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Financing a Home Improvement Project

It's time to do that home improvement project you've been putting off. According to David Hall, senior vice president at Quicken Loans, good results hinge on three important key factors:

Choosing the Right Project

The right project can dramatically increase the resale value of your home. Most experts agree that kitchen remodels, bathroom remodels and second-story additions yield the highest return on investment.

But be careful not to over-improve.

It's difficult to recover the investment in a home that's already more valuable than most others in the neighborhood. And remember, eclectic tastes probably won't appeal to mainstream home buyers.

Finding a Good Contractor Work with an experienced contractor who'll finish your home improvement project on time and on budget.

Talk to friends, neighbors, and co-workers - they're great sources for a referral. Also drive around your neighborhood and look for signs posted at job sites. That's a great way for you to view a contractor's work first-hand.

Deciding on the Right Financing Option.

While some people use cash or credit cards, others find that leveraging their home equity or refinancing their mortgage and getting cash out are far better options.

Home Equity Loan.

This is a second mortgage secured by the equity in your home, typically with a fixed mortgage rate. Rates may be somewhat higher than your first mortgage but they're typically better than interest rates on credit cards. And remember, the interest you pay on a home equity loan may be tax deductible whereas the interest paid on your credit card probably is not.

Home Equity Line of Credit.

This is a variation of a home equity loan. You'll get a revolving line of credit secured by the equity in your home that you can repay and draw on, as needed. It's ideal for major home improvements projects where you need to make multiple payments to a contractor over an extended period of time. Interest rates are typically variable and you may pay a nominal account fee each year.

Cash-Out Refinancing

With a "cash-out refinance" you refinance, your existing mortgage into a new mortgage that consists of your original mortgage plus the amount of home equity you decide to draw upon.

Here's an example: Let's say you owe $100,000 on a $200,000 house and you need $20,000 for a kitchen remodel. You can refinance your original mortgage into a new one for $120,000, extracting that $20,000 which you'll receive as one lump sum payment (when you close on your loan).

A cash-out refinance may allow you to secure a lower mortgage rate and the interest you pay is usually tax-deductible*.

One issue that frequently arises is the current value of your home does not allow you to obtain the cash required for the renovations via a cash out refinance or home equity loan or line of credit.  Renovation financing is available.  Renovation financing allows you to include the improvements in the value of the home allowing you to access the equity that you will be creating by renovating your property.

* Please consult your tax advisor.

By Diane Tuman

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Contributors to this article include: