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Home equity loans, home equity lines of credit (HELOCs), and cash-out refinances are all borrowing options that allow homeowners to access the equity they’ve built in their home. By tapping into home equity — the difference between a home’s current value and the amount still owed on the mortgage — homeowners can secure funds to meet other financial goals, such as making home improvements.

While these three types of loans do have similarities, there also are key differences in how each one works. Understanding the differences in a home equity loan vs. HELOC vs. cash-out refi can help you better determine which option is right for you.

Defining Home Equity Loans, HELOCs, and Cash-Out Refi

To start, it’s important to know the basic definitions of home equity loans, HELOCs, and cash-out refinances.

Home Equity Loan

A home equity loan allows a homeowner to borrow a lump sum that they’ll then repay over a set period of time in regular installments at a fixed interest rate. Generally, lenders will allow homeowners to borrow up to 85% of their home’s equity.

This loan is in addition to the existing mortgage, making it a second mortgage. As such, a borrower usually will make payments on this loan in addition to their monthly mortgage payments. To better understand what kind of payment might be due each month, it is helpful to use a home equity loan calculator.

HELOC

A HELOC is a line of credit secured by the borrower’s home that they can access on an as-needed basis, up to the borrowing limit. The amount of the line of credit is determined by the mortgage lender and based on the amount of equity a homeowner has built, though it can be up to 90% of the equity amount. Like a home equity loan, this is a second mortgage that a borrower assumes alongside their existing home loan.

How HELOCs work is somewhat like a credit card, in that it’s a revolving loan. For example, if a borrower is approved for a $30,000 home equity line of credit, they can access it when they want, for the amount they choose (though there may be a minimum draw requirement). The borrower is only charged interest on and responsible for repaying the amount they borrowed.

Another point that borrowers should keep in mind is that there is a draw period of 5 to 10 years, during which a borrower can access funds, and a repayment period of 10 to 20 years. During the draw period, the monthly payments can be relatively low because the borrower pays interest only. During the repayment period, on the other hand, the payments can increase significantly because both principal and interest have to be paid.

Cash-Out Refinance

A cash-out refinance is a form of mortgage refinancing that allows a borrower to refinance their current mortgage for more than what they currently owe in order to receive extra funds. With a cash-out refinance, the borrower’s current mortgage is replaced by an entirely new loan.

As an example, let’s say a borrower owns a home worth $200,000 and owes $100,000 on their mortgage at a high interest rate. They could refinance at a lower interest rate, while at the same time taking out a larger mortgage. For instance, they could refinance the mortgage at $130,000. In this case, $100,000 would replace the old mortgage, and the borrower would receive the remaining amount of $30,000 in cash.

Recommended: First-time Homebuyer Guide

Home Equity Loans and HELOCs vs. Cash-Out Refi

Here’s a look at how a home equity loan vs. HELOC vs. cash-out refinance stack up when it comes to everything from borrowing limit to interest rate to fees:

Borrowing Limit

With a home equity loan, lenders generally allow you to borrow up to 85% of a home’s equity. HELOCs allow borrowers to tap a similar amount, sometimes as much as 90%. Cash-out refinances, on the other hand, have a slightly lower borrowing limit — up to 80% of a borrower’s equity. The exception is a VA cash-out refi; here it is possible to borrow up to 100% per VA rules, although some lenders may impose a lower ceiling.

Interest Rate

With a home equity line of credit, the interest rate is usually adjustable. This means the interest rate can rise, and if it does, the monthly payment can increase. Home equity loans, meanwhile, generally have a fixed interest rate, meaning the interest rate remains unchanged for the life of the loan. This allows for more predictable monthly payment amounts.

A cash-out refinance can have either a fixed rate or an adjustable rate. Homeowners who opt for an adjustable rate may be able to access more equity overall.

Type of Credit

Both home equity loans and cash-out refinances are installment loans, where you receive a lump sum that you’ll then pay back in regular installments. A HELOC, on the other hand, is a revolving line of credit. This allows borrowers to take out and pay back as much as they need at any given time during the draw period.

Fees

With a home equity loan, HELOC, or cash-out refinance, borrowers may pay closing costs. HELOC closing costs may be lower compared to a home equity loan, though borrowers may incur other costs periodically as well, such as annual fees, charges for inactivity, and early termination fees.

When It Might Make Sense to Borrow

A home equity loan vs. HELOC vs. cash-out refi have varying use cases. With a fixed interest rate, home equity loans can allow for predictable payments. Their lower interest rates can make them an option for borrowers who want to consolidate higher interest debt, such as credit card debt.

HELOCs, meanwhile, provide more flexibility as borrowers can take out only as much as they need, allowing borrowers to continually access funds over a period of time. A cash-out refinance can be a good option for a borrower who wants to receive a large lump sum of money, such as to pay off debt or finance a large home improvement project.

Which Option Is Better?

Like most things in the world of finance, the answer to whether a cash-out refinance vs. HELOC vs. home equity loan is better will depend on a borrower’s financial circumstances and unique needs.

In all cases, borrowers are borrowing against the equity they’ve built in their home, which comes with risks. If a borrower is unable to make payments on their HELOC or cash-out refinance or home equity loan, the consequence could be selling the home or even losing the home to foreclosure.

Scenarios Where Home Equity Loans Are Better

A home equity loan can be the right option in certain scenarios, including when:

•   You want fixed, regular second mortgage payments: A home equity loan generally will have a fixed interest rate, which can be helpful for budgeting as monthly payments will be more predictable. Some may appreciate this regularity for their second monthly mortgage payment.

•   You want to get a lump sum while keeping your existing mortgage intact: Unlike a HELOC, where you draw just as much as you need at any given time, a home equity loan gives you a lump sum all at once. Plus, unlike a cash-out refinance, you aren’t replacing your existing mortgage. That way, if the terms of your current mortgage are favorable, those can remain as is.

Recommended: The Different Types Of Home Equity Loans

Scenarios Where HELOCs Are Better

In the following situations, a HELOC may make sense:

•   You have shorter-term or specific needs: Because HELOCs generally have a variable interest rate, they can be useful for shorter-term needs or for situations where a borrower may want access to funds over a certain period of time, such as when completing a home renovation.

•   You want the option of interest-only payments: During the draw period, HELOC lenders often offer interest-only payment options. This can help keep costs lower until the repayment period, when you’ll need to make interest and principal payments. Plus, you’ll only make payments on the balance used. A HELOC interest-only repayment calculator can help borrowers understand what those monthly payments might be.

Scenarios Where Cash-Out Refi Is Better

Cash-out refinances can make sense in these scenarios:

•   You need a large sum of money: If there’s a need for a large sum of money, or if the funds can be used as a tool to improve your financial situation on the whole, a cash-out refinance can make sense.

•   You can get a lower mortgage rate than you currently have: If refinancing can allow you to secure a lower interest rate than your current mortgage offers, then that could be a better option than taking on a second mortgage, as you would with a home equity loan or HELOC. If interest rates have risen since you first took out your loan, however, a cash-out refi could mean paying more in interest over the life of the loan.

•   You want just one monthly payment: Because a cash-out refinance replaces your existing mortgage, you won’t be adding a second monthly mortgage payment to the mix. This means you’ll have only one monthly payment to stay on top of.

•   You have a lower credit score but still want to tap your home equity: In general, it’s easier to qualify for a cash-out refinance vs. HELOC or home equity loan since it’s replacing your primary mortgage.

The Takeaway

Cash-out refinancing, HELOCs, and home equity loans each have their place in a borrower’s toolbox. All three options give borrowers the ability to turn their home equity into cash, which can make it possible to achieve important goals, consolidate debt, and improve their overall financial situation.

Homeowners interested in tapping into their home equity may consider getting a HELOC or taking a cash-out refinance with SoFi. Qualifying borrowers can secure competitive rates, and Mortgage Loan Officers are available to walk borrowers through the entire process.

FAQ

Can you take out a HELOC and cash-out refi?

If you qualify, it is possible to get both a HELOC and cash-out refinance. Qualified borrowers can use their cash-out refinance to help repay their HELOC.

Is it easier to qualify for a HELOC or cash-out refi?

It is generally easier to qualify for a cash-out refinance. This is because the cash-out refi assumes the place of the primary mortgage, whereas a HELOC is a second mortgage.

Can you borrow more with a HELOC or cash-out refi?

Ultimately, the amount you can borrow with either a cash-out refi or HELOC will depend on how much equity you have in your home. That being said, a HELOC can offer a slightly higher borrowing limit than a cash-out refi, at up to 90% of a home’s equity as opposed to a top limit of 80% for a cash-out refinance.

