How to pay for your home improvements
While it's fun to imagine how you'll use a new space in your home (a new master bathroom, a renovated kitchen or a spacious home office) figuring out how to pay for it is another matter entirely. Understanding the details of your financing options can help you make a decision that's as good for your pocketbook as the renovation is for your house.
Major credit cardsIf you have a smaller project (or a great introductory offer, like zero-percent interest for a year) credit cards can be a good option. With some cards, you may earn rewards or cash back valued at a few percentage points of the total amount that you spend. If you already have credit cards with high limits, you won't have to go through the sometimes lengthy application process required by some loans or other forms of credit.
The downside of this option, though, can be significant. If you can't pay the cards back in a timely fashion, you'll have to pay interest that will likely be far more than the perks you earned from the outset. And because rates are variable, you may end up being hit with even higher monthly payments than you planned.
Scott Bilker, founder of Debtsmart.com, says it's important to be disciplined if you choose to pay by credit card. "The trick," he says, "is to get as much money back (in rewards or cash) as you can, and then have backup financing available."
Pros: No paperwork needed for established credit lines; also, there is a possibility of cash back or other rewards. Cons: There is a possibility of high interest rates; variable rates mean you could pay more over time. You may or may not have limits that allow you to put the full amount of your improvements on the card.
Store credit cardsCards from home improvement stores like The Home Depot and Lowe's can be a good option if you know you can pay off the balance fairly quickly. Many cards provide an introductory offer with no interest for a set period of time (generally six months to a year on total purchases of $300 or more), while others will provide periodic specials on a range of products.
Like traditional credit cards, you want to make sure you can pay off the balance in a timely manner to avoid high interest payments. Watch out for expiring introductory offers -- if you don't pay off the balance in full by the time the offer ends, you'll generally be hit with all of the back interest, as though you never got the offer at all.
Pros: These cards offer the same pros as major cards and occasionally offer specific bargains for home improvement buys. Cons: Cards can only be used at a single chain of stores.
Home equity line of creditA HELOC, or home equity line of credit, is a bit like a credit card. It's also an increasingly popular option for homeowners, according to Matt Coffin, founder and president of LowerMyBills.com. The main difference is that the line of credit is secured with your home. In other words, if you don't pay on time, there's a chance that you may lose your home.
The rates are variable and will typically be higher than the rates you could get on a second mortgage -- though likely lower than those of credit cards. Often, a HELOC will start with a very favorable rate and adjust upward.
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 loanA 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.
RefinancingThere 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 loanTitle 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 loanIf 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.
Life insurance borrowingIf you've got a cash-value life insurance policy, one of its benefits is your ability to borrow up to the policy's cash value (but not the earnings). Not only that, but there's no set repayment schedule or even a required monthly payment.
That said, there are drawbacks. You're not actually borrowing from yourself, you're borrowing from the insurer; the cash value serves as collateral (an important technicality). Your loan balance could end up growing faster than the cash value of the policy if you don't pay it back. Even worse, if the amount that you owe exceeds the cash value, you'll get a bill to pay the difference, and you may face tax consequences.
Like borrowing from your retirement, this is an option you should exercise as a last resort, not your first.
Pros: There is no set repayment schedule; you can borrow up to the cash value of the policy. Cons: There are possible tax consequences, and your payments could eat into the collateral.
Private loansPrivate loans can be had from any number of sources, including the contractors who do your improvements or even the stores from which you bought the supplies to do it yourself. These unsecured loans often have higher interest rates and fees, but it's also often fast and simple to get approved. You won't be able to deduct any of the interest from the loan on your taxes, as you can with a variety of home loans and lines of credit. Pros: Private loans boast fast approval times. Cons: These loans have higher interest rates and fees.
Financing your remodeling project Upfront costs Approval process, etc. Collateral required Tax benefits Tax consequences Payment terms
Major credit cardsIf you have a smaller project (or a great introductory offer, like zero-percent interest for a year) credit cards can be a good option. With some cards, you may earn rewards or cash back valued at a few percentage points of the total amount that you spend. If you already have credit cards with high limits, you won't have to go through the sometimes lengthy application process required by some loans or other forms of credit.
