cash for your remodeling plan
7. No equity? Time for a personal loan or line of credit
If you don't have enough equity in your home
but have good or excellent credit, taking
a personal loan or line of credit may be the
way to go. They typically carry higher interest
rates, but if the proceeds pay for home improvements
that increase the value of your home, it's
possible to get an appraisal after the work
and refinance the loan at a lower interest
The drawback is that you would
have to pay closing costs on both loans, driving
up your costs. There's also the risk that
the housing market can't support a higher
appraisal, making it harder to refinance.
On the bright side, if you are careful with
your record keeping, you might be able to
deduct the interest from a personal loan following
the same guidelines as a home equity loan
or HELOC. "The only thing there is that
you need to demonstrate that it was used to
remodel and would have to keep good records
to prove it was," Ferrara says.
8. Do's and don'ts of credit-card financing
Financing a renovation with plastic can have
advantages and serious risks. On the positive
side, many credit cards offer airline miles,
cash back or other incentives for charging
up large sums. If you are looking at tens
of thousands of dollars, a 1-percent cash-back
offer could mean hundreds of dollars rebated
to you just for swiping your card.
If you want to use credit cards to take advantage of
a teaser rate or a points program, one less
risky way would be to apply for a HELOC before
charging up a large balance. That way you
don't have the high credit balance pulling
down your credit score when you are applying.
This method is risky, though, because if you
are so much as an hour late on your payment,
the bank could charge you interest retroactively
for the entire term, wiping out whatever benefits
you were able to eke out.
The serious drawback comes
when you fail to repay the entire balance
at the end of the grace period. While getting
a $100 rebate check is nice, annual interest
rates of 18 percent or higher quickly eliminate
any headway your cash-back offer might give.
"I don't think there is
any problem with paying through a credit card,
as long as you pay it off at the end of the
month," Ferrara says. "But that
should not be the long-term financing vehicle
that you use. Credit card money is very expensive.
You are typically much better off getting
a home equity line if you are looking for
a way to carry a balance."