Best Way to Pay for Home Improvements?

Dr. Don Taylor, a personal finance expert, here advises a couple on some good options for financing about $60,000 in home improvements. The couple in question has a $200,000 line of credit on their $575,000 home, which currently carries a $21,000 balance on a 4.95 percent fixed-rate mortgage. Taylor says the couple’s main goal is to minimize their total interest expense over a time period that lets them pay off loans while meeting their other financial goals. “How you can do that,” he says, “depends in part on your lenders’ willingness to work with you and your attitude toward interest rate risk.” He lists three potential options: Ask the lender to increase your home equity line of credit to $235,000; do a cash-out first mortgage refinancing; and pay off the first mortgage with the available balance on your home equity line and then finance the home improvements with a new home equity loan. Increasing the credit line to $235,000 should give you enough to take on the projects, maintain a low interest rate on the debt, and minimize closing costs on the change to the loan. A cash-out refinancing will pay off your existing first mortgage plus release money for your home improvements and repairs. In this scenario, Taylor says, the home equity lender may have to sign off on the refinancing. If the lender must agree and will not, you can possibly refinance both the first mortgage and the line of credit. This means a lower rate on your home equity line, but it also means there is no interest rate risk on your line of credit. Finally, you can take out a home equity loan as a third mortgage. This approach is preferable if you want to retain the home equity line, and also if the lender will not sign off on the cash-out first mortgage refinancing. | Read More