The downside of this option, though, can be significant. If you can't pay the cards back in a timely fashion, you'll have to pay interest that will likely be far more than the perks you earned from the outset. And because rates are variable, you may end up being hit with even higher monthly payments than you planned.
Scott Bilker, founder of Debtsmart.com, says it's important to be disciplined if you choose to pay by credit card. "The trick," he says, "is to get as much money back (in rewards or cash) as you can, and then have backup financing available."
Pros: No paperwork needed for established credit lines; also, there is a possibility of cash back or other rewards. Cons: There is a possibility of high interest rates; variable rates mean you could pay more over time. You may or may not have limits that allow you to put the full amount of your improvements on the card.
Store credit cardsCards from home improvement stores like The Home Depot and Lowe's can be a good option if you know you can pay off the balance fairly quickly. Many cards provide an introductory offer with no interest for a set period of time (generally six months to a year on total purchases of $300 or more), while others will provide periodic specials on a range of products.
Like traditional credit cards, you want to make sure you can pay off the balance in a timely manner to avoid high interest payments. Watch out for expiring introductory offers -- if you don't pay off the balance in full by the time the offer ends, you'll generally be hit with all of the back interest, as though you never got the offer at all.
Pros: These cards offer the same pros as major cards and occasionally offer specific bargains for home improvement buys. Cons: Cards can only be used at a single chain of stores.
Home equity line of creditA HELOC, or home equity line of credit, is a bit like a credit card. It's also an increasingly popular option for homeowners, according to Matt Coffin, founder and president of LowerMyBills.com. The main difference is that the line of credit is secured with your home. In other words, if you don't pay on time, there's a chance that you may lose your home.
The rates are variable and will typically be higher than the rates you could get on a second mortgage -- though likely lower than those of credit cards. Often, a HELOC will start with a very favorable rate and adjust upward.
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 loanA 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.
RefinancingThere 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 loanTitle 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 loanIf 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.
Life insurance borrowingIf you've got a cash-value life insurance policy, one of its benefits is your ability to borrow up to the policy's cash value (but not the earnings). Not only that, but there's no set repayment schedule or even a required monthly payment.
That said, there are drawbacks. You're not actually borrowing from yourself, you're borrowing from the insurer; the cash value serves as collateral (an important technicality). Your loan balance could end up growing faster than the cash value of the policy if you don't pay it back. Even worse, if the amount that you owe exceeds the cash value, you'll get a bill to pay the difference, and you may face tax consequences.
Like borrowing from your retirement, this is an option you should exercise as a last resort, not your first.
Pros: There is no set repayment schedule; you can borrow up to the cash value of the policy. Cons: There are possible tax consequences, and your payments could eat into the collateral.
Private loansPrivate loans can be had from any number of sources, including the contractors who do your improvements or even the stores from which you bought the supplies to do it yourself. These unsecured loans often have higher interest rates and fees, but it's also often fast and simple to get approved. You won't be able to deduct any of the interest from the loan on your taxes, as you can with a variety of home loans and lines of credit. Pros: Private loans boast fast approval times. Cons: These loans have higher interest rates and fees.
Financing your remodeling project Upfront costs Approval process, etc. Collateral required Tax benefits Tax consequences Payment terms
Credit cards None Simple None None None Monthly; variable interest rate
Store credit cards None Simple None None None Monthly; variable rates
HELOCs Yes;often waived More complicated Yes Yes None Monthly; variable rates
Home equity loans Yes More complicated Yes Yes None Monthly; fixed rates
Refinance Yes; often significant Most complex Yes Yes None Monthly; fixed rate
Title I Yes More complicated None up to $7,500; required for higher amounts Yes None Fixed rate
401(k)/IRA Possibly More complicated None None Possibly Varies; minimum once per quarter
Life insurance borrowing Possibly More complicated Yes None Possibly Varies
Private loans Possibly Varies No, generally None No Monthly; fixed rates
Source from : bankrate.com
Source from : bankrate.com
posted by !GOD BLESS YOU! at 22:54
1 Comments:
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