Are HELOCs or cash-out refi tax deductible?

Interest on your cash-out refinance or HELOC can be tax deductible so long as you use the funds for capital home improvements. This includes projects like remodeling and renovating.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOHL-Q424-144

One thing you should always look out for — regardless of the type of loan you’re applying for — is a loan origination fee. Many lenders charge origination fees for new loans to help cover costs on their end. What these fees are called and what they amount to, however, can vary quite a bit from lender to lender.

Knowing these things about origination fees before you settle on a lender can help you make the best borrowing decision for your financial situation.

What Is a Loan Origination Fee?

An origination fee is a cost the lender charges for a new loan. It’s a one-time expense you are generally asked to pay at the time the loan closes. The fee covers the costs the lender incurs for processing and closing the loan.

How Are Origination Fees Determined?

Loan origination fees depend on a number of factors. They include:

•   Loan type

•   Amount of loan

•   Credit score

•   Inclusion of a cosigner

•   Your financial situation, including assets, liabilities, and total income

Do I Have to Pay Origination Fees?

You don’t necessarily have to pay origination fees — while most lenders charge this fee, not all do. Additionally, origination fees may be negotiable. If you ask, a lender could simply lower the fee, or they could offer a credit to offset at least a portion of it. Or, they might agree to lower the fees if you pay a higher interest rate.

To minimize the sting of loan origination fees, research your loan options. Compare how much you’d pay overall for different loan offers, factoring in the term of the loan, the interest rate, and any fees.

One way to effectively compare and contrast different loan options is to check each loan’s annual percentage rate (APR), an important mortgage basic to understand. A loan’s APR provides a more comprehensive look at the cost you’ll incur over the life of the loan. This is because the APR factors in the fees and costs associated with the loan, in addition to the loan’s interest rate.

The Truth in Lending Act requires lenders to disclose an APR for all types of loans. Along with the APR, you’ll also see any fees that a lender may charge listed, including prepayment penalties.

How Much Are Loan Origination Fees?

How much a lender charges — and what the fee is called — varies based on the type of loan and the lender.

A traditional origination fee is usually calculated based on a percentage of the loan amount — and that percentage depends on the type of loan. For a mortgage, for instance, an origination fee is generally 0.50% to 1%. Origination fees for personal loans, on the other hand, can range from 1% to 8% of the loan amount, depending on a borrower’s credit score as well as the length, amount, and sometimes intended use of the loan.

There are a variety of other origination fees that lenders may charge, and these can be flat charges rather than percentages of loan amounts. Other fees that lenders may charge to originate a loan could be called processing, underwriting, administration, or document preparation fees.

Can Loan Origination Fees Affect Your Taxes?

Loan origination fees, categorized by the IRS as points, may be deductible as home mortgage interest. This can be the case even if the seller pays them. Borrowers who can deduct all of the interest on their mortgage may even be able to deduct all of the points, or loan origination fees, paid on their mortgage.

To claim this deduction, borrowers must meet certain conditions laid out by the IRS. They’ll then need to itemize deductions on Schedule A (Form 1040), Itemized Deductions.

The Takeaway

Loan origination fees are important to consider when shopping for a loan during the home-buying process. These fees are charged by lenders to help cover their costs of processing and closing a new loan application. While many lenders charge origination fees, not all do, and some may be willing to negotiate.

Origination fees are just one reason it’s important to shop around and compare home loans. With a SoFi Home Loan, for instance, qualified first-time homebuyers can make a down payment as low as 3%.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOHL-Q424-131

Hypothecation may not be a word you’ve heard before, but it describes a transaction you may have participated in. Hypothecation is what happens when a piece of collateral, like a house, is offered in order to secure a loan.

Auto loans and mortgages frequently involve hypothecation, since it allows the lender to repossess the car or house if the borrower is later unable to pay.

There are, though, some more subtle details to understand about hypothecation, particularly if you’re in the market for a home loan. Read on to learn about hypothecation loans.

Note: SoFi does not offer hypothecation. However, SoFi does offer home equity loan options.

What Is Hypothecation?

