BLOG / KITCHEN
Three Simple Ways to Finance Your
Kitchen Remodel in 2021 With Home Equity
Your kitchen tops the list of home spaces that you would always want to renovate. But since renovations can be pretty expensive, it takes a lot of soul-searching and strategy to finance your kitchen remodel successfully.
Thus, before considering taking a personal loan for the renovation, consider using the equity in your home to finance your kitchen project.
What Is Home Equity?
Home equity is the current market value of your house, less the balance of your mortgage. Thus, if your home has a significantly higher value than the amount you owe on it, you can tap into the equity in your home to finance your kitchen remodel.
The Benefits of Using the Equity in your Home to Finance Your Kitchen Remodel
Are you looking for options for financing your kitchen remodeling? We advise that you consider using your home’s equity to finance your kitchen remodel over other financing options like a personal loan.
Thanks to current low-interest rates, it stands out as one of the smartest ways of home improvement financing.
The benefits include:
Home equity loans currently have interest rates that average 5.1% APR. Alternatively, Home Equity Lines of Credit (HELOC) have average interest rates of about 4.5% APR. The rates can be considerably lower than rates for other loans because your home acts as collateral for the loan. Their objective is to help homeowners maintain and improve their property.
Interestingly, the interest you will pay on HELOC and equity loans can be tax-deductible if the loan proceeds are used to improve the same home that secured the loan. Check with your tax advisor to confirm tax deductibility.
High Return On Investment
Investing in your home is always beneficial, whether your project is for you to enjoy or to prepare your home for resale. A kitchen renovation, for example, will positively improve the value and resale price of your home.
Three Options to Finance Your Kitchen Remodel Plans
The most popular financing options you should consider to finance your kitchen-remodel include: Equity loans, a Home Equity Line of Credit (HELOC), and a cash-out home refinance. These three options allow you to borrow up to 85% of your property’s value, less any outstanding mortgage balances.
Let’s briefly look at each option!
1. Home Equity Loans
A home equity loan provides a lump sum amount to finance your project. Like most other home loans, this type of financing gives you up to 80% of your home’s total value.
Payments can begin right away; hence budgeting is easier;
The fixed rates ensure that your payment does not change;
You get the entire loan amount upfront;
These loans, as with any loan, require financial discipline. You shouldn’t spend the funds on something else before paying for your kitchen remodeling project;
Your home acts as collateral and secures the loan;
These loans may include closing fees and costs.
2. Home Equity Line of Credit (HELOC)
A second alternative to finance your kitchen remodel is the Home Equity Line of Credit, also known as HELOC. This option also uses your home’s equity, but unlike a home equity loan where you get a lump sum amount, this arrangement gives you access to a line of credit of up to 80% of your home’s value.
These credit lines allow you to use only the amount you need, as you need it, for periods of up to 10 years.
You decide how much and when to use the available credit;
HELOC’s carry low-interest rates;
You can make interest-only payments during the draw period.
They may have fluctuating interest rates;
These too require financial discipline! You don’t want to overextend yourself and use more of the available credit than what you can afford to repay;
Some lenders charge an annual fee to keep the HELOC open;
It may take longer for HELOC approval.
3. Cash-Out Refinance
The last equity option is to refinance your existing mortgage and take “cash-out.” This option involves making an application for an entirely new mortgage to replace any existing one.
It too comes with low-interest rates;
You can use it to repay your existing mortgage and possibly lower your current interest rate;
It can provide up to 80% of your property’s value, less the balance of your loan;
It will increase your mortgage balance.
Wrapping It Up
Renovating your kitchen can take years off the appearance of your home. Thus, it really can help to improve your home’s value.
While financing your project can often be challenging, using your home equity to finance your kitchen remodel remains incredibly reasonable. You can leverage your equity through home equity loans, HELOC or a cash-out refinance, depending on your situation and personal preferences.
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