6 loan options to finance a kitchen renovation

Summary

• There are 6 main loans used to pay for a kitchen renovation: RenoFi Loans, Home Equity Loans, Cash-out Refinance, FHA 203k/Fannie Mae Homestyle Loans, Construction Loans.
• Traditional home equity loans and HELOCs, as well as cash-out refinancing, often doesn’t allow you to borrow the amount you need because the average new homeowner doesn’t have enough equity built up to draw from.
• Construction loans and government-sponsored renovation loans, like FHA 203ks and Fannie Mae Homestyles, allow you to borrow more because they’re based on your home’s after renovation value, but they’re extremely cumbersome and difficult to use.
• RenoFi Loans (RenoFi Home Equity Loans, RenoFi HELOCs, and RenoFi Cash-out Refinancing) allow you to borrow from your future equity based on your home’s after renovation value, similar to the above options, but they’re much less cumbersome.

See how a RenoFi Loan transformed this kitchen in Pennsylvania

A kitchen remodel is perhaps the most desired renovation project that homeowners want to undertake, and these can be expensive, but choosing the right financing option can make it possible for you to borrow the money to do it just the way you want, without having to compromise on the specification.

The reality is, though, that you’re presented with a number of different ways to finance your new kitchen, and it’s not always easy to figure out the right route to go down. Maybe you’ve started searching up ‘kitchen remodel loans’ on Google and have been left feeling confused about the different options available to you.

But we want to help you understand the right financing option for you to use to pay for your new kitchen.

How to Pay for a Kitchen Renovation

You have a number of options to choose from when it comes to financing your kitchen remodel, with these options differing based on the equity that you have in your home, whether they’re secured or unsecured loans, and the borrowing power that they offer.

Secured vs Unsecured Options

Secured loans use your home as collateral, meaning that if you fail to make monthly payments, you could be forced to sell the property in order to settle the debt.

Because of this security, secured loans pose less risk to lenders, meaning you’ll typically be able to borrow a higher amount and access lower interest rates than with unsecured alternatives.

Secured financing options are commonly used to finance home improvement projects, with both home equity loans and lines of credit, and cash-out refinance being popular options. But, both of these options require you to have a sufficient amount of tappable equity in your home.

Whereas secured financing uses your home as collateral and therefore poses less of a risk to lenders, there are also other loan options that don’t use your home as collateral, and would fall under the category of unsecured loans. If you fail to make monthly payments on an unsecured loan, your credit score will worsen.

Types of Kitchen Remodel Loans

RenoFi Loans

Let us introduce you to RenoFi Loans, a type of home renovation loan that combines the best bits of a construction loan with a home equity loan.

See how these homeowners completed a kitchen makeover with a RenoFi Loan

A RenoFi Loan is a renovation-specific version of a home equity loan product. There are RenoFi Home Equity Loans, RenoFi HELOCs, and RenoFi Cash-out Refinances.

These loans let you borrow based on your home’s future value, allowing you to increase your borrowing power as a result of the value that the renovation will add.

And this makes this type of loan the perfect way to finance your kitchen remodel, especially when you consider that you won’t need to have built up equity.

In fact, with a RenoFi Loan, your borrowing power could increase by an average of 11x when compared to a traditional home equity loan, HELOC, or cash-out refinance.

This makes these loans the ideal choice for homeowners who have recently bought their property.

They also let you avoid the hassle of construction loans, an option that has often been used to pay for renovations in the past, much to the dismay of contractors.

To put it simply, RenoFi Loans let you borrow the most money at the lowest cost.

Home Equity Loans or Lines of Credit

Using a traditional home equity loan or HELOC is a common way to finance home improvements, including kitchen remodels, however many homeowners find that they don’t have enough equity available to finance major projects. Especially if they’ve only recently purchased the home.

Building up enough tappable equity to finance anything more than a minor kitchen remodel can take years, and most people don’t want to wait.

If you’ve lived in your home many years, then a home equity loan or HELOC might be a suitable option, but for many homeowners, this option will limit your borrowing power and make it so that you struggle to afford to undertake the project to your own specification.

But let us tell you one thing; you don’t need to reduce the scope of your project if you’ve found that you don’t have the equity available to use this option, you just need to find an alternative that lets you borrow based on your home’s future value.

Cash-Out Refinance

For some homeowners, refinancing to pay for home improvements, including a kitchen remodel, is not a good idea.

But as with home equity loans, a cash-out refinance is often considered one of the go-to ways to finance a renovation project.

And while this can be a great way to borrow the money that’s needed if you’re able to lock in at a significantly lower rate, the reality is that some folks will refinance into a higher interest rate and end up paying more money over time because of this.

Add to this the fact that your borrowing power will typically be limited to 80% of your home’s current value (unless you use a RenoFi Cash-out Refinance).

