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How to Finance a New Kitchen

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Kitchen renovations are one of the most expensive types of home remodeling projects. In fact, the average national cost of a kitchen remodel ranges from $22,507 for a minor remodel all the way up to $131,510 for an upscale version, according to Remodeling magazine’s 2019 Cost vs. Value Report.

Many different factors can contribute to raising the cost of this project, including changing the layout of the room or setting your sights on an expensive in-demand appliance package. However, there are ways for you to secure the cash to make a major improvement to your kitchen.

Below is our guide on how to finance a kitchen remodel with outside help. Read it over to get a sense of your options and start figuring out which remodeling strategy might work best for you.

How to finance a renovation

Home equity loan

A home equity loan is sometimes called a second mortgage. As the name suggests, when you choose a home equity loan, you borrow money against the amount of equity you have in your home. Equity is the percentage of your home you own outright, or the value of your home minus the amount of any existing mortgages.

Once you’ve been approved for the loan, you’re given the money in one lump sum that can be used however you choose. The money is financed at a fixed interest rate and you make regular payments on it over the life of the loan.

Home equity loans are a great choice for people who like stability. The fixed interest rate this type of loan provides means your monthly payment will stay the same over the entire term of the loan. You’ll know exactly how much you’re expected to pay each month and how long the payments will last. There won’t be any changes or surprises.

However, because the funds from home equity loans are disbursed all at once, there’s very little room for error in your calculations. You need to know exactly how much your kitchen remodel will cost from the get-go. It may not be the best choice for you if you have a habit of changing the plans for your remodel or electing for upgrades on the spot.

Home equity line of credit (HELOC)

Home equity lines of credit — often referred to as HELOCs — are similar to home equity loans in that you’re borrowing against the equity in your home. However, instead of being paid out in one lump sum, a HELOC acts as a line of credit you can draw upon as needed.

This type of loan is a good choice for those who need a little more flexibility. Because a HELOC is a line of credit, you have the option to use it when you need it and leave it alone when you don’t. It can be useful for those who want to space out their remodel over time, or want to renovate multiple areas of their home at once.

In addition, HELOCs have the added benefit of offering a low initial payment period. These loans have two distinct phases: the draw period and the repayment period. The draw period is a fixed amount of time during which you’ll often only have to make payments on the interest incurred by your purchases. Afterward, you’ll either enter the repayment period, where you’ll have to start making payments on both the principal and interest of the loan, or you’ll have a balloon payment, where you’ll be responsible for paying off the loan in full.

However, that payment structure is also one of the downsides of using a HELOC to finance your kitchen remodel. After the initial draw period ends, the amount of your payment will rise substantially. You will need to be prepared for your payment to change after a few years. If you’re not, a more stable home equity loan may be a better choice.

Cash-out refinance

A cash-out refinance is different than other refinancing scenarios in that you borrow more money than you owe on the home, rather than just taking out enough to pay off your existing mortgage. The difference between what you’ve borrowed and what you owe is then given to you in the form of funds, which can then be used to finance a kitchen remodel.

One of the advantages of doing a cash-out refinance is that it allows you access to a large amount of funds at a relatively low interest rate, much lower than a personal loan for the same amount. Also, it gives you access to a long repayment period. As refinancing essentially resets your mortgage, you have the ability to choose a new loan term. Usually, these loans end up having either a 15- or 30-year repayment window.

This type of refinancing also has its downsides, however. For one, because you’re borrowing more money than you currently owe on the home, your monthly payment will likely go up after you refinance. Also, any time you borrow against the value of your home, you accept a risk of foreclosure. If you don’t make payments toward your cash-out refinance, the lender reserves the right to foreclose on your home.

Options for those with lower incomes

FHA Title I loans

The Title I program offered through the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) makes it easier for low- to moderate-income buyers to secure home improvement loans. They do that by insuring the loan and protecting the lender against loss in the event that you ever default.

