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How Should You Pay for Your Home Renovations?


Paying for home renovations

Before the housing bubble burst, you could pretty much just walking into a bank and get a home equity loan for virtually any amount you wanted.  Then, you could turn around and use the money to renovate your kitchen, upgrade your bathroom, or turn your basement into a state-of-the-art "man cave".
Times have changed, though.  Today, things aren't quite that simple.  Lending standards have gotten much stricter.
So, does that mean you've got to come up with a ton of cash to pay for your renovations?
Lots of people do, however.  After all, when you use cash, you don't have any "strings".  There's no red tape to go through, no interest rates to worry about, and no closing costs to spring for.
But if you don't have the cash -- or simply don't want to use your life savings to get a new bathroom -- there are other ways that you can foot the bill for your home renovations, like:
1.     A home equity loan
They're not as easy to get as they once were, but if you can get your hands on one, it's a great deal.  These days, though, you typically need to have at least 20% of your mortgage paid off before you can qualify.
With these loans, you use your house as collateral (just like a mortgage), so if you default, you'll get foreclosed.  That alone is enough to keep some people away from these loans.
However, in many cases, interest you pay counts as a tax deduction, so you'll at least get to save some money.  Plus, these loans come with fixed rates, so if you get one now, you'll get to take advantage of near-record-low rates for the life of your loan.

2.     A home equity line of credit
If you plan on doing a bunch of renovations over a long period of time, a home equity line of credit is a better deal than a traditional loan.  
With this type of funding, you don't get a big lump sum loan all at once.  Instead, you get to draw money as you go, using special checks.  The best part?  You only have to pay interest on the money that you've drawn -- instead of the entire available amount.  (Think of it like a credit card -- you only pay interest on the money you've spent, not on your entire line of credit that the card company has given you.)
Like a home equity loan, you have to use your house as collateral, so there is a foreclosure risk.  Luckily, though, there's a good chance your interest payments will count as a tax deduction.

3.     A Title 1 loan
These loans are part of the FHA program, so they're given out by private lenders and insured b y the federal government.
With these loans, though, there are some extra rules.  The biggest loan you can get is $25,000.  And, you can only use the money for essential upgrades.  So, if you want to put in a pool or spruce up your master bathroom, this money isn't going to pay for it.

4.     Borrowing from your 401K
With this type of funding, you can skip the qualifying process altogether, because the money is already sitting in your account!  However, the key to this funding is to convince your employer to let you do it -- since some won't.  If you're lucky, you'll get to tap into your 401K and only pay small interest rates.
Just remember -- if you leave your job before the money is paid back, you'll be on the hook for all kinds of penalties and taxes!

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