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Finding Home Improvement Funds
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No matter what type of home improvement project you have in mind, it’s always a good idea to do a little advance planning. If you're thinking of adding a deck, swimming pool, or exercise room to your home, you're probably wondering how you're going to pay for it. Chances are you will need to finance it.
You have numerous options, from paying with a credit card to refinancing your first mortgage. Look at the pros and cons of each.
Credit cards are probably the most convenient method of financing because there's no application involved. And credit cards may be the best way to go if your project is in the $100 to $500 range—say a new sink for the bathroom or wallpaper for the kitchen. But for large projects, credit cards are not an efficient or prudent use of credit. Interest rates typically are higher for credit cards, an unsecured type of credit, versus other types of credit that may be secured by the equity in your house.
A signature loan from your credit union may be good if time is a critical factor, for example, if a storm does extreme damage to your roof. Signature loans can usually be approved within an hour.
Another alternative is a loan you secure with an asset such as your house, car, or the money in your savings account. You will get a lower rate of interest than with an unsecured loan, yet you'll be taking a risk because a default could mean the loss of your asset.
Other home improvement loans include home equity loans, which can take up to four weeks for approval. That's because of the documentation and appraisal process required for home equity loans. There are two types of home equity loans: closed-end and open-end. Both require a lien on your house.
A closed-end home equity loan is for a set amount for an established length of time. The interest rate may be fixed or variable. When all payments are complete, the loan is paid off. An open-end home equity loan, or line of credit, is similar to a credit card: You have a pool of funds to draw on — up to the lender's limit — at any time. As you replenish the pool with your loan payments, the funds again become available.
If you are undertaking a project involving $20,000 or more, it may be worthwhile to investigate refinancing your first mortgage. The loan for remodeling is combined with the first mortgage and payments are spread out over 20 or 30 years.
Financing a home improvement project requires more thought than taking out a loan to buy a lawn mower or compact disc player. Because the amounts are so large, the right or wrong decisions either can save or cost you a lot of money. A good place to start is with a lending officer at your financial institution. Based on your priorities, credit history, and current credit commitments, the loan officer can offer you the best solution to meet your home improvement needs.
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