Financing

What are the different methods available for financing my home improvement project?

Fortunately, there are several options that can provide the dollars you need.

Cash
If you have cash in savings to pay for your home remodeling project, this may be the best way to finance your home improvements. But be sure to consider the fact that, by paying in cash, you tie up money that could be earning interest in other investments. Look at the interest rate that you would be charged by financing the project and compare this to the interest you could earn by investing these funds.
Home Improvement Loan
Two special loans administered through the Federal Housing Administration (FHA) are the Title I and Section 203(k) programs. A Title I loan allows you to borrow up to $25,000 for improvements to a single-family home. These are fixed-rate loans that FHA insures against the risk of default.

The 203(k) program is not as well known, but if you are looking to purchase a fixer-upper or foreclosed home, it is a terrific opportunity. It allows home owners to receive a single, long-term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of the property.

Home Equity Line of Credit
A home equity line of credit is a form of revolving credit in which your home serves as collateral. This allows you to tap into the funds whenever you need. The credit line is usually set at 75-80% of the appraised value of your home minus the balance of the first mortgage. Your credit history and ability to pay may also be considered in determining the amount of credit available.

Second Mortgage
This is a fixed-rate, fixed-term loan based on the equity in your house that is paid back in equal monthly installments over a specific period of time.

Cash-Out Refinancing
The refinancing alternative allows you to use the accumulated equity in your home to take out a new loan to pay off your existing mortgage and then use the remaining funds for remodeling.  Factor in the length of time you plan to live in the house and the number of years left on your current mortgage before you decide to refinance.

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