Hypothecation is essentially the fancy word for pledging collateral. If you’re taking out a secured loan — one in which a physical asset can be taken by the lender if you, as the borrower, default — you’re participating in hypothecation. (Hypothecation is also possible in certain investing scenarios. We’ll briefly talk about that later.)

As mentioned above, some of the most common hypothecation loans are auto loans and mortgages. If you’ve ever purchased a car, it’s likely you have (or had) a hypothecation loan, unless you paid the full purchase price in cash.

It’s important to understand that, just because the asset is offered as collateral, it doesn’t mean the owner loses legal possession or ownership rights of it. For instance, with an auto loan, the car is yours even though the lender might hold the title until the loan is paid off.

You also maintain your rights to the positive parts of ownership, such as income generation and appreciation. This is perhaps most obvious in the case of homeownership. Even if you’re paying a mortgage on your property, you still have the right to lease the place out and collect the rental income.

However, the lender has the right to seize the property if you fail to make your mortgage payments. (Which would be a bad day for both you and your renters.)

Why Is Hypothecation Important?

Hypothecation makes it easier to qualify for a loan — particularly a loan for a lot of money — because the collateral makes the transaction less risky for the lender.

For instance, hypothecation is the only way that most people are able to qualify for a mortgage. If those loans weren’t secured with collateral, lenders might have very steep eligibility requirements before they would pay out hundreds of thousands of dollars for a home on a piece of land!

Unsecured loans, however, are possible. A personal loan is a good example.

With an unsecured loan, you’re not at risk of having anything repossessed from you, and you can use the money for just about anything you want.

It’s a trade-off: Unsecured loans are riskier for the lender, so they tend to be harder to qualify for and to carry higher interest rates than secured loans.

On the other hand, if you compare a car loan and personal loan of equal length, you’ll likely be subject to a stricter eligibility screening to get the unsecured loan and pay more interest on it in the end.

Recommended: Smarter Ways to Get a Car Loan

Hypothecation in Investing

Along with hypothecation in the context of a secured loan for a physical asset, like a house or a car, hypothecation also occurs in investing — though usually only if you take on advanced investment techniques.

Hypothecation occurs when investors participate in margin lending: borrowing money from a broker in order to purchase a stock market security (like a share of a company).

This technique can help active, short-term investors buy into securities they might not otherwise be able to afford, which can lead to gains if they hedge their bets right.

But here’s the catch: The other securities in the investor’s portfolio are used as collateral, and can be sold by the broker if the margin purchase ends up being a loss.

TL;DR: Unless you’re a well-studied day trader, buying on margin probably isn’t for you and you should not worry about hypothecation in your investment portfolio. But you’ll want to know it can happen in investing, too.

Recommended: What Is Margin Trading?

Hypothecation in Real Estate

A mortgage is a classic example of a hypothecation loan: The lending institution foots the six-digit (or seven-digit) cost of the home upfront, but retains the right to seize the property if you’re unable to make your mortgage payments.

Hypothecation also occurs with investment property loans. A lender might require additional collateral to lessen the risk of providing a commercial property loan. A borrower might hypothecate their primary home, another piece of property, a boat, a car, or even stocks to secure the loan.

A promissory note details the terms of the arrangement.

Recommended: 31 Ways to Save for a Home

Is Hypothecation in a Mortgage Worth It?

Given the size of most home loans and the risk of losing the home, you may wonder if taking out a mortgage is worth it at all.

Even though any kind of loan involves going into debt and taking on some level of risk, homeownership is still usually seen as a positive financial move. That’s because much of the money you pay into your mortgage each month ends up back in your own pocket in some capacity…as opposed to your landlord’s bank account.

As you pay off a mortgage, you’re slowly building equity in your home. Homes have historically tended to increase in value.

More broadly, homeownership can help build generational wealth in your family.

A Note on Rehypothecation

There is such a thing as rehypothecation, which is what happens when the collateral you offer is in turn offered by the lender in its own negotiations.

But this, as anyone who lived through the 2008 housing crisis knows, can have dire consequences. Remember The Big Short? Rehypothecation was part of the reason the housing market became so fragile and eventually fell apart. It is practiced much less frequently these days.

