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Home Improvement Guide 2007
On the money
Whether it's a fresh coat of paint or a total home renovation, sooner or later it comes down to paying for it.
On the money
Finding cash for your remodeling plan
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1. Take out a home equity loan
Also known as a second mortgage, home equity loans are made against the value of your home. The bank uses the equity in your home as collateral and puts a lien on your home. Interest rates, normally fixed, are often higher than on a first mortgage. Fees and closing costs are relatively high, too, although they are lower than with a refinanced mortgage. Fees and closing costs, too, are relatively high compared with other options.

One drawback is an 80 percent loan-to-value ratio. If your house is worth $250,000 and you owe $190,000 on your first mortgage, you could borrow just $10,000 before hitting that cap. If you want to make $40,000 in upgrades, you would have to go with either a higher-interest loan or look for another option. The interest you pay on the first $100,000 of your home equity loan may be tax-deductible. (To be tax-deductible, the IRS says you need to use the money exclusively to pay for home improvements, and you must itemize.)

Home equity loans work best for amounts you consider medium to large and that require more than 10 years to pay back. They also typically don't carry a prepayment penalty, so if you get a bonus or other windfall, you usually can pay it back early.

2. Consider a home equity line of credit
A home equity line of credit, or HELOC, is a cross between a home equity loan and a credit card. In fact, many banks give you a credit card which you then use to access the money in your equity line. Like a home equity loan, the interest on the first $100,000 you borrow may be tax-deductible.

The bank sets a "draw" period during which you can take money from the line, usually between five and 10 years, and another span during which you must repay, typically 10 to 15 years. HELOCs allow you to repay your loan and then borrow again as you need it during the draw period. The bank only charges closing costs once, upon opening the line. During your draw period you pay back only accrued interest. After the draw period ends, you must repay both principal and interest. The primary drawback of a HELOC is that the borrower is at the mercy of interest rate movements. When rates go up, so do the monthly payments. The option to pay interest only, though, may tempt some borrowers to take risks, says Ferrara.

A HELOC makes sense for short- to midterm loans and especially when you need to withdraw money over a span of many months. They also make sense if you believe interest rates will fall over the next year or two.

-- Posted: April 4, 2007
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Home Equity
Compare today's rates
$30K HELOC 4.59%
$50K HELOC 4.09%
$30K Home equity loan 4.87%
Rates may include points
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