If you need to borrow money to fund home renovations, it makes sense to choose projects that increase the value of your home. Kitchen remodels usually pay off, especially if you invest in updating the kitchen in an older home. When estimating the return you can get for your renovation investment, consider the cost of the loan, including interest rates and fees.
Provide the lender with a cost estimate for your kitchen renovation project. Get written bids from at least three contractors. Request that the contractor proposal list the labor costs and costs for materials separately. Tack on about 10 percent extra to cover any unexpected costs.
Assess your credit rating. Order a copy of your credit report from the three major consumer credit reporting bureaus -- Experian, Equifax and TransUnion. You are entitled to one free copy a year from each.
Contact a local real estate agent willing to prepare a comparative market analysis for free. If you don’t want to spend several hundred dollars to hire a professional appraiser, a CMA may give you a general idea of your home’s value based on what similar homes in your area have recently sold for.
Calculate how much equity you have in your home. Subtract the outstanding balances of your mortgages and any liens from your home’s current market value. The amount of equity you have in your home is the difference.
Apply for a home equity loan using the available equity in your home. Although the interest rate might be higher than the rate on your mortgage loan, you get a fixed rate with a monthly payment.
Examine the option of a home equity line of credit, especially for a long-term kitchen renovation project. If approved, the lender gives you a line of credit that allows you to take out the money as you need it. The rate is adjustable and varies among lenders.
Apply for a cash-out refinance loan. Pay off your existing mortgage and get extra money to renovate your kitchen. You'll have to pay closing costs to finance the new loan. Different from a home equity loan, the cash-out refinance loan replaces your original mortgage instead of taking out an additional loan.
Consider an FHA 203(k) mortgage. Refinance your first mortgage and the costs of home improvements into a single, new mortgage. Ask for 10 percent to 20 percent in additional loan funds to cover expenses that exceed your repair estimate
If you are doing the remodeling work yourself, include the costs for permits and equipment rental in the estimate for the lender.
Although FHA 203(k) mortgage loan limits vary by county, lenders base how much money you can borrow on how much your home will be worth after you make the improvements.
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