Financing Your Home Improvement or Remodeling Projects

If you are considering a home improvement or remodeling project, you are probably wondering where the money will come from. Certainly small projects can be budgeted for, but what about the larger renovations?

For most of us without a ready source of cash, refinancing a mortgage to pay for the repairs or improvements is the best option. Depending on interest rates at the time you refinance, you may end up with a lower monthly payment if the interest rate is lower than it was on your original loan.

In the event that you do not wish to refinance your first loan, you may take out a second mortgage, or a loan against the equity in your home. In most circumstances you can usually borrow up to 80% of the appraised value of your home, less the balance on your original mortgage. In other words, if you own a $100,000 home and have a $70,000 balance, you may obtain $10,000 through a second mortgage. Don't forget to factor in standard closing fees that usually accompany mortgage transactions. Speak with your accountant to confirm that you may also use your second loan as a tax deduction. 

A Home Equity Line of Credit works similarly to a second mortgage in that it lets you access around 80% of the appraised value of your home, less your mortgage balance. However, this is set up as a line of credit, so you aren't charged interest until you make a withdrawal. You will have to have to pay closing costs on the loan however. You can make withdrawals whenever you need to make payments to contractors, or to any vendor to pay for personal purchases. You may also write yourself a check for expenses you have incurred and paid for by some other means. As you pay off your balance, the unused portion of your credit line is available for your continued use. The interest rate is usually variable and is generally based on the outstanding balance. Again, the interest may be tax deductible, so be sure to ask your accountant if this applies to you.