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Finance Your Kitchen Remodel in 2021
with 401K savings – Pros & Cons

Upgrading your kitchen and making necessary repairs is always a  wise investment for every homeowner. Remodeling your kitchen enhances its look, comfort, style, and functionality and can significantly increase your home’s resale value. Most home buyers will, of course, choose updated and visually appealing houses.   Even if you are not considering selling your home, remodeling your kitchen can give your home an incredible facelift.

Kitchen makeover projects, whether major or not, can be quite expensive. On average, kitchen remodeling will cost over $23,000 in the United States. However, your cost will depend on several factors, such as the scope of work and the project’s size. High-end kitchen remodels can cost  between $50,000 and $100,000. Consequently, most people  use home improvement loans to  complete most of these high-end remodeling projects., The following are some of the most common financing options used for home improvement projects:

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  • Home Equity Line of Credit (HELOC)

 

  • A home equity line of credit allows you to access the equity in your home. These loans provide a credit line that you access only as needed.  You can use as little or as much of the credit line as you wish, and these loans can be repaid over a long period of time, perhaps ten years, with low-interest rates.
  • Home Equity Loan

 

  • These home equity loans also allow you to access the equity in your home. However, the difference here is that you borrow a set amount upfront, and the loan is then repaid over whatever term you agree to, maybe 5, 10, or 15 years.  Interest rates are also lower for this type of loan.
  • Cash-out Home Refinancing

 

  • This type of loan again allows you access to the equity in your home. Here you refinance your home and borrow more than what you currently owe on your home.  For instance, if your mortgage balance is $100,000, you would refinance the $100,000 plus the cost of your kitchen remodeling project (assume $50,000). You would then have one loan for $150,000 and one monthly payment. Again, the interest rate for these loans is currently very attractive.
  • Home Improvement loan

 

  • A home improvement loan is typically an unsecured personal loan with a fixed interest rate that you repay in monthly installments over one to 12 years. Unlike home equity loans or HELOCs, the loans are not secured by your home. Interest rates are generally higher for these personal loans, and approval is based mainly on your creditworthiness.
  • Credit cards
  • The least desirable option to pay for your kitchen project is to use your credit card(s). This option generally carries a much higher interest rate and thus will take much longer to pay off.
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401k Loan for Kitchen Remodel

Another way you may obtain the much-needed kitchen remodeling funds is by borrowing from your 401k. It is considered a convenient way of financing home repairs, renovations, and remodeling projects. However, not every 401k plan will allow you to borrow money. As such, you should consult your fund rules regarding loans to confirm how borrowed funds can be used.

A 401k loan is generally repaid through payroll deductions. Depending on your plan rules, other requirements will impact when you must fully repay the loan. Be sure to fully evaluate the pros and cons of using your retirement assets for any remodeling project.

Pros

The Process

Securing a loan through your 401k is straightforward and less intensive as compared to other types of credit. It eliminates the hassles that come with credit checks, underwriting, and other lengthy application procedures. It is critical that you speak with a financial professional to walk you through the loan process and understand the loan specifics. “With a 401k loan for kitchen remodel, you are borrowing from your investments, and as such, this is relatively cheaper than traditional unsecured loans”, says Lauren Anastasio, who is a CFP at SoFi.

Repayment Terms

In most cases, you are allowed up to five years to repay your loan. Additionally, payments are automatically deducted from your paycheck, eliminating the risk of delayed or forgotten payments. Importantly you should understand that borrowing from a 401k loan translates into a smaller paycheck.

Cons

Harsh Repayment Rules

If you leave your job, you may be required to repay your outstanding loan balance within 60 to 90 days. Otherwise, according to Robert Farrington, the founder of College Investor, the loan will be considered a distribution (income). As a result, that income will become taxable with penalties.

The Lost Gains

If you leave your job, you may be required to repay your outstanding loan balance within 60 to 90 days. Otherwise, according to Robert Farrington, the founder of College Investor, the loan will be considered a distribution (income). As a result, that income will become taxable with penalties.

The Amount you are Allowed to Borrow

You are only allowed to borrow up to 50 percent of your 401k savings balance. If your kitchen remodeling budget surpasses this amount, you will have to seek alternative financing options. If you already have a 401k loan, the amount you can borrow now will be reduced by the existing loan balance.

Most financial advisors discourage borrowing money from your retirement plan. While it might seem like an easy and hassle-free way of funding your kitchen remodeling project, borrowing from 401k for a kitchen remodel can be quite risky. As such, it would be best to consider more traditional loan alternatives, such as those mentioned above.

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