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| Via Berkshire Green |
The kitchen renovation I've been dreaming of has finally arrived, and I'll be paying for a good deal of it out of pocket. But adding up cost estimates so far for cabinets, countertops, and appliances, I can see I'll need additional funds. Financing a renovation isn't a topic many home blogs cover, so I thought I'd share my discovery process. Let's take a look at the cost of a major kitchen renovation and the estimated return on investment (ROI).
Cost of Renovation
Every year Remodeling studies the cost and return on investment of different types of home upgrades. The site offers an easy, interactive map, where you can choose your region and the type of project you're planning and see a chart like this one. The good news for kitchen remodelers is that if we're going to live in our house a while, some are still seeing an almost 60% return, however, it's a good deal less for those of us living in New York City compared to the national average. And ROI is reduced even further if your renovation is considered upscale. I don't think of this renovation as particularly upscale when compared to homes in our region. I'm saving costs with IKEA boxes and I'm not springing for a pro range or Sub-Zero refrigerator. However, I am sourcing marble and quartz countertops, and Remodeling considers stone countertops upscale. (Hah, by those standards my current kitchen is considered upscale, and that just makes me laugh!) The ROI on a major upscale kitchen renovation is down from last year, at only about 49%, so I can look forward to eating half the cost of this renovation over time.
It is a sobering thought, but given workflow issues in the current galley kitchen, it comes down to expand the kitchen or move. We knew when we purchased that this day was coming. We got our home in fixer condition, knowing full well I'd be renovating. Even so, we lived with the kitchen a while before coming around to the final decision that, yes, we really do need to open the galley walls. The good news is, in the four years since our purchase, the appraisal value has more than doubled. Looked at this way, it's almost as though our renovation is free. There's just this minor issue of needing financing to be able to complete it now, instead of later.
Financing a Renovation
For anyone looking for a full scope of all possible financing strategies, Bankrate spells out the pros and cons of a home equity loan (HEL) vs. home equity line of credit (HELOC) vs. cash-out refi.
Planning to pay it off as quickly as possible, I'm leaning towards a HELOC, and here's why.
Cash-Out Refinance
Pros: Easy to obtain if you have a good deal of equity in the home. Mortgage interest is still low, so you'll be getting the money "cheap" (for a loan) and at a fixed rate. You can pay it off over time and write off the interest.
Cons: We would be paying for this renovation for years to come, when my goal is to pay it off quickly. But most importantly, we'd lose the low, locked-in interest rate of our current mortgage. We're unlikely to find another as good today, as we purchased when rates were at an all-time low. In addition, we'd have to pay closing costs again. In short, refinancing would make this kitchen cost more long-term.
Home Equity Loan (HEL)
Pros: These have all the pros of a refi, but more cons for our particular situation. A low-interest loan with a fixed rate, it can be paid off over time and you can write off the interest (though this may be changing with the new tax laws). In addition, these types of loans are pretty easy to qualify for. As you already have a mortgage, a good history of paying on time makes you practically a shoe-in with your current lender and other lenders would likely be willing to match.
Cons: This has all the cons of a cash-out refi, and then some. It is a second mortgage, after all, and the collateral is your home.
Home Equity Line of Credit (HELOC)
Pros: A HELOC is a bit like a credit card, but at a much lower interest rate. Most have an adjustable rate, but it's tied to the Prime rate which has been stable. Interest-only payments and 10-year draw period make it an attractive option. In short, it's a good way to borrow a relatively small sum for a relatively short time. Unlike the other two, it doesn't restructure your current mortgage and there are no closing costs.
Cons: You can't write off the interest. And borrowers have been known to be tempted to use more than they need, or to use the money for other things, and accumulate debt.
Zero-Interest Credit Card
Speaking of like a credit card... I briefly considered a zero-interest credit card to close the gap. There are several out there that offer zero interest for 18 months, but if you read the fine print that's on balance transfers. The longest period of time offered right now for purchases is zero interest for one year. This doesn't appeal to me. I'm putting myself on a three year repayment plan, and I really don't feel like putting the effort into zero-interest credit card roulette, where you keep transferring the balance to another zero-interest card until you've paid it off — though I do think it's a reasonable strategy for anyone organized enough to stay on top of the paperwork.
Next steps for me: I've read that the whole HELOC process can take 2-6 weeks, so I'm feeling good about my timeline. I have a call out to the broker who helped me find my current mortgage. Having met with my contractor yesterday, walked him through the project, and determined a June-July window, I'm waiting for his cost proposal and scope of work. Once I have that and copy of his license and insurance, I'll fill out the renovation agreement and hand it into my co-op board. By the time the board has reviewed my plan and it's time to start purchasing products, the funds will be there.
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