The Takeaway

Hypothecation simply means that collateral, like a house or a car, is pledged to secure a loan. Mortgages are a classic example of hypothecation, and hypothecation is the reason most of us are able to qualify for such a large loan.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOHL-Q424-124

If the kitchen is the heart of the home, what does it say when yours is falling apart? Shabby fixtures, failing appliances, or a dysfunctional layout might have you daydreaming about a full gut reno — but how much does an average kitchen remodel cost? A minor kitchen update by DIY-savvy homeowners may come in around $7,000, while a major remodel can balloon to $50,000, or even $100,000+.

Before you begin your kitchen update, it helps to consider why you’re remodeling and whether it will add value to your home. We’ll help you scope out the average cost of a kitchen remodel — including cabinetry, countertops, and labor — and where you can save money without sacrificing function or design.

Factors Affecting Kitchen Remodel Costs

Before you start a kitchen remodel, it’s important to consider what you want to get out of it and what your return on investment (ROI) might be. You’ll also want to understand what factors can impact your costs so you know just how far your kitchen remodeling budget can go. Here are some factors to keep in mind:

Size of the Kitchen

The more square footage you’re remodeling, the more expensive the project tends to be. After all, you’re not only buying more materials (think cabinets, flooring, or tile), you’re also paying more in labor costs to have everything installed.

Scope of the Remodel

Generally speaking, the more extensive the work, the higher the price tag. For example, knocking down walls will set you back anywhere from $1,000 to $10,000. Want to relocate your sink? Expect to pay between $500 to $1,000. Compare that to the cost of smaller jobs, like replacing cabinet pulls (around $300) or adding new kitchen lighting ($100-$200 per fixture).

You may be interested in this story on the difference between a renovation vs. remodel.

Quality of Materials and Finishes

The average kitchen remodel cost can vary a lot depending on a few key items: cabinetry, countertops, and appliances. And the quality and type of materials of those items can have a significant impact on how much you’ll pay.

Take, for example, the cost of countertops, which is determined by the material. Typical materials include granite, marble, quartz, stainless steel, and butcher block wood. Granite, stainless steel, and butcher block are good budget options, ranging from $850 to $6,750 depending on the size of your kitchen. Marble and quartz command $1,500-$10,000.

Level of Customization

The more complex the design — and the more customized features you include — the more you’re likely to pay for a kitchen remodel. Consider cabinetry, which typically eats up 25% of a kitchen budget. There are three types of kitchen cabinet construction, each priced per linear foot:

•   Stock cabinets, the least expensive, run $100-$300 per linear foot.

•   Semi-custom are $100-$650 per linear foot.

•   Custom will set you back $500-$1,200 per linear foot.

Custom cabinets are made to order, based on your kitchen’s precise measurements, and are made of solid wood. Stock are ready-made and mostly constructed of engineered wood, and semi-custom are a hybrid of stock and custom.

Installation and Labor Costs

Labor is a major cost that can be hard to predict. But count on spending 20%-35% of your budget on contractors and installers. Your price will depend on where you live, how large your space is, and the features being installed.

Regional Variations in Kitchen Remodel Costs

Bargain hunters should be aware that some factors influencing budget are not within their control — like where in the U.S. you live. Homeowners on the West Coast generally pay more for materials and labor than in the South. Prices also tend to run higher in and around major cities. There are several reasons for this, including the cost of shipping materials to your area, local permits and fees, and your cost of living.

Notice how the overall costs vary by region, according to 2024 data from the home services website Angi.

Budgeting for Your Remodel

Deciding what your new-and-improved kitchen will look like is important, but so is figuring out how to pay for it. Here are some strategies to keep in mind:

Set a Realistic Budget Based on Your Goals

Money.com recommends spending between 10% and 15% of the value of your home on a kitchen remodel to get the best ROI. A major reno for a $400,000 home, then, would cost between $40,000 and $60,000.

Look for Ways to Save

In a full-scale kitchen remodel, new kitchen cabinets are typically the biggest expense, accounting for up to 40% percent of the project budget. If your cabinets are in good shape and fulfill your storage needs, refacing them can slash your bill. Refacing can mean either stripping and repainting or staining existing doors, adding stick-on veneers, or replacing the doors while preserving the cabinet shelves. Add new hardware for a more modern look.

You may also be able to trim some costs by doing simple things yourself: picking up items instead of paying for delivery, painting walls instead of paying contractors for the labor, or replacing your own backsplash.

