You’ve loved your home since the first day you got the keys. Yet over the years, you’ve been hatching ideas and trying to figure out ways to love your home even more. Remodeling the kitchen is probably the best idea you have had. Only one problem: Renovating a kitchen can be an expensive undertaking.
Fortunately, a half dozen easy options exist to help make your kitchen remodeling dreams come true. While they can be a big help, finding a loan that fits your needs the best does require a little legwork.
Benefits of a Home Improvement Loan
On the surface, the benefits are obvious. But dig a little deeper, and a few interesting perks start to show up.
From a long-term standpoint, securing and wisely investing into your home will bump up your property value. If this wasn’t the case, it’s doubtful people would bother to gut their old kitchen just before putting their house on the market. It’s a shame they didn’t start this project sooner, which brings us to our second point.
Securing a loan to renovate your kitchen is literally going to make you happy, and you’ll feel that happiness every time you walk into the kitchen for years. Why wait until you’re ready to sell and never get to enjoy that new kitchen?
Types of Loans
No two home improvement loans are alike. If you’ve decided to get one, there are two basic ways to finance your project: unsecured and secured.
Unsecured Home Improvement Loans
This type of financing doesn’t use your home for collateral, which means it puts the lender at a greater risk. As a result, loans under this umbrella are typically smaller, have higher interest rates, and must be repaid within a 10-year-or-less window.
Low To No Interest Credit Cards
If you have good credit, you probably get low interest credit card offers in the mail all the time. They might be in the form of a new card or checks you can write against cards you already have. It’s not uncommon to qualify for $10,000 of unsecured credit for 18 months at 3.99%. That’s a perfect amount for a small kitchen refresh like new countertops, floors, and lighting.
You really can’t beat that, as long as you pay it back according to the terms. Just be warned, if you go past the agreed upon repayment period you may end up owing a lot of interest and this option will not have been fiscally responsible.
The Good - An easy to get and a low interest loan.
The Bad - You don’t have a lot of time to pay it back and if you go beyond the offer expiration date you could owe big. Additionally, interest is not tax deductible.
If you plan to spend more than $10,000 and up to $30,000 to remodel, consider getting an unsecured personal loan. Generally you’ll be able to get more money than borrowing from a credit card and they are fairly easy to get.
Since they’re unsecured the annual percentage rate ‘APR’ will likely be more than double than with a credit card, but the repayment period will be much longer, making the payments a lot easier to handle on a month to month basis.
Shop around at a few banks and make sure to check your credit union and the larger online banks. Interest rates and terms on personal loans will vary widely at different banks, so don’t be shy about submitting a half dozen or more applications in a single day.
The Good - The application process is easy. You can get enough money to finance a substantial kitchen remodel without having to couch up cash for processing fees or closing costs.
The Bad - Higher interest rates than with a secured loan and no tax benefit.
Secured Home Improvement Loans
Do you have equity and are planning on spending more than $30,000? This may be your best bet.
Options include a home equity line of credit (aka HELOC), cash out refinance, or a home equity loan (aka second mortgage). This type uses your home as collateral. The benefit is that they usually lend qualified applicants a higher amount at a lower fixed interest rate, with longer payoff terms, and tax-deductible interest.
If they ask during the application process what you want the money for, don’t be shy about telling them you’re using it to remodel your kitchen. The fact that you’re improving the house that you’re using as collateral is a factor in if you will qualify and what your rate and terms will be.
There are a few gotcha’s with these vehicles, however. You’re going to have to jump through more hoops while going through the application process. You’re also likely to pay some closing costs before you get the cash and you need to have enough equity in your home to qualify.
If your home is worth $100,000 and you owe $50,000 to the bank as a mortgage, then you’ll probably be able to borrow around $35,000 dollars. The banks generally won’t let you max out your loan to equity ratio.
Don’t forget that if you take out a secured loan against your home to remodel your kitchen, then your home is as risk. If you fail to pay the bank does have the right to foreclose on you to get their money back.
