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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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5. Pay from savings if you can manage it
If you have the luxury of a having substantial personal savings account, tapping that nest egg might (or might not) be a good way to cover the cost of your renovations. The deciding factor should be where you are keeping that money and how much interest it earns.

First, Ferrara says, consider the cost of borrowing money.

"Say the cost is 8 percent, and I am able to itemize and deduct the first $100,000," he says. "My net cost, if I am in the 25 percent bracket, is 6 percent. What you need to then look at is, is my cash earning me more than a net 6 percent?" Assuming you have a sufficient emergency fund and enough cash on hand to handle your monthly expenses, Ferrara says paying cash can be a good idea. "But, if you can earn more than 6 percent after tax, investing and then borrowing the money to cover your renovations would be the obvious good thing to do," he says.

The reality of most borrowers is that their cash is not earning 6 percent, says Dan Fritschen, author of "Remodel or Move."

"When it comes down to it, if you can pay out of savings, that is usually the cheapest money you are going to find," Fritschen says. "Borrowing money always costs you something, and if you are only earning 1 percent on your savings account, it doesn't make sense to borrow it at the much higher rate."

6. A hybrid savings-equity loan can be tricky but effective
If your savings are earning a healthy return, Ferrara says, there is a way to let that money continue to work while using it to finance a renovation. He does this by setting his clients up with an investment account earning an interest rate higher than the loan. He then sets up an automatic draft from that investment account to make the loan payments. The savings pays off the loan and has the potential of earning a surplus for the borrower.

"This method sounds neat, but the drawback is that you are subject to the market," Ferrara says. "You have to remember, with any investment you are taking a risk." The danger is a loss on your investment portfolio and a loan that still needs to be paid off. "But I would like to think that over 10 years your gains and losses would average out and you would do OK," Ferrara says.

-- Posted: April 4, 2007
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