Kitchen Remodel Financing 101: Every Loan Option to Consider

An updated kitchen can transform the entire feel of a home from dull and outdated to sleek and modern. But whether a kitchen needs a simple appliance upgrade or a full renovation, kitchen remodeling doesn’t usually come cheap. As homeowners dream up kitchen remodel ideas, it’s important to consider how they’ll pay for those projects.

There are several kitchen remodel financing options that can help homeowners pay for their remodel projects, including home improvement loans and home equity lines of credit. Some homeowners may even qualify for government-backed loan programs. Before reaching out to contractors and kitchen remodelers to get quotes on home improvement projects, homeowners will want to learn more about the kitchen remodel financing options available so they can compare each one and choose a loan or line of credit that’s right for them.

Before You Begin…

Homeowners considering a loan or line of credit to pay for their renovations may want to calculate the potential costs of financing their remodeling project. Additionally, many loan programs include other fees to cover administrative costs for the lender. The interest and fees associated with a loan could make financing a more expensive option in the long run compared with taking money out of a checking or savings account and using it for this purpose. However, if homeowners lack the funds needed to pay for a kitchen remodel—or would prefer not to draw on their savings for a home improvement project—then financing could make a lot of sense.

In addition to the cost of the loan, it’s recommended that homeowners also consider the added debt of taking on a home improvement loan. Borrowers will need to pay back the loan in monthly installments, and they may want to ask themselves if they can afford the additional costs of a remodel loan on top of their other monthly expenses, such as their mortgage payment and utility bills.

STEP 1: Decide how much money you’ll need to remodel your kitchen.

The average cost to remodel a kitchen is $26,240, but the price can range from around $14,000 up to $40,500. The exact cost depends on several factors, including the scope of the project and the size of the kitchen. For instance, the average cost to remodel a small kitchen is $12,750—much less than the national average for all kitchen remodel jobs.

Homeowners will want to calculate how much money they need to borrow before shopping for a home improvement loan. They can start by contacting some of the best kitchen remodeling companies such as Granite and TREND Transformations to get quotes on their remodel. With those quotes in hand, homeowners can get a good idea of how expensive their kitchen remodel project will be and how much money they will need to borrow to cover their costs. They may find that their ideas for a kitchen remodel are too ambitious and need to be scaled back even with financing to help pay for them.

STEP 2: Check your qualifications as a borrower—credit score, debt-to-income (DTI) ratio, and available equity—to see if you’re eligible for financing.

Many home improvement loans have minimum credit score or debt-to-income (DTI) ratio requirements. Likewise, loans that rely on the equity in a home may require a homeowner to have paid down a certain amount of their mortgage balance to qualify. Before applying for a loan or line of credit, borrowers may want to check any minimum eligibility requirements to see how their credit profile compares. While those who meet the minimum requirements can qualify for a loan, they may need to pay higher interest rates if they have a relatively low credit score or a high DTI ratio.

Homeowners who don’t qualify for the best home improvement loans and other types of financing may want to re-evaluate their remodel plans. It may make more sense to consider several small kitchen remodel ideas stretched out over a long period of time instead of a single major renovation. Painting cabinets, changing drawer pulls, and adding a backsplash, for example, can all be inexpensive kitchen remodel projects that still help spruce up a dated kitchen. Tackling smaller projects may give homeowners time to improve their financial circumstances—paying down debt, building equity, and boosting their credit score—so they’ll be eligible for more favorable financing terms down the line.

STEP 3: Explore equity-based options such as HELOCs and home equity loans if you’ve paid down a significant portion of your mortgage.

Home equity refers to the homeowner’s financial stake in their property—in other words, how much of their home they actually own. When a house is financed with a mortgage, ownership is split between the lender and the borrower. If the borrower makes a 20 percent down payment, then they will start with 20 percent equity in their home, and they will gain more equity with each mortgage payment. Home equity can be calculated by subtracting what’s owned on the property from the value of the home. For instance, someone with a house worth $500,000 and $300,000 left on their mortgage would have $200,000 of equity in their home. Homeowners with enough equity can tap into this value through home equity loans or a home equity line of credit (HELOC).

Home equity loans use the equity in a home as collateral for a lump-sum loan. The homeowner uses the loan funds to pay for kitchen remodeling services and then repays the loan in monthly installments. HELOCs, on the other hand, work more like a credit card. With a HELOC, the homeowner receives a line of credit based on the equity in their home. They can borrow as much as they need from the credit line up to their credit limit. Like a credit card, the homeowner can pay down the balance of their HELOC and borrow more funds as needed—again, up to the credit limit.

STEP 4: Consider getting renovation funds through a cash-out refinance if you’re planning to refinance your mortgage soon.

Another way for homeowners to take advantage of their home equity is through a cash-out refinance. A cash-out refinance is essentially a new mortgage on the home with a larger loan amount. The lender will extend a loan for the borrower’s remaining balance plus a lump-sum payment on any equity they wish to cash out. Lenders typically require borrowers to maintain at least 20 percent equity in their home with cash-out refinancing. This means a homeowner with $100,000 of equity could potentially borrow up to $80,000 through a cash-out refinance.

The benefit of cash-out refinancing is that homeowners can tap into money they’ve already put into their home through mortgage payments. However, it does require homeowners to refinance their mortgage, and if they already have favorable loan terms such as a low interest rate, refinancing could cost them more in the long run. As with any mortgage refinance, borrowers will owe lender fees and other closing costs, which adds to their total cost. With that in mind, a cash-out refinance may make the most sense for those who would consider refinancing their mortgage even if they didn’t have a home improvement project in the works.

