How to finance your home improvement projects

KittenAccording to Fox Business, Americans are likely to spend more than $121 billion on home improvement in 2010, so knowing how to finance home improvement is important. Here are seven financing options.

How to finance home improvement: Seven possibilities

Breaking a larger concept down into smaller parts makes it much less daunting; that includes how to finance home improvement. Here are your seven steps to solving the home improvement finance riddle.

1. Use cash

Fox Business reports that historically, about 65 percent of homeowners who invest in home improvement pay cash for the job. It’s simple and there are not interest fees with which to contend. However, a large cash outlay can certainly make it more difficult to pay other bills if you aren’t careful. Considering that as many as 85 percent of today’s homeowners finance home improvement with cash, even more people are budgeting carefully.

2. Use credit cards

Josh Frank, a senior researcher at the Center for Responsible Lending, reminds that revolving interest can keep you in debt for some time. Even the lowest credit card APRs are about twice the rate of standard home loans and home refinance loans. Furthermore, miss a couple of payments and your interest rate will skyrocket to 30 percent or more. If you must use a credit card, don’t use the card’s cash advance feature, as the interest rate for cash advance via credit card is much higher than the standard credit card APR.

3. Use personal loans

Whether you go to a payday lender, a bank or a credit union, unsecured personal loans may be available, depending upon your relationship with the institution and your credit score. In the case of a payday lender, however, having good credit is not required for personal loans. According to Steven Rick of the Credit Union National Association, such personal loans (aka signature loans) can be either higher or lower in rate than credit cards. Thus, it pays to shop around.

4. Use home equity loans

As the housing bubble has burst, standards for home equity loans have increased. With an excellent credit score, you may be able to get up to 90 percent of your current home’s value in a fixed-rate 10-to-15-year loan. Expect rates slightly higher than a mortgage (by a point or two), says Fox Business. Fixed-rate loans make long-term budgeting much easier when you’re trying to decide how to finance home improvement projects. Be wary of variable rate loans, as they typically will not go lower and usually will only increase, particularly if you have difficulty making payments on time.

5. Use a HELOC

A home equity line of credit (HELOC) sets up an account where the money is there for home improvement if you need it, rather than coming to you in a lump sum as with a standard home equity loan. Look for a fixed rate, rather than a HELOC with a variable rate.

6. Use an FHA remodeling loan

The Federal Housing Administration (FHA) has a small remodeling loan program – 3,854 loans in 2009, according to Fox Business – but if you can get in, you can borrow up to $25,000 for up to 20 years at a very reasonable rate. Any loan more than $7,500 is secured by the home itself.

7. Use contractor financing

Terms will vary wildly here, but if you can get a fixed rate, no points loan with no other hidden fees, a contractor loan can cost anywhere from 5 to 11 percent. It depends upon your credit score as well as how much you trust the contractor. Do your research.


Fox Business

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