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Family/Home
This us our Family/Home section. Related topics include
budgeting, children,
credit, credit
cards, debit cards, debt,
emergency funds, and financial
planning.
How to Pay for Your Home Improvement
You want to add a deck to your home to enjoy your evenings outside with your family and friends. You have cash sitting in your bank or you have a few credit cards that you can tap into to finance your home improvement. What is the best option? Should you get a Home Equity Line of Credit? Making the right decision is based on knowing various pros and cons of different ways to finance your project and your current situation. Even if you have cash sitting in the bank, it may not always be the best option.
If you have cash at hand, it should be earning at least 5% in a savings
account. If you are not earning 5% from your bank, dump them and go to
a bank that will give you at least 5% on your money. Search the Internet
and you will be able to find a few online savings accounts, offered by
well known banks like Citibank, Emigrant bank or HSBC that will give you
a 5% return on your deposit.
If your credit is good and the project is small, search for a credit card
that will give you 0% interest rate for a year. Apply online and get approved
instantly. Within a couple of weeks, you will get your card and you will
be able to use it for your home improvement project. You can use the same
technique for store credit cards, Master Card or Visa. When you get a
loan on 0% interest rate, make sure that you don't miss a payment. To
avoid missing a payment, use online payments offered by many banks for
free or the online payment option of the credit card company. Using an
online payment, setup a scheduled payment plan for the monthly payment
to the credit card. If you miss a payment, your credit card company will
withdraw your 0% rate and may even impose a high rate on the remaining
balance. So it is very important that you don't miss a single payment.
Be aware that when you use a credit card to finance your home improvement
project, you cannot claim any tax deductions on the interest you pay.
Hence, it is extremely important that you retain your 0% interest rate
till you pay off the loan.
If your home improvement project is a large one and you want to do it
in stages, HELOC, or Home Equity Line of Credit, is a good option. Search
the Internet to get the best rate. Find a bank that not only offers the
best rate but also waives the finance charges. When you take a HELOC loan,
you are essentially putting your home as collateral and the interest you
pay may be tax deducible.
Refinancing your home is a good choice if you have a large equity in your
home or you want to reduce your existing mortgage rate. Also, if your
home improvement project will add substantial equity to you home, refinancing
is an attractive option. You will also get tax benefits on the interest
you pay.
Obtaining a second mortgage to finance your home improvement project makes
sense if you get a low fixed interest rate and the interest rate on your
first mortgage is even lower than the second mortgage. A second mortgage
involves less paper works than a full refinancing.
Are you thinking about getting your money from your company's 401 (K)
plan? Forget it. Don't use your 401 (K) plan money for your home improvement.
A 401 (K) plan is for your retirement not for your home improvement projects.
If you are not old enough (59.5 years or more) to take a distribution,
you will have to pay tax and 10% penalty for any withdrawal from your
401 (K) plan. Borrowing against your 401 (K) savings is also not a wise
choice because 1) you have to pay it back with the above average interest
rate 2) money borrowed from your 401 (K) plan will not earn anything in
your 401 (K) plan till you pay it back completely. On top of that, if
you are laid off you will be hit with the tax and a 10% penalty unless
you pay the remaining balance in one lump sum.
Don't make a decision on haste. Weigh the pros and cons of various methods
discussed above and your current situation. Find the best way to finance
your home improvement project using other people's money and without hitting
your pocket book hard.
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