Cash Out Refinance
Using the previous example, with a cash out refinance you would take out a loan for $85,000, use it to pay off the old mortgage of $50,000 and pocket the balance of $35,000 to invest into your kitchen. What’s nice about this financing option is that you can pay it back over 30 years or more. Monthly mortgage payments are low compare to other options but you’re making them for much longer.
Consider this very strongly if you can get a substantially lower interest rate than you’re currently paying. Your payment might not change as much as you think it will if you qualify for a lower rate than you are paying on your current mortgage.
Home Equity Loans
Also often referred to as a second mortgage. They are usually a medium to long term loan with a fixed interest rate and monthly repayment plan with an amoritization schedule.
If you have $50,000 in equity you’ll get a lump sum of about $35,000 for your project, if your home is valued at $100,000. Your original mortgage will stay intact, and now you’ll make two payments a month, one for the original mortgage and a second for the home equity loan to remodel the kitchen.
Home Equity Line Of Credit ‘Heloc’
Opening a credit line is a flexible way to raise the money to update your kitchen with. But you pay for it with a adjustable interest rate that can be higher than what you’d pay on fixed home equity loan. It’s a riskier option because rates can rise, but on the plus side there are no closing costs associated with a HELOC.
Different banks have different products but generally what you’ll come across is that you can borrow money from it for 5 to 10 years. During this ‘draw’ period as it is called you pay interest on what you borrowed. After the draw period is over you get a specified number of years to pay it back. Usually that’s 10 to 15 years depending on the agreement up front.
Borrow Against Your 401K
Most people aren’t aware of this alternative to a mortgage but it’s a very attractive financing option that can get you money overnight. Using your 401k as collateral you can typically borrow up to $50,000 or up to half of what your vested balance is. That’s more than enough for most modest kitchen remodels.
Since we didn’t qualify for a second mortgage or a credit line (not enough equity) this is how my wife and I financed our kitchen renovation. We took out the loan as a lump sum and the payment is taken from my check every week after taxes. I don’t even miss it anymore and we absolutely love our kitchen now. We are charged an interest rate of 4% but that money doesn’t go to the bank. That 4% actually goes back into our 401k so we are basically paying ourselves interest.
There are some caveats with taking a loan against a 401k to remodel a kitchen. The most notable of them is that if you lose or leave your job it’s likely that you’ll have to pay back the balance very quickly. So if job security is an issue at all don’t consider this financing option even for a second.
Another concern is that you will have a little less in your 401k when you retire. Here’s a handy calculator to help you approximate how much less.
So, Which One is Best?
Since a secure loan features benefits like fixed interest rates and the ability to be a tax write-off, getting one to finance your project may look like a slam-dunk. Assuming you have decent credit, determining what works best for you isn’t quite the open-and-shut case as you may think, however.
For instance, if you are planning a small-scale project that’s relatively affordable, you may decide unsecured is the way to go. The reason being is the structure is not that different from obtaining a credit card. Lenders deploying these loans typically use the same screening methods that are used to get a credit card.
Plus, the term ‘second mortgage’ is admittedly a scary phrase – or intimidating at the very least. An unsecured loan doesn’t put your home up for potential foreclosure, which is something you may not want to deal with if the scope of your kitchen project is small enough to pay back in just a couple years.
If your kitchen needs a full overhaul, then a secured loan may be more your speed. Because they offer lower interest rates, this will result in lower monthly payments and a more generous repayment plan.
A secure home improvement loan tends to grant you a little extra flexibility. Because you can get more money, you can have the freedom to get the whole kitchen remodeled at once instead of in piecemeal. You can go a little overboard with the updates here, which is perfectly fine – just as long as you make your payments on time.
Keep in mind that if borrow money for ten years the value of your home will be increasing the entire time you are paying it back. So if your home was worth $100,000 to start, and you borrowed $20,000 for 10 years to remodel the kitchen, by the time you pay off the loan the house is now worth $140,000 because of the improvements and appreciation.
It’s a big win for you as long as you stay in the home, and even if you sell and move out before the loan is fully repaid you’ll still more than likely recoup what you spent on remodeling the kitchen.