By ERIN PETERSON
bankrate.com
21-JUL-06
While it's fun to imagine how you'll use a new space in your home (a new master bathroom, a renovated kitchen or a spacious home office), figuring out how to pay for it is another matter entirely. Understanding the details of your financing options can help you make a decision that's as good for your pocketbook as the renovation is for your house.
Major credit cards
If you have a smaller project (or a great introductory offer, like zero-percent interest for a year), credit cards can be a good option. With some cards, you may earn rewards or cash back valued at a few percentage points of the total amount that you spend.
Scott Bilker, founder of Debtsmart.com, says it's important to be disciplined if you choose to pay by credit card. "The trick," he says, "is to get as much money back (in rewards or cash) as you can, and then have backup financing available."
Pros: No paperwork needed for established credit lines; also, there is a possibility of cash back or other rewards.
Cons: There is a possibility of high interest rates; variable rates mean you could pay more over time. You may or may not have limits that allow you to put the full amount of your improvements on the card.
Store credit cards
Cards from home improvement stores such as The Home Depot and Lowe's can be a good option if you know you can pay off the balance fairly quickly. Many cards provide an introductory offer with no interest for a set period of time (generally six months to a year on total purchases of $300 or more), while others will provide periodic specials on a range of products.
Pros: These cards offer the same pros as major cards and occasionally offer specific bargains for home improvement buys.
Cons: Cards can only be used at a single chain of stores.
Home equity line of credit
A HELOC, or home equity line of credit, is a bit like a credit card. It's also an increasingly popular option for homeowners. The main difference is that the line of credit is secured with your home.
The rates are variable and will typically be higher than the rates you could get on a second mortgage _ though likely lower than those of credit cards. Often, a HELOC will start with a favorable rate and adjust upward.
HELOC generally doesn't require as much paperwork as a full refinance or a second mortgage. If you already have a relationship with the bank offering the line of credit, the bank may waive any fees associated with opening it.
Another potential benefit comes on April 15. In most cases, you can take a tax deduction on the interest you've paid.
Finally, a HELOC may be a good option if you're considering doing your remodeling in stages. "You only pay interest on the amounts you borrow on the HELOC," says Matt Coffin, founder and president of LowerMyBills.com. You can also use it again and again, borrowing money, paying it off and borrowing again.
Pros: HELOCs may have lower interest rates than credit cards and offer tax benefits.
Cons: Collateral is required in order to sign up; variable rates can climb.
Home equity loan
A home equity loan is a second mortgage _ it offers a fixed rate, like a traditional 30-year mortgage. The rate you'll be offered is typically higher than it would be for a first mortgage or refinance. On the other hand, there usually isn't nearly the amount of paperwork involved as there is for a full refinance. As with a HELOC, the interest is generally tax-deductible.
Pros: A home equity loan is less complicated than a full refinance, less expensive than a line of credit and can offer tax benefits.
Cons: These loans tend to have higher interest rates than full refinances; you could end up owing more on your house than it's worth.
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The benchmark 30-year fixed-rate mortgage rose 2 basis points to 6.89 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.3 discount and origination points. One year ago, the mortgage index was 5.78 percent; four weeks ago, it was 6.83 percent.
The 15-year fixed-rate mortgage rose 2 basis points to 6.49 percent. The 5/1 adjustable-rate mortgage rose 3 basis points to 6.55 percent.
(E-mail Erin Peterson at editors@bankrate.com.)
(Distributed by Scripps Howard News Service. E-mail Holden Lewis at hlewis@bankrate.com)
