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.