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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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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.

Pros: Refinancing can likely get you the lowest interest rate available and is good for those looking to do substantial remodeling; also offers tax benefits.
Cons: Refinancing 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.

Pros: A Title I loan is a good option for those with little or no equity in their homes.
Cons: Your 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 first.

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 inadvisable choice.

Pros: Borrowing from a 401(k) or IRA is an option if no other options are available.
Cons: Borrowing from a 401(k) or IRA can have possible tax consequences and long-term losses in retirement funds.

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