STEP 5: Ask mortgage lenders about an FHA 203(k) rehab loan to cover renovation costs when buying a fixer-upper.

A kitchen remodel might be one of several renovation projects a home buyer wants to tackle when purchasing a fixer-upper. The Federal Housing Administration (FHA) created the 203(k) rehab loan program to help home buyers cover the high costs of renovations in these scenarios. This program allows qualified borrowers to purchase a fixer-upper property and roll both the purchase price and cost of renovations into one mortgage.

FHA 203(k) rehab loans are offered by private lenders and backed by the federal government. Borrowers hoping to use a 203(k) loan must meet certain qualification requirements, including minimum credit scores and maximum DTI ratios. In addition, the property must be the primary residence of the borrower, and the renovations must be done by a licensed contractor.

STEP 6: Research other renovation loan programs such as Fannie Mae HomeStyle loans to finance kitchen remodel projects.

Fannie Mae HomeStyle is another type of loan program that lets homeowners finance the purchase and renovation of a property in one mortgage. The Federal National Mortgage Association—commonly known as Fannie Mae—is a government-sponsored entity established in 1938 to increase access to affordable housing options. Like the FHA, Fannie Mae doesn’t provide mortgages directly, so borrowers will likely need to contact lenders that offer HomeStyle loans. While FHA 203(k) rehab loans can only be used to buy and renovate a primary residence, HomeStyle loans allow borrowers to use the funds on an investment property or second home.

In addition, the U.S. Department of Agriculture (USDA) offers a government-backed loan program for home renovations. The Section 504 Home Repair program helps low-income homeowners get financing to repair, improve, and modernize their homes. The program has strict eligibility requirements, including very low income limits, as it is intended to provide financing to those who won’t qualify for other home renovation loans.

STEP 7: Reach out to construction loan companies that offer renovation loans for existing home structures.

Traditional construction loans help homeowners cover the cost of building a home from the ground up. However, construction loan lenders may also offer renovation loans for home remodels and other projects. In the interest of due diligence, it may be a good idea for homeowners to contact the best construction loan lenders to learn about their kitchen remodel financing options. As with any loan product, borrowers are encouraged to compare interest rates, loan terms, and fees from different lenders to get the best terms available.

STEP 8: Look into personal loans if other financing options aren’t available—although the overall cost could be high.

Many kitchen remodel financing options are secured loans—that is, they require collateral, and in many cases, the home itself serves as the collateral. Lenders can offer lower interest rates on secured loans because there’s less risk. However, this type of financing won’t make sense for every situation. A homeowner may not want to refinance their mortgage or they may not have the equity to qualify for a HELOC or home equity loan. Additionally, some homeowners and home buyers won’t qualify for government-backed home renovation loan programs.

If a homeowner can’t find the right secured loan product to finance a kitchen remodel, they may want to consider a personal loan. Many lenders offer personal loans with borrower-friendly requirements for credit scores and DTI ratios. However, personal loans have higher interest rates than equity-based loans because there’s often no collateral required.

STEP 9: Consider taking out a new credit card to cover renovation costs—but watch out for high interest rates.

In the right circumstances, paying for a kitchen remodel with a credit card can work out for homeowners. However, charging home renovation projects to a credit card can be risky if cardholders aren’t prepared to pay down their credit card bill as quickly as possible. Credit cards generally have much higher interest rates than other types of financing, and interest could quickly add up for large remodel projects.

Homeowners looking to finance smaller projects, however, may want to consider credit cards as an option. Many credit card companies offer generous introductory terms for new customers—–such as 0 percent financing for a limited amount of time. A homeowner who qualifies for those terms and pays off their balance before the offer expires would be able to finance their project at no extra cost.

STEP 10: Shop around for the best financing terms and choose a lender or bank.

Once a homeowner has decided on the type and amount of financing they want for their project, they can start comparing lenders. The type of loan they choose will likely determine which lenders they’ll want to compare. For example, homeowners planning to open a home equity line of credit will want to narrow their search to the best HELOC lenders. Meanwhile, those who want to tap into their home equity to receive a lump-sum payment will likely reach out to lenders offering the best home equity loans or cash-out refinance options.

It’s recommended that homeowners contact multiple lenders regardless of the type of financing they choose. Getting quotes for loan terms from multiple lenders gives homeowners the best chance of finding financing that fits both their needs and budget.

STEP 11: Receive your loan funds or access a line of credit to start paying for a kitchen remodel.

Depending on the type of financing, loan funds may arrive in a couple of days or take several weeks to access. In general, financing options such as credit cards and HELOCs give homeowners quick access to funds. Mortgage refinances and government-backed loans, on the other hand, typically take longer to process and distribute funds.

It’s also a good idea for homeowners to go over with their lender how they’ll receive funds. In most cases, the lender will provide a lump-sum payment to the borrower. Some loan types, however, may pay kitchen remodeling contractors directly. For example, many government-backed kitchen remodel loans pay the licensed contractor who completes the remodel after the work is done.

Once those funds are available, borrowers can schedule quotes and projects with kitchen remodeling pros and build the kitchen they’ve always wanted. Homeowners are encouraged to carefully consider how much money they need when choosing a loan type. For instance, someone looking to finance a $2,000 project likely won’t want to refinance their mortgage with cash-out refinancing terms because the closing costs could be higher than the cost of the remodel project. Likewise, someone with a major renovation project will likely want to skip putting tens of thousands of dollars on a credit card to avoid hefty interest payments. By carefully weighing the pros and cons of each loan or line of credit available, homeowners can find the right type of financing for their kitchen remodel project.