4 Options for Financing Your Kitchen Renovation
By Ryan Horvath
Financing a kitchen renovation can be as stressful as the renovation itself. Homeowners spend hours figuring out loan options. They also stress over how much money they should borrow. I’m covering three financing options to consider for your kitchen renovation. These options also work for a bathroom renovation as well.
Figure Out Your Renovation Budget Today!
USING YOUR HOME’S EQUITY
You’ve been in your home for several years. In that time, your home should have built up some equity. According to NerdWallet.com, home equity is “the current market value of your home minus what you owe”. You’re looking for a positive number here. You can get a positive number in two ways. One is paying down the principal balance of your loan. The other is there’s an increase in market value over time.
There are two loan options for home equity: home equity loan (HEL) or home equity line of credit (HELOC). Both will use your home as collateral which makes the loan secured. By using your home as collateral, you can lower the interest rate of the loan. But, should you miss a loan payment, you run the risk of losing your home.
HEL VS. HELOC
A home equity loan is basically a second mortgage. When you borrow the equity, you’re given a lump sum of money. With the lump sum, the interest rate is often fixed. The interest paid could be tax-deductible as well.
Think of a home equity line of credit like a credit card. Instead of a lump sum, you can borrow what you need, when you need it. You’ll be paying interest on the amount borrowed instead of interest on a large amount. Lenders will check to see if you have a good credit score and if there’s enough equity to use. To qualify, your combined loan-to-value (LTV) ratio needs to be 70% or lower.
CALCULATING LTV
To calculate your LTV ratio, add your current mortgage loan balance and the ideal loan amount. Take the sum and divide it by the current value of your home. Use the example from SmartMoney.com below to help find your LTV ratio:
- Current mortgage loan balance = $150,000
- Ideal loan amount = $20,000
- Current value of home = $250,000
- $150,000 + $20,000 = $170,000 / $250,000 = 68% LTV ratio
Another thing to consider is your debt-to-income ratio. According to ThisOldHouse.com, your house payment and other debt should be below 36% of your gross monthly income.
FINANCE THROUGH YOUR CONTRACTOR
Financing a kitchen renovation through your contractor is another option. The advantage is that it’s convenient and a one-stop-shop. But, the disadvantage is you’ll only have one loan to consider. Loan rates and terms might not be competitive since they’re set by the contractor. Compare against other contractors and financial institutions before signing.
TAKE OUT A PERSONAL LOAN
The final option you have is taking out a personal loan. This is a great option if you don’t have a lot of equity built up in the home. This could be an ideal option for first-time homeowners. A personal loan is unsecured since you’re not using your home or assets as collateral. They’re also quick and easy. Funds appear almost immediately once approved.
A personal loan can have longer repayment terms and fixed interest rates. This means you would have a lower monthly payment but would pay more in interest. Keep in mind that the lower the credit score you have, the higher the interest rate you’ll pay. A personal loan has a ton of lending options include credit unions, online lenders, and your bank.
FHA 203 (K) LOAN
The U.S. Federal Housing Administration supports an FHA 203 (K) loan. The loan refinances the first mortgage. It then combines the first mortgage with the renovation costs into a new mortgage. An FHA 203 (K) loan bases the loan on the value of the home after the renovations. Terms for this type of loan is 30 years. Consider using a mortgage broker for an FHA 203 (K) loan.
THE WRAP-UP
Financing a kitchen renovation can be stressful, but it doesn’t need to be. There are a few ways to get started. Know how much money you’ll need and ballpark what you can get. Narrow the loan options. Pick out the ones that fit with your needs and finances. Focus on the lenders that will most likely provide you the loan you want. Follow those three suggestions and you’re off to a great start.
For more budgeting information, be sure to read our “Renovation Budget 101” blog. It’s full of information to help narrow down your renovation budget. Read it by clicking here.
Do you have an idea or suggestion on financing a kitchen renovation? Feel free to leave a comment below!
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