Kitchen Remodel Loans: How to Finance a Kitchen Renovation

Renovating an outdated kitchen can take years off the age of your house.

This is good news if you’re trying to sell, as many homebuyers seek properties with updated spaces. 

But even with no plans of selling, a newly designed kitchen can give your property a major facelift.

However, kitchen remodels — whether major or minor — can be expensive projects. So you might prefer to finance the renovation. 

If you’re thinking about getting a loan or using credit for a kitchen remodel, here’s a look at a few options. 

1. Low-Interest Credit Card

If you have a low-interest credit card (with enough available credit), one option is to finance a kitchen remodel using this card. 

The benefit of using credit is that you don’t have to go through a loan approval process. Also, when you use a credit card, you don’t have to pledge personal property as collateral.

Yet, there are a few things to keep in mind before whipping out your credit card to pay for a kitchen remodel. 

If you’re using a credit card with a 0% introductory rate, make sure you pay off the card before your introductory rate ends. Some credit card issuers only offer 0% interest for about 18 to 24 months. After this time period, the standard APR kicks in. 

If you don’t pay off the kitchen remodel by this time, you could end up paying a lot more in interest charges.

Also, using a credit card to pay for a kitchen remodel can potentially lower your credit score. 

Credit card debt is a type of revolving debt, which is riskier than other types. Maxing out a credit card to pay for a kitchen remodel can increase your credit utilization ratio. 

This is the percent of available credit you use in relation to your credit limit. Typically, the higher your ratio, the lower your credit score.

To protect your credit, your credit card balance should never exceed 30 percent of your credit line.

2. Home Improvement Loan

Another option for a kitchen remodel is to apply for a home improvement loan. 

These are basically personal loans used for home improvement projects.

You can use funds for many types of renovations, such as a kitchen remodel, a bathroom update, a home addition, etc. 

One benefit of a home improvement loan is that these are unsecured loans.

That means:

You don’t pledge personal property as collateral to qualify. 

But although collateral isn’t required, unsecured personal loans often carry higher interest rates. The upside, though, is that the rate on this loan will likely be less than the rate on a credit card.

Different types of lenders offer home improvement loans. If you have an existing relationship with a bank, contact them to discuss your financing options.

In addition, you can get these loans from some credit unions and online lenders.

3. Home Equity Loan

When financing an expensive home improvement project like a kitchen remodel, another option is to use your equity and apply for a home equity loan. 

This type of loan allows you to tap or borrow cash from your home’s equity.

The amount you’re able to borrow depends on several factors such as your income and current debt low.

But typically, homeowners can often borrow up to 80 percent of their home’s equity. Since this is a loan, you’ll receive a lump sum of cash. 

Most home equity loans also have a fixed interest rate, so you can expect predictable monthly payments. As a bonus, you might be able to write off the interest you pay on a home equity loan. 

The danger:

Your home secures this type of loan.

So if you fall on hard times and can’t repay your lender, there’s the risk of foreclosure.

4. Home Equity Line of Credit

An alternative to a home equity loan is a home equity line of credit or HELOC.

Both options have a similar purpose, but they’re not the same.

When you apply for a home equity line of credit, instead of receiving a lump sum of cash, you’re given access to a line of credit up to a certain amount. This line of credit is similar to a credit card, in that it’s a revolving credit line.

You can tap your home equity line of credit on an as-needed basis and then make monthly payments. Your payments are based on how much you withdraw from the credit line. 

Home equity lines of credit have a draw period of about 10 years. So this is a suitable option if you’re looking to complete more remodeling projects over the years. 

Once you pay back funds used for your kitchen remodel, you can tap the line of credit again and renovate another part of your home.

Like a home equity loan, you might be able to write off interest paid on a home equity line of credit. However, HELOCs typically have variable interest rates, which are subject to change based on economic conditions. 

Also, your home secures the line of credit. So if you default or stop making payments, you could lose your home.

5. Cash-Out Refinance

Another equity solution is a cash-out refinance.

This process is slightly different from a home equity loan and home equity line of credit. With a refinance, you’ll apply for a new mortgage to replace your existing mortgage. 

Refinancing is great for getting a lower interest rate and mortgage payment. However, the process also allows you to borrow cash from your equity — usually up to 80 percent.

But this isn’t free money.

You’re responsible for paying back whatever you borrow. Therefore, a cash-out refinance will increase your mortgage balance.

To illustrate, let’s say you have a current mortgage balance of $150,000 and your house is worth $230,000. In this case, you have $80,000 worth of home equity. If you’re able to borrow $64,000 (which is 80 percent of your current equity), you’ll have a new mortgage balance of $214,000.

The benefit of using a cash-out refinance to remodel your home is that updates to the property often add value. This helps you recoup some of your equity.

Tips When Financing a Kitchen Remodeling Project

Thinking about financing a kitchen remodeling project sooner rather than later?

Here are a few tips to help ensure a smooth process.

1. Check your credit

Your credit influences whether you’re approved for financing, and it also affects your interest rate. 

You don’t need perfect credit to get a loan, a line of credit, or a credit card. But the higher your credit score, the less you’ll pay when financing a kitchen remodel. 

Before you apply for any loan, always get a copy of your credit report.

Every consumer is entitled to one free credit report from each of the bureaus annually. To get your reports, go to Annualcreditreport.com. You can also get your credit score from MyFico.com. 

If you’re not in a rush to complete the project, work on improving your credit first.

This includes paying bills on time, paying down existing debt, and disputing any errors on your credit report.

2. Only borrow what you need

When getting a home equity loan, a home improvement loan, or a home equity line of credit, the lender might offer more money than you need. 

While it’s tempting to get your hands on additional cash, it’s important to only borrow what you need to complete your kitchen remodel.

The less money you borrow, the lower your monthly payment. Plus, it’ll be easier to pay back the balance.

3. Shop around and compare rates

Understand that rates can vary from lender to lender. Whether you’re using a credit card, a home improvement loan, or an equity solution, always compare rates and terms. 

A low rate could save you hundreds or thousands over the course of a loan.

As a general guideline, you should request quotes from at least three different lenders before making a decision.

4. Pay for some of the remodel with cash

It’s also a good idea to pay for part of a kitchen remodel with cash.

Even if you don’t want to empty your savings account on a project, using some of your own money reduces the amount you need to borrow. 

This can keep your monthly payment affordable, allowing you to pay off the kitchen remodel sooner.

Final Word

Kitchen remodeling projects are expensive. Fortunately, there are several practical, affordable ways to finance these renovations. 

The money you put into improving your home can raise the property value and have a high rate of return. Still, be sensible.

Only borrow what you need, compare rates, and make sure you know your options before choosing a financing solution.