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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 big home remodeling plan
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3. Refinance your existing mortgage
Home values in some real estate markets have doubled during the past few years, inspiring homeowners to take on big renovations. Because mortgages are paid over 15, 30 and in some cases 40 years, monthly payments are spread over a much longer period and are thus lower than a shorter-term HELOC or a home equity loan. And since your home is used as collateral, interest rates are typically some of the lowest you can find.

Lower interest rates and lower monthly payments might make a larger project possible, but they also mean you will be paying interest longer and thus the financing will cost you more in the long run. The biggest danger with a refinance is when real estate values fall. If you borrowed against the full value of your home and prices fall in your area, you may end up with a more expensive loan than your home is worth.

Ferrara advises his clients against frivolously refinancing. "I am typically not a fan of pulling equity out of your house unless there is a darn good reason," he says. "Refinancing should not be a way to buy a boat or a big screen TV, but if you remodel and add value to your house, then you are increasing your net worth. People get wealthy by increasing their net worth, not their paycheck."

4. A construction loan can be a short-term fix
If you donít have enough equity in your home to cover a renovation, a construction loan may be a good bridge. With a construction loan, you tell the lender what work you plan to do on the house and they decide how much that might increase the value of their house. Based on that increase, the lender approves the money to get it done. Construction loans are meant as short-term options and only last as long as the work on your home is ongoing. After construction is over, you must refinance with a home equity loan, a HELOC or a new mortgage.

Construction loans offer variable interest rates. If rates go up, so do payments. You, the bank and your contractor agree to a schedule that the bank will use to issue payments, either directly to you or your contractor. Construction loans also offer an added level of protection for homeowners because banks typically require several steps to protect their interests. "A construction loan is a perfectly fine idea and, in fact, if you are doing a major remodel, the good news is the bank will require a release of liens from subcontractors and will protect you from other common traps before they issue the final payment to your builder," Ferrara says.

Because they aren't typically backed by substantial equity, construction loans do carry higher interest rates. On the bright side, some construction loans can automatically convert to a longer-term loan, meaning you only have to pay closing costs once.

-- Posted: April 4, 2007
 
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Home Equity
Compare today's rates
NATIONAL OVERNIGHT AVERAGES
$30K HELOC 4.38%
$50K HELOC 4.11%
$30K Home equity loan 4.98%
Rates may include points
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