Financing a Kitchen Remodel: Your Options

How you pay for a kitchen affects what you can build and how the project is scheduled. This page explains the common options in neutral terms, using the definitions published by the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Housing and Urban Development (HUD). It quotes no interest rates, because rates change constantly and depend on your own credit and equity. It is general information, not financial advice.

The options side by side

Cash

Paying from savings is the simplest route and has no borrowing cost. The risk is spending the reserve you need for surprises. Before committing savings, add up the full budget, including sales tax and a contingency, as set out in how to budget a kitchen remodel.

Borrowing against home equity

The CFPB defines equity as the amount your property is currently worth, minus the amount of any existing mortgage on it. Three products borrow against it.

Home equity line of credit

In the CFPB's words, a HELOC is "a line of credit that allows you to borrow against the equity of your home." You draw what you need when you need it, which suits a remodel paid in stages. Ask the lender how long you can draw, how the rate can change and what the payments become afterward.

Home equity loan

Sometimes called a second mortgage. The CFPB describes it this way: you typically borrow all the money up front and then repay it in regular monthly payments, and it usually has a fixed interest rate. The CFPB also states the risk plainly: if you cannot pay the loan back, the lender could foreclose on your home.

Cash-out refinance

Here, the CFPB explains, "you replace your existing mortgage with a bigger mortgage and take the difference in cash." Because it replaces the whole mortgage, the question is not only the cost of the new money but what happens to the rate and term on the balance you already owe.

FHA renovation loans

These are federally insured loans made by private lenders, not by HUD itself.

• Limited 203(k). HUD says it "permits homebuyers and homeowners to finance up to $75,000 into their mortgage to repair, improve, or upgrade their home," and gives remodeling the kitchen as an example. A 203(k) consultant is optional for the Limited version.
• Standard 203(k). For major rehabilitation and repair of single-family properties. HUD states that the cost of the rehabilitation must be at least $5,000 and that the total value of the property must still fall within the FHA mortgage limit for the area.
• Title I property improvement loan. HUD insures private lenders against loss on these loans. Improvements must substantially protect or improve the basic livability or utility of the property. Loans above $7,500 must be secured against the property, the rate is fixed, there is no prepayment penalty, and the home must have been completed and occupied for at least 90 days before you apply.

A 203(k) finances the work into the mortgage itself. If you already have a mortgage you want to keep, ask an FHA-approved lender whether it suits your situation before you spend time on an application.

Unsecured borrowing

The CFPB notes that a personal line of credit "lets you borrow based on your credit, instead of using your home as collateral." A personal loan works on the same basis. Your home is not at stake, which is the advantage. Compare the cost and the term with the secured options before deciding.

Contractor-arranged financing

Many remodelers work with a lender so that financing can be set up alongside the project. JDI Construction offers financing through Lend Home Improvement, described on its financing page. Treat any contractor-arranged offer the way you would treat a bank's: read the written terms, and compare them with at least one offer you sourced yourself.

Questions to ask any lender

• Is the rate fixed or variable, and if variable, how and when can it change?
• What are all the fees, including closing costs, and are any charged if I pay the loan off early?
• Does this loan put a lien on my home?
• How and when are funds released: to me, to the contractor, or in stages?
• How long from application to available funds?
• What documents do you need from my contractor?
• If the project runs over, can the amount be increased, and how?

Your right to cancel

For a loan secured by your home, the Washington Attorney General's Office summarizes the federal Truth in Lending right this way: you may cancel before midnight of the third business day after signing the contract. Separately, RCW 63.14.154 lets a buyer cancel a retail installment contract that was solicited in person away from the seller's address, by certified mail posted not later than midnight of the third day (excluding Sundays and holidays) after signing. Whether either applies depends on the product, so ask the lender which cancellation rights come with yours and where the notice is in your paperwork.

Match the payment schedule to the money

However you pay, the contract's payment schedule and your source of funds have to line up. A lender that releases money in stages needs a schedule built around the same stages. Payments tied to completed phases of work also protect you, which is the approach the Washington Department of Labor & Industries recommends and which contracts, deposits and change orders explains. Anyone who supplies labor or materials to your project may have lien rights, so read Washington construction liens before the first payment.

Next steps

Work out a realistic figure first. JDI Construction's kitchen cost calculator gives a planning range for your kitchen size and finish tier, and the kitchen remodel cost page shows all the ranges in one place. Before you borrow, make sure you are not counting on incentives that have ended. When you want a written scope to take to a lender, contact JDI to arrange a free in-home consultation.