Understand the Potential Return on Investment

The truth is you probably won’t recoup the total cost of a kitchen remodel in a home sale. According to Remodeling Magazine’s 2024 Cost vs. Value Report, the national average ROI for a minor remodel with mid-range materials is 96%. A major remodel with upscale materials, on the other hand, yields just a 38% ROI.

Clearly, the best bang for your buck will be less costly but visually impactful minor updates: replacing cabinets fronts, countertops, faucets, and lights, plus painting and perhaps new flooring. But if you want to change the layout or add all new appliances, you’re looking at five figures. More on that in a minute.

Consider a Loan to Help Cover Costs

It can be tempting to throw all your kitchen purchases on a credit card, but keep in mind that high-interest rates can inflate your renovation costs. These days, many homeowners are turning to a flexible personal loan to fund home renovations and remodels.

With home improvement loans, you receive a lump sum payment to cover your kitchen remodel cost. You can pay back the loan over a term of your choosing in equal monthly installments. The interest rate is determined by your credit history and credit score, but is typically lower than credit card interest.

Our Home Improvement Cost Calculator can give you an idea of how much you’ll need to borrow.

Maximize Value and ROI in Your Kitchen Remodels

Want to get the most bang for kitchen remodel buck? Here are a few places to start:

•   Choose durable, timeless design elements. Trends come and go, so to get the most mileage out of your remodel, stick with upgrades that can stand the test of time (and appeal to future buyers). If your budget allows, select a durable, classic countertop material like granite or marble, and opt for a neutral color palette and go-with-anything fixtures and handles.

•   Optimize layout and functionality. The kitchen isn’t just a natural gathering spot — it’s also a place for work. Whether it’s prepping meals or cleaning up afterward, a functional space is key. As your remodeling vision starts to take shape, be sure above all it enhances the workflow and offers you plenty of countertop and storage space.

•   Select energy-efficient appliances and fixtures. Sure, energy-efficient appliances and lighting use less energy and can lower utility bills. But they also have the added bonus of attracting potential eco-conscious buyers.

Choosing the Right Kitchen Remodeling Contractor

When you’re starting the home remodel process, it’s important to find a contractor you can trust. That means doing your research, speaking with and getting quotes from multiple contractors, and reaching out to their previous clients for referrals. You’ll also want to check licenses and certifications.

It’s also a good idea to request detailed project proposals and cost estimates to avoid any surprises. And when entertaining bids, remember that an experienced, in-demand contractor will likely charge more than less capable competitors, but will almost certainly be worth it.

Popular Kitchen Remodel Ideas

The Internet can be your best friend if you want to spruce up your kitchen but have no idea what to tackle first. As you’re browsing, keep an eye out for projects that will improve the functionality of the space and increase the value of your home.

Updating cabinets and countertops, for instance, can give your space a whole new look and provide more room for meal prep. Both upgrades also tend to deliver a high ROI.

Adding more functional storage solutions can make cooking more enjoyable and also make your home more attractive to potential buyers down the line. Similarly, adding or improving the lighting in your kitchen — or freshening up the fixtures — can also breathe new life into your space.

The Takeaway

The average kitchen remodel cost can vary widely from $7,000 to $50,000 or more, though you can get a fair return on your investment by spending between 6% and 10% of your home’s value. Your cost will depend on a number of factors such as kitchen size and whether you choose bargain, mid-range, or high-end materials and appliances. The major kitchen remodel cost drivers are cabinets, countertops, appliances, and labor. The good news is that the ROI for a smart, mid-range remodel is 96%.

When you’re ready to take the next step, there are various ways to finance the remodel, including a personal loan. Your credit history and credit score will help determine your interest rate, but it will likely be lower than the interest you’d pay on a credit card.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is a realistic budget for a kitchen remodel?

When setting your budget for a kitchen remodel, a good rule of thumb is to plan to spend between 6% and 10% of your home’s value.

Is $10,000 enough for a kitchen remodel?

On average, a kitchen remodel can cost as little as $7,000 or as much as $50,000 or more. With a budget of $10,000, you’ll likely have enough to cover a cosmetic refresh or even a more substantial upgrade for a small kitchen.

Is $30,000 enough for a kitchen remodel?

Depending on the size of your kitchen and the work you want to do, a budget of $30,000 should easily cover a mid-range remodel.

What is the most expensive part of a kitchen remodel?

