When the contractor brought you the home improvement estimate, did you almost fall off your chair? Once the dizziness faded, did you take a deep breath and quickly regain your composure? Now you're ready to face the big challenge-where will the money come from?

Types of home improvement loans

Home improvement financing falls into two categories: a home equity loan or a home equity line of credit (HELOC). A loan is the more structured of the two-the money is funded all at once and repaid via fully amortized, fixed monthly payments. A HELOC, on the other hand, works more like a credit card-you can borrow and repay with relative flexibility.

Funding factors

As with any large purchase, it's essential to do your research and shop around. Before contacting lenders, know what the current home equity loan rates are in your state. Then, consider the following factors:

  • Your cash flow. If your income is stable and you can afford the extra payments, a loan is usually the preferred instrument. If, however, your monthly income fluctuates wildly with annual bonuses and commissions, the flexibility of a HELOC is a strong selling point.
  • Your budget. Home improvement projects often run over budget. If you prefer the structure of a fixed-rate loan, set aside an additional amount to cover project overruns. If you decide on a HELOC, you can take another draw off the line, as long you don't exceed your approved limit.
  • Your future. If you're planning to sell the home soon, the ideal financing will have low upfront costs and no prepayment penalties.
  • Your credit. With good credit, you can often negotiate low or no closing costs and competitive rates. If you have less-than-perfect credit, you might get the best deal from your existing bank or lender. If your credit rating is poor, your best option might be with a lender that specializes in bad credit home equity loans.

Tackling the home improvement funding challenge isn't hard, as long as you show up prepared. You selected your contractor with care. If you do the same with your lender and financing structure, you can bank on a smooth experience.

Published on February 8, 2007