Under the Title I program, the FHA will approve home improvement loans up to $25,000 for single-family homes, though anything over $7,500 must be secured by the deed to the home. These loans must be used to finance improvements that “protect or improve the basic livability or utility of the property.”

Because the program is aimed at lower-income borrowers, the eligibility requirements are much easier to meet than those for a home equity loan or line of credit. There is no income or credit requirement for Title I loans, and a debt-to-income ratio of 45% is accepted.

Housing Improvement Program (HIP)

The Housing Improvement Program (HIP) is a housing grant program administered by the Bureau of Indian Affairs (BIA). It’s aimed at eliminating substandard housing conditions among American Indians and Alaska Natives. The program will provide up to $60,000 for repairs and renovations that allow the home to meet applicable building codes.

Because this is a grant program, interested parties need to apply for assistance. You can do so by contacting your local tribal or BIA Regional Housing Office. Those whose annual household income exceeds 150% of the poverty line are not eligible.

Section 504 Home Repair program

The Section 504 Home Repair program is offered by the Department of Agriculture and provides loans to very low-income homeowners to improve or modernize their homes, as well as grants to very low-income elderly homeowners in order to eliminate health and safety hazards in their homes.

In order to qualify for a Section 504 loan, you must be the homeowner and occupy the home, unable to qualify for a loan from another source and you must make below 50% than your area’s median income. For a grant, you must be at least 62 years old and unable to repay a repair loan from another source.

Government-backed programs

FHA 203(K) program

The FHA 203(K) program works similarly to a cash-out refinance. Whether you’re just buying the property or you’re refinancing an existing mortgage, part of the loan is used to pay off any debt on the home. The other portion of the loan goes toward paying renovation costs once the work has been completed.

AN FHA 203(K) loan is a great choice for financing a kitchen remodel because the funds may be used for “modernization and improvements to the home’s function,” as well as “changes that improve appearance and eliminate obsolescence.” As long as the project cost is over $5,000, borrowers only have to worry about meeting the standard FHA eligibility guidelines.

Energy Efficient Mortgage options (EEM)

Depending on the type of renovation you have in mind, an energy efficient mortgage (EEM) could allow you to make sustainable improvements to your property. Under the EEM program, FHA will insure a loan big enough to cover the cost of the loan purchase or refinance, plus the cost of energy-efficient improvements. However, the borrower only needs to be approved for a loan big enough to cover the purchase or refinance portion.

To use this type of loan, the savings from the energy-efficient improvements must be greater than the cost of installing them, and you must have an assessment done on your home prior to doing the renovations in order to identify opportunities for cost savings.

HomeStyle® Renovation loans

HomeStyle® Renovation loans are conventional loans’ answer to the FHA 203(K) loan. Like the FHA option, buyers can bundle the cost of purchasing a home with that of their remodel to make for a single monthly payment.

As this type of loan is conventional, borrowers should expect stricter qualifying requirements. It’s not uncommon to see FICO score requirements of 620, as opposed to FHA’s requirement of 580. It also requires a debt-to-income ratio of 43% or less, whereas the 203(K) loan simply requires proof of income.

Personal loans

Getting a personal loan is also an option for financing a new kitchen. On the one hand, personal loans generally do not require you to put up collateral to secure the loan in the same way a home equity loan or line of credit does. Additionally, if you only need to finance a small amount, it may be easier to acquire a personal loan, as home equity loans and lines of credit are generally used for big-ticket items.

However, interest rates are often much higher on personal loans, up to about 36% at the high end, and the loan terms are often much shorter. There’s a good chance your payment will be much higher and that you’ll end up paying more over the life of the loan than you would with another option.

The bottom line

All told, there are many options available when it comes to financing a kitchen renovation. This guide should give you a sense of which strategy might be appropriate for you. However, you should also do your own research and talk to a few different lenders in order to see which loan programs they recommend for you. With a little due diligence, you can find the right fit.


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