There are a few reasons why you may want to consider
a full refinancing of your home to finance your remodeling
project -- even though it will require some significant
paperwork and often quite a few upfront costs. If you've
got a major home improvement project to take on and
have built up significant equity, refinancing and taking
cash out might make sense.
According to George
Hanzimanolis, vice president of the National
Association of Mortgage Brokers, rising interest
rates have made refinancing a less popular option than
in previous years, but there are circumstances that
may make some people good candidates for it. "If
someone has a high interest rate on their home currently,
it may make sense to refinance, rather than get a higher-risk,
higher-rate second mortgage," he says. As with
any mortgage, you may qualify for tax deductions on
your mortgage interest.
can likely get you the lowest interest rate available
and is good for those looking to do substantial
remodeling; also offers tax benefits.
can be complicated and is initially costly.
Title I loan
Title I is a government program that helps make home
improvement loans more affordable for consumers by insuring
lenders against losses on those loans. The improvement
must be light or moderate, and the loan cannot exceed
$25,000 on single-family residences. (Other limits apply
to different structures.) Title I allows lenders to
provide funding to homeowners who have minimal or no
equity in their homes -- that is, an owner's total loans
would exceed the value of the house. Upfront costs usually
amount to 1 percent of the loan. The Department of Housing
and Urban Development offers online
help in finding a lender for Title I loans.
A Title I loan is a good option for those with little
or no equity in their homes.
remodeling must fit certain requirements.
401(k) or IRA loan
If you've got money in a 401(k) or a traditional
IRA, it may be tempting to raid the account to help
finance those home improvements. But, unless you're
old enough to take distribution (59½), try to
make sure you've exhausted all of your other options
Most employers will
allow employees to take out loans from their 401(k)
programs, but not all, so you'll need to check to make
sure it's an option for you.
In some ways, borrowing
seems like a good deal: Because you're borrowing money
from yourself and paying the principal and interest
back to yourself, you benefit, right? Not really. First
of all, if you don't pay the money back within a specified
period of time, you'll be hit with a 10-percent penalty.
And if you leave the job that's providing the 401(k),
you'll need to pay back the loan immediately or face
penalties. You're also losing out on the money you'd
otherwise be earning if it were in the account.
Borrowing from your
IRA is possible but almost always inadvisable. The money
you take out is all taxable, and, if you're less than
59½ years old, you'll be hit with a 10-percent
penalty. Not only that, but you could be cheating yourself
of thousands of dollars in retirement funds. If you've
got a Roth IRA, you can borrow from it without penalty
(assuming that you've held it for a specified amount
of time), but retirement drawbacks still make this an
from a 401(k) or IRA is an option if no other options
Cons: Borrowing from a
401(k) or IRA can have possible tax consequences and
long-term losses in retirement funds.