FHA 203k or Fannie Mae HomeStyle Loan

FHA 203k Renovation Loans and Fannie Mae HomeStyle Renovation Loans are two government-backed mortgages that let you borrow based on a property’s after renovation value in the same way that RenoFi Loans do.

They can be used to either refinance and pay for a remodel on your existing home or to finance the purchase and renovation of a fixer-upper.

But while borrowing against your home’s future value can increase your borrowing power significantly compared with a home equity loan or line of credit, these types of loans don’t come without their complexities.

In fact, compared to alternative options, the process of applying for and obtaining a 203k or HomeStyle loan can cause significant delays and required, costly mortgage insurance. Let’s not forget to also mention that you’ll need to refinance your mortgage to take out these loans.

Once over, they were the best option out there, but when alternatives exist that still let you borrow against your home’s after renovation value, you should probably rethink your options if you’ve been considering this method of financing for your kitchen remodel.

But there’s one exception to this, and that’s if you have a lower credit score and a bad credit history, given that FHA 203ks and HomeStyles require scores of 580+ and 620+ respectively.

Construction Loan

Whatever you’ve been told, you shouldn’t use a construction loan to pay for a renovation. And that includes your kitchen remodel.

This type of financing was once the only option that allowed homeowners to borrow against the after renovation value of their home, giving no real choice without sufficient equity available other than expensive personal loans.

But what’s wrong with using a construction loan for a renovation? Quite simply, it’s the complex draw process that’s involved.

Times have changed, and construction loans are no longer your only choice, and if this is an option that’s been recommended to you, we urge you to take the time to learn a little more about RenoFi Loans.

Personal Loans

We’ll say it straight up; most people shouldn’t use a personal loan to pay for home improvements, and that includes a kitchen project.

At least that’s the case for major remodeling projects, given that using a personal loan (or a ‘home improvement loan’ product from a lot of lenders) will usually result in higher monthly payments as a result of significantly higher interest rates (these can often be between 8% and 15% on personal loans), shorter payback periods, much lower borrowing power and interest that isn’t tax-deductible. Most will also carry a costly origination fee.

That said, if you’re only looking to carry out a minor remodel, let’s say you’re only looking to replace countertops or refinish your kitchen cabinets, the total cost of your project is going to be significantly lower than a major remodel of your entire kitchen. In these scenarios, you might only need to borrow $5,000 and for lower budget borrowing, a personal loan is probably going to be your best option.

Credit Cards

Credit cards usually come with an even higher interest rate than personal loans, making them an expensive way to borrow the money needed to remodel your kitchen. You’ll also find that the limit on most credit cards won’t be sufficient to pay for most home improvement work.

However, if you already have a credit card, funds can be accessed instantly, without having to go through a lengthy application process for another loan. If you only need to borrow a small amount of money, let’s say to replace a single appliance, this might be your easiest option.

Cash

Using cash to pay for your new kitchen, of course, is the cheapest option in the long run given that there’s no interest payable.

But not many of us are lucky enough to have access to the amount that’s needed to pay for even a minor kitchen project without draining a savings account or borrowing from their 401k.

On top of that, most secured loan options offer interest rates lower than the average return on money invested in the stock market (9%), so investing your earnings and paying off a loan can make you more money over time than simply storing it in a savings account to pay in cash.

In fact, it has been reported that the average American household has an average of $30,600 in their savings account, and this is rarely going to cover the cost of your entire remodel.

That’s before we point out that completely emptying your savings account (and, in turn, leaving nothing there in case of an emergency) is a stupid idea, especially when we consider the suitable and affordable financing options available.

Your new kitchen isn’t an emergency, so don’t drain your emergency funds to pay for it. Instead, spread the cost over a period of time with an affordable monthly payment.

What’s The Best Way To Finance Your Kitchen Remodel?

The best way to finance your kitchen renovation is going to be dependent upon the scope of the project and its total cost. And you need to consider whether this is the only room in your home that you’re wanting to remodel or whether this is just part of a larger full-home renovation project that you’ve been longing to carry out. Often, there’s a bigger wishlist of renovation works that homeowners want to carry out, but don’t know that there are ways of financing the whole project upfront.

And here’s what you should be thinking about when choosing the best financing option:

• How much money you need to borrow based on the scope of your remodel
• How much equity you have in your home
• Your credit score and credit history
• Any debt on other loans and credit cards
• The maximum monthly payments you can afford
• The timeframe that you wish to repay the loan over

Consider Your Options Carefully & Start Planning Your Dream Kitchen

Planning your dream kitchen should be exciting, but the worry around whether or not you’ll be forced to reduce the scope of your renovation because of your borrowing power or an unexpectedly high monthly payment can take away this excitement.

Take the time to consider your options carefully and be sure to understand the pros and cons of each.

If you’re still not sure how to qualify for the lowest possible interest rates and monthly payments while maximizing your borrowing power, we’d love to chat about whether or not a RenoFi Loan is right for your project.