Generally speaking, the most expensive line item in a kitchen remodel is the cabinets. Stock cabinets are the least-expensive option, typically running around $100-$300 per linear foot. Custom cabinets are the most-expensive option and cost around $500-$1,200 per linear foot.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q424-058

Looking to get into a home but can’t qualify for a traditional mortgage? You may want to look at owner financing.

Owner-financed homes aren’t very common, but they have some benefits for unique buyer and seller situations. Owner financing bypasses a traditional mortgage when the seller takes on the role of lender, but seller financing comes with some risks.

Let’s take a deep dive into how owner financing works and when it could make sense.

What Is Owner Financing?

Owner financing, also known as seller financing, is a transaction in which the property owner takes on the role of lender by financing the sale to the buyer. Like the trading of homes, this type of transaction bypasses traditional mortgages (unless the purchase of the home is only partially owner-financed.)

The payments for buyers are typically amortized over 30 years for a smaller monthly payment, but there’s often a large balloon payment at the end of a shorter period of time (usually one to seven years). Owner-financed transactions operate on the belief that the buyer’s finances may improve over time or the property will appreciate to a point where the buyer can get a home loan from a traditional lender.

Note: SoFi does not offer owner financing at this time. However, SoFi does offer conventional mortgage loan options.

How Does Owner Financing Work?

Owner-financed homes work much like traditionally financed homes, but with the seller acting as the lender. The seller may (or may not) require a credit check, loan application, a down payment, an appraisal of the home, and the right to foreclose should the buyer default. Buyers and sellers will need to agree on an interest rate and length of loan.

The buyer and seller sign a promissory note, which contains the loan terms. They also record a mortgage (or deed of trust), and the buyer pays the seller. The buyer should also pay for homeowner’s insurance, taxes, title insurance, and other loan costs. It is typical to hire real estate professionals or lawyers to get more into the details of how to use a home contract in owner financing.

Pros and Cons of Owner Financing

For Sellers

Owner financing isn’t nearly as beneficial for sellers as it is for buyers, but there are still some upsides to consider along with the increased debt load and assumed risk.

For Buyers

There are advantages to buying a house for sale by owner, namely that a buyer can obtain housing sooner under owner financing. A buyer may also be able to lower the down payment needed and pay lower closing costs. But it’s also riskier than borrowing from a traditional mortgage lender. If, for example, buyers are unable to finance the balloon payment, they risk losing all the money they’ve spent during the loan term.

To reduce risk exposure in an owner-financed transaction, buyers may want to hire an attorney.

Example of Owner Financing

Bob and Vila want to purchase a large, forever home for their family. The purchase price of the home is $965,000, but Bob and Vila can only qualify for $815,000. Part of Bob’s income is from recent self-employment, which is not accounted for by the lender but will help the couple be able to afford the house.

For the remaining $150,000, the seller offers owner financing as a junior mortgage. The buyers will pay both a traditional mortgage lender as well as the seller in this type of owner financing.

Recommended: How Much Home Can I Afford?

Types of Owner Financing

Land contracts, mortgages, and lease-purchase agreements are a few ways to look at owner financing. Here’s how they work and how they’re different from a traditional mortgage.

Land Contracts

Because the title cannot pass to the buyer in owner financing, a land contract creates a shared title for the buyer and seller until the buyer makes the final payment to the seller. The seller maintains the legal title, but the buyer gains an interest in the property.

Mortgages

These are the different ways to structure a mortgage with owner financing.

•   All-inclusive mortgage. The seller carries the promissory note and the balance for the home purchase.

•   Junior mortgage. When a buyer is unable to finance the entire purchase with a lender on one mortgage, the seller carries a junior mortgage (or second mortgage) for the buyer. The seller is put in second position if the buyer defaults, so there is risk to the seller by doing a second mortgage.

•   Assumable mortgage. Some FHA, VA, and conventional adjustable-rate mortgages are assumable, meaning the buyer is able to take the seller’s place on the mortgage.

A mortgage calculator can help you get an idea of what purchase price you may be able to afford.

Lease-Purchase

In a lease-purchase arrangement, both parties agree on a purchase price. The potential buyer leases from the owner for an amount of time, usually one to three years, until a set date, when the renter has the option to purchase the property. In addition to paying rent, the tenant pays an additional fee, known as the rent premium.

