Financing Options for Your Home Improvement Projects

by Kelly Richardson
Guide to Home Improvement Columnist

Thinking about a brand new kitchen, a bonus room for the kids, or an enclosed patio or deck? Will it involve a small remodeling project or major renovation? Do you know how you're going to fund the project?

In your mind, you already have a million creative ideas for home renovation projects that will increase the value of your home. Do you have as many creative ideas about how to pay for the upgrades? There are several ways to finance your dream home improvement project.

Typical Financing Methods for Home Improvement
The most prevalent financing methods are:

• Home equity loan or line of credit
• Store credit line
• Personal credit card
• Personal funds

Home Equity Loan and Line of Credit
A home equity loan uses the equity that you've built up in your property over time as collateral. Home equity refers to the appraised value of your home minus the outstanding principle balance of your mortgage. You borrow a set amount of the equity. The benefit of using a home equity loan is that the interest may be tax deductible.

A home equity line of credit (HELOC) allows you to decide when and how much you borrow against your home equity. This may be the smart option for small remodeling projects or projects where the time of completion and final cost are not set in stone.

One of the downsides to home equity loans and lines of credit is that your home can be repossessed if you run into financial difficulty and cannot make the payments. You may also have to pay origination fees and prepayment penalties. Lines of credit may also have variable interest rates.