Kitchen Articles
Kitchen Renovations: Getting a High Return on Investment Using Cash or Home Equity
Kitchen renovations are popular remodels because of their high return on investment. Realtor? Magazine stated in their "2005 Cost v. Value Report" that a major kitchen renovation produces a 91% return on investment. However, planning what resources will be used to finance this investment and following a well planned budget are keys to a successful renovation.
Remodeling your home, especially your kitchen, can require a substantial financial investment. The National Association of Home Builders predicts that homeowners will spend near $200 billion this year on remodeling and more each coming year. A Realtor? Magazine report from 2005 gives a good idea of the average national cost of popular kitchen renovations (examples are based on a 200 square foot kitchen):
- Minor kitchen renovation: $14,913
This average cost includes replacing cabinet doors, installing laminate countertops, midrange sinks, a new oven and range, flooring, and lighting. - Major kitchen renovation: $43,862
This average cost includes new, custom cabinets; midrange countertops; sinks; appliances; flooring; an island, and lighting. - Major upscale kitchen renovation: $81,528
This cost includes excellent custom cabinets with a variety of interior features, ceramic or glass countertops, top-of-the-line appliances, high-end flooring, a new gourmet sink with water filtration system, and under-cabinet lighting.
Financing Your Remodel: Cash or Home Equity?
Planning for this investment is critical to a household, and the first step is deciding what resources to use. Two common resources are the cash that you have saved and the equity built up in your home. Much of this decision will be made by how much money you have available in your savings and how much equity you have built up in your home. If you have $50,000 in the bank but only $25,000 in equity, the choice becomes relatively simple.
Using Cash
Using cash to finance a kitchen renovation is a popular option: Over 50 percent of homeowners use cash for renovations, according to an RBC Royal Bank survey. Using cash comes with its own benefits and disadvantages:
Benefits
- No need for applications or approvals
- No waiting for funds
- No creation of debt
- Decreases your savings
- Decreasing your liquid assets
- Does not build your credit
Another financing option is to use the equity built up in your home. This option requires careful planning and research and comes with its own pros and cons:
Pros
- Lower interest rates than credit cards
- Builds your credit
- Protects your cash savings
- Increases your debt ratio
- Addition of a monthly payment
- Uncertainty of housing market
If you want to use the equity in your home, the first step is to research home improvement loans. There are many home equity loan options available to homeowners, and finding the right one is very important. Research interest rates, payment options, and determine how the financing option will affect your monthly mortgage payments. The next step is to contact a lender or loan officer to begin the application process. Your lender will appraise your home to determine the amount of equity available to you for your home renovation.
Protecting Your Investment through Budgeting
Creating a home renovation budget is the best way to protect yourself and your investment. Researching the cost of your kitchen renovation and plotting each expense on a time schedule will allow you to see all the details, as well as the larger financial picture. Planning a good budget, which corresponds to your financial resources and protects you against unexpected renovation problems, is the best preparation for a successful kitchen renovation. There are budgeting tools available online which can be used to plan renovation expenses.
By deciding whether to use cash or home equity, planning and following a good budget, and being prepared for the unexpected, you can complete a great kitchen renovation that will increase your satisfaction with your home as well as its value.
Sources
Realtor? Magazine
Realtor? Magazine COST v. VALUE Report
National Association of Home Builders
Style at Home
About the Author
Joe Cooper is a freelance education, technology, and home design writer. He holds a bachelor's in American Literature from UCLA.
