Kitchen Remodel Financing: How to Fund Your Dream Kitchen

Is the linoleum in your kitchen dated and peeling? Does your sink leak into your cupboards? If so, you might be toying with the idea of a kitchen remodel. However, unless you have earmarked thousands of dollars, you’ll need to borrow money to give your kitchen a facelift.

Popular financing options for kitchen remodels include:

Personal Loans
Credit Cards
Home Refinancing
Home Equity Loans
Home Equity Line of Credit
Government Programs

But which lending avenue is best? That depends on the price tag of your kitchen remodel as well as your personal finances (e.g. debt-to-income ratio, monthly budget, credit score).

In this guide, we provide more information about each financing option so that you can find the right fit for you.

USING A PERSONAL LOAN TO FINANCE A KITCHEN REMODEL

Personal loans are financed by a financial institution like a bank or credit union. They’re fairly straightforward and easy to secure, at least compared to other types of loans. However, they can carry higher interest rates.

Consider these pros and cons of personal loans:

PROS OF PERSONAL LOANS

No collateral. Unsecured personal loans don’t require collateral. That means you won’t have to put your home on the line.
Quick cash. Many financing tools require mountains of paperwork and weeks (if not months) of your time. Personal loans are comparatively simple. You’ll likely complete an online application and, if approved, will receive your money in one to five days.

CONS OF PERSONAL LOANS

High interest. Since personal loans are unsecured, they often carry comparatively high interest rates. Even consumers with above-average credit scores can expect an APR of 10% or higher.
Limited credit line. Many banks and credit unions prefer to lend higher amounts to borrowers with collateral. That means it’ll be tough to receive a personal loan for enough money to cover your kitchen remodel

TAPPING CREDIT CARDS TO FUND YOUR KITCHEN UPGRADE

If you have a credit card with a high enough line of credit, you could use it to fund your kitchen facelift. However, whether or not this is a smart choice depends on several factors, including:

APR. The annual percentage rate (APR) on your credit card can make or break your budget. If your APR is high – 10% or above – another financing tool would make more sense.
Rewards. Some credit cards offer rewards programs. For example, your credit card may offer cash-back on purchases made at specific stores. Kickbacks for shopping at Lowe’s or The Home Depot could pay dividends during your kitchen remodel.
Interest-free period. If you have a high enough credit score, you may qualify for a credit card with an interest-free period. This period, which typically lasts 18 months, allows you to fund your kitchen renovation without paying interest

Do you think a credit card could be the right financing tool for you? Before racking up consumer debt, consider these pros and cons:

PROS OF CREDIT CARDS

No collateral. Like personal loans, credit cards don’t require that you put your home on the line. However, if you default on this debt, you could risk bankruptcy.
Convenience. More than 70% of American adults have credit cards. With that being said, most homeowners already have a credit card that could be used to fund a kitchen remodel.

CONS OF CREDIT CARDS

High interest. As mentioned above, credit card companies offer astronomically high interest rates. Paying off debt with an APR of 18% (the average for credit cards) is very difficult, if not impossible, for many homeowners.
Irresponsible spending. Credit cards encourage irresponsible spending. Unless your kitchen rehab is dire, the best choice is to wait until you have enough cash.

CASHING OUT YOUR HOME’S EQUITY WITH A REFINANCE

If you owe less on your home than its current market value, you may consider a cash-out refinance. A cash-out refinance allows you to take out a larger mortgage. This new loan pays off your original mortgage. You then pocket the difference.

Though refinancing is a savvy tool, you risk losing your home if you cannot afford your new monthly payments. Other factors to consider include:

PROS OF CASH-OUT REFINANCE

Lump sum. With a cash-out refinance, you walk away with a lump sum of money after closing. The dollar amount is typically 80% of your home’s value.
Longer loan term. Much like a traditional mortgage, you’ll have 15 to 30 years to pay off the debts incurred during a cash-out refinance. These payoff terms are significantly longer than those of a personal loan or credit card.

CONS OF CASH-OUT REFINANCE

Collateral. A cash-out refinance will put your home on the line. That means if you default on your loan, you risk foreclosure.
Closing costs. Homeowners can expect to pay 2-6% of their loan amount in closing costs. Some lenders allow you to bundle these costs into the loan; however, some do not.

FUNDING YOUR NEW KITCHEN WITH A HOME EQUITY LOAN

Like a cash-out refinance, a home equity loan allows you to unlock your home’s equity. However, unlike a refinance, a home equity loan grants a homeowner a second mortgage. That means you’ll have two payments each month. Consider the pros and cons of a home equity loan:

PROS OF HOME EQUITY LOANS

Set loan terms. Home equity loans come with a fixed interest rate and set payment schedule.
Low interest rates. Compared to credit cards and personal loans, home equity loans offer lower APRs.

CONS OF HOME EQUITY LOANS

Foreclosure risk. If you default on your home equity loan, your lender could repossess your home.
Resale value. If your home’s value decreases, you could end up owing more than your house is worth.

FINANCING A KITCHEN REMODEL WITH A HELOC

Homeowners may also consider a home equity line of credit (HELOC for short). A HELOC is similar to a home equity loan, but instead of receiving a lump sum, you’re essentially granted a revolving line of credit. That means you can borrow only what you need.

If you think a HELOC might be for you, consider these pros and cons:

PROS OF A HELOC

No closing costs. Unlike a cash-out refinance, you won’t be expected to pay closing costs with a HELOC.
Flexible borrowing. A HELOC is perfect for homeowners who don’t know exactly how much their kitchen remodel will cost.

CONS OF A HELOC

Variable interest rate. With a HELOC, you’ll repay your debt at a variable interest rate. That means your APR will ebb and flow based on market conditions.
Termination fees. Many lenders charge a termination fee if you pay off your debt early.

APPLYING FOR A GOVERNMENT-BACKED KITCHEN RENOVATION LOAN

Many government agencies offer home improvement loans for borrowers with less-than-perfect credit. Since these loans are backed by a federal agency, they have very low interest rates and are worth exploring, even if you qualify for other financing options.

For example, the Federal Housing Administration (FHA) offers two renovation programs for low- to moderate-income homeowners:

Title I Property Improvement Loans. These fixed-rate loans are available for home repairs. Loans under $7,500 are unsecured.
Energy Efficient Mortgage Program. This initiative helps eligible borrowers make energy-efficient modifications.

Home improvement grants are also issued by the government at the federal, state, and local levels. This financial assistance helps low-income homeowners make improvements to their properties. For example, the VA Specially Adapted Housing Grant helps disabled veterans modify their homes to be more accessible.

As long as you meet the requirements for a home improvement grant, you don’t have to repay the money.

GET YOUR DREAM KITCHEN WITHOUT THE FINANCIAL STRESS

Because remodeling a kitchen is expensive, many financial institutions have lending programs specifically designed for home renovations. However, you should always carefully review the terms of any loan. Some banks and credit unions charge ridiculously high interest rates. Others have clauses that allow them to adjust your “teaser” rate after a set amount of time.

As a trusted general contractor in Charlotte, Portico can guide you through your kitchen remodel. We understand that securing financing can be a nightmare and want to help alleviate some of that stress.

Want to learn more? Contact Portico today!