodel financing tips 

Here are some important financing tips that will make your kitchen remodeling seamless and tension-free:

  • When budgeting for a kitchen remodel, always set aside 17% to 20% of your home’s market resale value for sudden, unexpected costs.
  • Sit down with your contractor and get a cost estimate before planning the kitchen remodel.
  • Try to minimize your spending on renovation and maximize your return on investment.
  • Plan upgrades that will increase your house’s value. Consult an experienced real estate agent if you need help. 
  • Prioritize your updates in terms of their importance.
  • Always check your chosen financing option for hidden costs, fees or a prepayment penalty. 

Read more: Kitchen countertop financing

Kitchen Remodel Financing & Loan Options was last modified: May 24th, 2022 by Ramona Sinha
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