How to pay for a remodel

A $27,500 kitchen is the largest discretionary purchase most households make outside a car, and unlike a car it usually has no built-in financing attached. The order that costs least, roughly, is cash, then a home equity line, then a cash-out refinance, then a credit union loan, then contractor financing, then a credit card.

On $27,500 over ten years, the gap between the top and the bottom of that list is more than $15,000.

What the borrowing costs

The trap in "0% for 18 months"

Most contractor promotional financing is deferred interest rather than waived interest. Interest accrues from the first day at the full rate, typically 25% to 30%, and is cancelled only if the entire balance is cleared before the promotional period ends.

Miss it by a month, or by a hundred dollars, and the whole accrued amount lands on one statement. On $20,000 over eighteen months at 27%, that is roughly $7,500.

It is a genuinely good deal if you can clear it, and you should know before signing whether you can. Divide the total by the promotional months. If that payment does not fit comfortably, take a real loan instead.

Also ask what the dealer fee is. Contractors pay finance companies 3 to 8% for promotional offers and it is inside the quoted price whether or not you finance. Asking what the cash price is sometimes recovers it.

Home equity, and when it is the wrong answer

A HELOC or a home equity loan is usually the cheapest borrowing available to a homeowner, because it is secured on the house.

That security is the point and the risk. A kitchen financed on home equity is a kitchen the house is now collateral for. For a necessary repair on a house you are staying in, that trade is generally reasonable. For a discretionary upgrade in a household with unstable income, it is worth a longer think.

The interest may be tax deductible when the loan is used to substantially improve the home that secures it. That is a real benefit and it has conditions; it is worth asking an accountant rather than a contractor.

Getting the number down before you borrow

The cheapest financing is a smaller project.

• Keep the layout. Moving plumbing and walls is the single biggest cost driver in both kitchens and bathrooms.
• Reface or paint sound cabinets rather than replacing them. It is a fifth of the cost and most of the effect.
• Choose the material one grade down where it is not touched daily. Quartz on the island and laminate in the pantry is not a compromise anyone sees.
• Do the cosmetic work yourself and pay for the trades. Demolition, painting and handles are realistic; plumbing, gas and electrical are not.
• Phase it. Cabinets and counters this year, flooring next. Less efficient overall, and much easier to pay for without borrowing.
• Get three quotes with the same specification, so you are comparing the same job.

Frequently asked questions

Should I pay cash if I have it?

Usually yes, and keep an emergency fund intact. Spending your entire cash reserve on a kitchen and then borrowing at 25% when the water heater fails is a common and expensive sequence.

Is contractor financing ever the right answer?

Yes, when it is a true 0% offer you will clear within the term and the price was competitive before financing came up. Agree the price first, then discuss payment.

What about a 203(k) loan?

It rolls renovation costs into a purchase mortgage and is genuinely useful when buying a house that needs work. It has more paperwork, required inspections and a consultant on larger projects. Not a tool for an existing homeowner's kitchen.

How much should I put down?

A deposit of 10 to 30% is normal. Anything approaching half up front is a warning sign, and paying the entire amount before work starts removes every piece of leverage you have.

Does a remodel raise my property taxes?

Permitted work that increases assessed value can, in most jurisdictions. It is usually modest, and it is not a reason to skip a permit: unpermitted work is a far more expensive problem at sale.