It’s typical to see options that credit a percentage of the purchase price (often between 1% and 5%), rents, and rent premiums toward the purchase price. If the option to buy is not used, the buyer will lose the option fee and rent premiums.

They are also known as rent-to-own, lease-to-own, or lease with an option to purchase. They can be used when an aspiring buyer has a lower credit score and needs some time to qualify for traditional financing.

Steps to Structuring a Seller Financing Deal

If you’re thinking about finding a property with owner financing, consider taking these steps to help get you through the process.

1.    Hire a professional. Because owner financing bypasses traditional lending institutions, there’s a lot more risk involved. Hiring a real estate professional and an attorney can help you structure the deal to protect your interests.

2.    Find a property where the owner offers financing. An owner must be willing and able to offer seller financing to make this type of transaction happen. It’s difficult, which is why owner financing is more common between parties that know each other very well. It’s usually required that the property is owned free and clear of any mortgage. A few other ways to look for seller-financed properties:

◦   Asking your current landlord if they’re open to selling their property to you.

◦   Looking for real estate listings with phrases like “seller financing available.”

◦   Contacting the real estate agent for a home you’re interested in. If the home has been on the market a while and the conditions are right, the sellers may be open to this option.

◦   Finding a personal connection who is able to offer owner financing.

3.    Agree to terms. Because seller financing terms are so flexible, there are a lot of details that buyers and sellers need to work out, including:

◦   Sales price

◦   Amount of down payment

◦   Length of the loan

◦   Balloon payment amount

◦   Interest rate

◦   Structure of the contract (land contract, mortgage, or lease-purchase, as described above)

◦   Any late fees, prepayment penalties, and other costs the buyer is responsible for

4.    Complete due diligence. Buyers and sellers would be wise to do their due diligence as if it were a regular purchase. Sellers may want to examine a buyer’s credit, complete a background check, and confirm that buyers have obtained homeowner’s insurance and title insurance to move forward with the transaction. On the buyer’s end, a home inspection and appraisal may be warranted.

5.    Sign and file paperwork. Much like a real estate transaction, the contracts involved in owner financing arrangements can be pretty involved. Depending on how your financing is structured, you may have a promissory note, owner financing contract and addendums, and title paperwork. You’ll also want to be sure your promissory note and deed of trust are filed with the county recorder’s office. An attorney, if you hired one, should be able to complete this process for you.

Alternatives to Owner Financing

Traditional mortgage financing may work better for your individual situation.

•   FHA loans. FHA loans have a low down payment requirement and low closing costs and may be approved for homebuyers with lower credit scores. They are underwritten by the Federal Housing Administration. Even if you’ve had a bankruptcy, you may be able to get an FHA loan.

•   USDA loans. USDA loans are backed by the U.S. Department of Agriculture. Income must meet certain guidelines (as determined by geographic region), and the home purchased must be in an eligible rural area.

•   VA loans. Loans guaranteed by the Department of Veteran Affairs are geared toward eligible military members, veterans, National Guard and Reserve members and spouses. The favorable terms include a low down payment (or no down payment), lower closing costs, low interest rate, and the ability to use the VA for a home loan multiple times.

•   Conventional loans. A conventional loan simply means the financing is not insured by the federal government as it is with FHA, VA, or USDA loans. Fannie Mae and Freddie Mac provide the backing for conforming loans: those that have maximum loan amounts that are set by the government.

It’s a good idea to not take interest rates at face value but to compare APRs instead. The annual percentage rate represents the interest rate and loan fees, so even if, for instance, an FHA loan looks better than a conventional mortgage, based on just the rates, an APR comparison may tell a different story. A help center for mortgages can be a great resource for learning more about the mortgage and homebuying process.

Recommended: 18 Mortgage Questions for Your Lender

The Takeaway

With owner financing, the seller is the lender. Both buyers and sellers face upsides and downsides when the transaction involves owner-financed homes.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Why would an owner offer financing?

Owner financing broadens the pool of potential homebuyers, which might appeal to some homeowners. They may also appreciate having the opportunity to earn interest paid by the homebuyer.

What risks does owner financing have for buyer?

There are fewer consumer protections available to buyers who get owner financing, which is why it is recommended that buyers seek a lawyer’s help in reviewing any agreement. Buyers also risk paying a higher than usual interest rate.

Photo credit: iStock/KTStock

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