 Using
zero percent card for home remodeling
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 Dear
Dr. Don,
Here is a new twist on a home improvement/financing
question. I would very much appreciate your opinion. My wife and
I plan to build a $150,000 addition to our home, bringing the value
to about $600,000. Our current 15-year fixed mortgage balance is
$217,000 at 4.625 percent. We do not want to touch that, as we feel
it is at a great rate.
My question is how to best finance the addition. We
could take an equity loan for the full amount or pay some portion
from savings. Exclusive of retirement funds, our savings/investments
are about $160,000. We have little other debt, and are in our mid
40s.
Now for the twist: I have been offered a credit card
with zero percent for 15 months. Believe it or not they have approved
us for a $100,000 credit limit (we used to own a business, and would
purchase inventory -- paid off each month)
It seems a no-brainer to take the zero percent for
1¼ years, and then at that point take an equity loan/pay
cash, etc. But it also seems insane to carry a credit card balance
of $100,000 or more. What are the pitfalls, besides the obvious
of monthly cash flow or somehow "forgetting" to pay and
ending up with some ludicrous default interest rate? Would you recommend
an approach like this? Thank you.
-- Matt Munificence
 Dear
Matt,
The big risks are those you mention at the end of your letter. One
late payment on any loan can trigger your zero percent arrangement
to blow up. It's a little unusual to see a zero percent offer as
a line of credit versus a balance-transfer offer. It's possible
that the lender's rationale comes from your past payment history
on your inventory purchases.
A Bankrate feature, "Proceed
with caution on balance-transfer 'deals'," talks about
the potential pitfalls and rewards of below-market and zero-percent
interest rate offers.
A consumer with a unique credit history like yours can take advantage
of how the lender evaluates your credit history and get a free ride
-- in this case for up to 15 months. The risk is that something
blows up in your credit report and you lose access to mortgage money
to pay off the loan. Since you're holding some cash in investments
that could get you out of this predicament, there's not that much
risk.
You're right to leave well enough alone on the first mortgage.
That's a great rate that you can't replicate in today's market.
The decision on whether to use cash or a home equity loan/line for
the remainder of the remodeling budget will depend on your income
and credit history.
Maxing out a $100,000 line of credit will affect your
credit score and credit capacity. The line of credit on the credit
card is unsecured, while the home equity loan or line is secured
by the equity in your home, which is a comfort to the mortgage lender,
but might not be enough to get them to commit to a $50,000 home
equity loan or line.
Bottom line: It's worth pursuing this further with
the credit card company.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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