FINANCING HOME IMPROVEMENT PROJECTS

Funding home improvement and remodeling projects can be quite daunting. Surely smaller projects can be budgeted for, but what about the larger ones? This is a financing guide for those of us who are not independently wealthy.

If you participate in a 401k plan through your employer, you may be able to procure a short-term loan from this account. To see if this is an option, contact your human resources department. Don't forget to ask about any potential tax implications.

Additionally, many life insurance policies may be borrowed against. Ask your insurance agent for details.

Banks, savings and loans, credit unions and other traditional lenders may also provide assistance in procuring other types of loans. Before you decide on the best loan for you, don't forget to compare interest rates, repayment options and penalties. Some examples of different types of loans are outlined below.

A second mortgage is a loan against the equity you have built up in your home. Many financial institutions will let you borrow up to 80% of the appraised value of your home, less any outstanding loans. To illustrate an example, if you have a home valued at $100,000 and have an outstanding mortgage totaling $70,000, you may be able to borrow $10,000 (80% or $80,000, less the $70,000 mortgage). Don't forget about the fees that usually accompany mortgages, such as closing costs, title insurance and processing fees. It is also important to check with your accountant to see if you can use any of these funds as a tax deduction.

Refinancing may also be an option. If your old mortgage is satisfied, you may be able to take out a new mortgage on your house. A qualification criterion includes a good credit rating, a steady source of income, and, of course, equity in your home. As with a second mortgage, refinancing also includes closing costs and the like.

A home equity line of credit (HELOC) is similar to a second mortgage (up to 100% and beyond of the appraised value of your home, less your current mortgage balance). However, a HELOC can be much more cost effective, since it operates as a line of credit (hence the name). This means you won't be charged interest until you make a withdrawal. However, you will still be responsible for closing costs. You will be able to make withdrawals whenever necessary, enabling you to pay contractors, and so forth. The interest rate for a HELOC is usually variable, and based on your outstanding balance. Your interest may be tax deductible, so you should discuss this with your accountant.