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Home Improvement 2006  

Paying the price

  Once you've attached a price tag to your next project, check out if and how you can afford it.
How to pay for your home improvements
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A HELOC generally doesn't require as much paperwork as a full refinance or a second mortgage. If you already have a relationship with the bank offering the line of credit, the bank may waive any fees associated with opening it.

Another potential benefit comes on April 15. In most cases, you can take a tax deduction on the interest you've paid.

Finally, a HELOC may be a good option if you're considering doing your remodeling in stages. "You only pay interest on the amounts you borrow on the HELOC," says Coffin. "If you don't use the line of credit, you don't have any monthly payments to make." You can also use it again and again, borrowing money, paying it off and borrowing again.

Pros: HELOCs may have lower interest rates than credit cards and offer tax benefits.
Cons: Collateral is required in order to sign up; variable rates can climb.

Home equity loan
A home equity loan is a second mortgage -- it offers a fixed rate, just like a traditional 30-year mortgage. Because it's a slightly riskier proposition for a bank, the rate you'll be offered is typically higher than it would be for a first mortgage or refinance.

On the other hand, there usually isn't nearly the amount of paperwork involved as there is for a full refinance.

"There's a lot less documentation for a second mortgage," says Lance Melber, president of Capital One Home Loans. "Often, homeowners can get approved the same day, and an appraisal can (frequently) be done online." Like a refinance and a home equity line of credit, you may be able to take a tax deduction on the interest.

A home equity loan also may be appropriate if you want a fixed rate but have a great interest rate on the first mortgage. With this type of loan, you can continue to pay off your first mortgage at the low rate and just tack on a second payment.

Another benefit -- but occasionally a drawback -- is the opportunity to borrow more than the value of your home. If you plan to stay in your home for several years after you borrow the money, or expect that the improvements will significantly increase the value of your home before you sell it, this can work in your favor. However, sell too quickly afterward on an improvement that doesn't have a great return on investment, and you could end up owing more than your house is worth.

Pros: A home equity loan is less complicated than a full refinance, less expensive than a line of credit and can offer tax benefits.
Cons: These loans tend to have a higher interest rates than full refinances; you could end up owing more on your house than it's worth.

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