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Dr. Don Taylor, CFA, Bankrate.com advice columnistUsing zero percent card for home remodeling

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

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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."

Bankrate.com's corrections policy -- Posted: June 26, 2006
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