Paying for a Home Renovation
Financing options like cash-out refinancing and home equity loans make paying for your dream renovation a reality. A home renovation is a chance to create the home of your dreams out of your current house. However, it may cost quite a bit to create your dream home. If you don’t have the cash to pay for renovations and don’t want to wait years until you’ve saved enough to pay for it, you still have options. You can finance your dream renovation in a variety of ways:

Mortgage refinancing
Got a lot of equity built up in your home? You can use that equity to finance your home renovation project. One way to do that is through cash-out refinancing. In this scenario, you refinance your first mortgage to a higher loan amount. You then cash out the difference and use that money to pay for your projects.

Do you have big structural changes planned for your home renovation? Planning an addition that is going to add a lot of value? The lender may even approve your new loan based on the value of your home after the improvements, giving you more money for the renovations.

Home equity loan
You don’t have to refinance your first mortgage to get money to renovate your kitchen. Instead, you may want to consider a home equity loan. It uses the equity you have built up in your home for a second mortgage. You get the money in one lump sum, good for renovations with a contractor where you have to pay the full amount upon completion. Although a home equity loan typically has higher interest rates than a first mortgage, it also usually has lower closing costs.

Home equity line of credit (HELOC)
A HELOC is another good option for home renovations. A HELOC is a revolving line of credit secured against your home’s value. You can get the money as you need it by using a checkbook or credit card attached to the loan. A HELOC is great for pay-as-you-go projects. Plan to complete the renovation in stages? Then, a HELOC may be your best bet. You make payments only on what you use and sometimes you even have the option of making interest-only payments.

Personal loan or line of credit
Is your project too small to justify using your home’s equity? Maybe a personal loan is the right choice for you. It’s not secured against your home so you’ll have a higher interest rate, but you’ll also have much lower fees. So, if your renovations are just cosmetic improvements to your home, you can avoid tapping into your home equity with a personal loan.

You can also get creative with your credit cards as long as you are disciplined. Find a card with zero interest for the first year, and use this revolving line of credit to pay for your home renovation project. Just be sure it is a small project and that you faithfully make payments in order to pay off the balance within that first year. You don’t want to have too much debt on the credit card. Also, miss one payment and your nice zero percent interest rate may be replaced by an exorbitant rate.

How to Finance a Home Improvement Project
Thinking about a home improvement project? Knowing the needs of your project can help you choose the right type of financing. Need to finance a home improvement project? There are several options available. Knowing the needs of your project can help you make the right financing choice.

Before you choose how to finance your home improvement project, consider just what your renovation entails. Are you just making cosmetic improvements to a dated bathroom? Ripping out wallpaper, painting, and replacing faucets? That isn’t going to require a major loan. However, if the plan is to gut your kitchen and replace everything, it may require some serious money. It’s smart to know how much money your home improvement requires and when you’ll need to make payments before deciding how to finance your renovation.

Here are some of the choices available.

Using home equity
For major renovations, you may need a significant loan. Your home equity is a great resource to for securing financing. If you have built up equity in your home, you can access it in a variety of ways.

• Cash-out refinancing – If you have substantial equity in your home, you can refinance to a mortgage with a higher loan amount. The lender cashes out the difference and pays that equity to you. You can then use that to finance your home improvement project.

• Home equity loan – Another option for using your home equity to finance a home improvement project is through a home equity loan. Instead of refinancing the first mortgage, a home equity loan lets you use your equity for a second mortgage. The money comes in one lump sum. A home equity loan typically has lower closing costs than a first mortgage, but may have a higher interest rate.

• Home equity line of credit – A HELOC is a revolving line of credit secured against your home’s value. If your home improvement project is DIY or a pay-as-you-go project, a HELOC can work for you. You access the money as you need it, usually through a checkbook or credit card attached to the loan.

Using a personal loan or line of credit
For less costly home improvement projects, consider a personal loan or line of credit. It’s not secured against your home, which means a higher interest rate, but it also means you aren’t tapping into your home equity unnecessarily. This type of loan is also not going to help you out with the taxman – it’s not tax deductible whereas the choices above typically are.

Using a credit card
A creative way to finance a renovation is through a credit card. If this renovation is a DIY project, this may be a great option for you. Some home improvement stores offer credit cards with low or zero-interest for a set amount of time. When making the bulk of your purchases, you can sign up for the store’s credit card and use it for the purchases. Many times this qualifies you for an automatic 10 percent off your entire purchase. This option generally makes the most sense when you find an offer of zero-interest for a year and you know you can pay off the balance within the year timeframe. But you must be diligent about making payments – miss one and your lovely zero percent can morph into an outrageous double-digit rate.

Home Equity Loans vs. Line of Credit
Understand the difference and decide which option is best for you. If you’re a homeowner, you can borrow against the value of your house through either a home equity line of credit (often called a HELOC or a line) or a home equity loan (often called a HEL or loan). Both are essentially a second mortgage.

What’s the Difference?
A HELOC is a form of revolving credit similar to a credit card. It allows you to draw funds, up to a predetermined limit, whenever you need money. There is generally a minimum payment due each month, with the option to pay off as much of the line as you want. With a HEL, you receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period. In each case, the amount you can borrow is based on factors such as your income, debts, the value of your home, how much you still owe on your mortgage and your credit history.

Benefits
The appeal of both of these types of loans is their interest rates, which are almost always lower than those of credit cards or conventional bank loans because they are secured against your home. In addition, the interest you pay on a home equity line or loan is often tax deductible (consult a tax advisor about your particular situation).

Which is Best for You?
Generally, a HELOC is a good choice to meet ongoing cash needs, such as college tuition payments or medical bills. A HEL is more suitable when you need money for a specific, one-time purpose, such as buying a car or a major renovation.

Comparing the Costs
Both HELOCs and HELs usually carry a higher interest rate than that of a first mortgage. With a HEL, you may choose either an adjustable rate that fluctuates according to variations in the prime rate, or you may opt for a fixed rate. A fixed rate enables you to budget a set payment monthly without worrying about increasing costs should interest rates rise. With a HEL, there are also closing costs that you should consider.

A HELOC usually carries a lower initial interest rate than a HEL, but its rate fluctuates according to the prime rate, so there is more interest rate risk. Unlike a HEL, where your monthly payments are a set amount, a HELOC enables you to borrow funds as needed and repay as little as interest only each month. In addition, there are generally no closing costs when you open a HELOC.

Keep in mind, your home is the collateral for both a HELOC and a HEL. If a HELOC’s easy access to cash tempts you to run up more debt than you can repay, or if you fail to make your payments, you risk losing your house.