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Home Improvement 2006  

Paying the price

  Once you've attached a price tag to your next project, check out if and how you can afford it.
How to pay for your home improvements

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. If you already have credit cards with high limits, you won't have to go through the sometimes lengthy application process required by some loans or other forms of credit.

The downside of this option, though, can be significant. If you can't pay the cards back in a timely fashion, you'll have to pay interest that will likely be far more than the perks you earned from the outset. And because rates are variable, you may end up being hit with even higher monthly payments than you planned.

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 like 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.

Like traditional credit cards, you want to make sure you can pay off the balance in a timely manner to avoid high interest payments. Watch out for expiring introductory offers -- if you don't pay off the balance in full by the time the offer ends, you'll generally be hit with all of the back interest, as though you never got the offer at all.

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, according to Matt Coffin, founder and president of LowerMyBills.com. The main difference is that the line of credit is secured with your home. In other words, if you don't pay on time, there's a chance that you may lose 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 very favorable rate and adjust upward.

-- Posted: April 12, 2006
 
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