Home Improvement Financing

Using your money to increase the value of your home.

Home improvement financing is often so easy to obtain that homeowners are tempted to use it for things other than home improvement. That's generally a bad idea. Even some home renovation projects aren't the best use of home improvement financing. Here are some tips on how to best use your home improvement financing - plus a few alternative financing methods for homeowners with low equity.

How to maximize the value of home improvement financing

Most home improvement financing is equity based. Unsecured home improvement loans are not, but second mortgages and home equity lines of credit are frequently used for repair and renovations. If you're borrowing from the value of your home, it's a good idea to use the money to maximize your home's future value.

A simple benefit analysis for home improvement financing is hardware vs. software. Software is surface changes: modernized appliances, new paint jobs, or unnecessary luxury items. Hardware is renovations that will increase your home's value: the addition of a new room, a new garage, or a major kitchen renovation. Hardware is a smart use of home improvement financing, but software usually is not.

The exception of course is if you intend to remain in your house for a long time and have secured home improvement financing for a pet project. In such cases, long-term comfort more than justifies the increased debt.

Home improvement financing for low equity homeowners

Unsecured home improvement loans, home equity lines of credit, and second mortgages are the commonest forms of home improvement financing. But they're not the only home improvement loans available.

If your home equity is low, borrowing from a 401(k) is a home improvement financing alternative. Not all retirement plans allow this, but if you can, the interest rates are low and you don't need a credit check. To avoid costly penalties you will need to pay the loan back within five years while remaining at your current job.

A life insurance loan is another home improvement financing option. Similar to other low-maintenance types of home improvement financing, life insurance loans require interest-only payments, and you can borrow nearly the full cash value of the policy. The only downside to this type of home improvement financing is that the policy's death benefits will be lessened in the event of an accident, plus you earn lower interest on the borrowed money until it's paid back.

Finally, a Title 1 loan is a federal form of home improvement financing for low-equity homeowners with essential home improvement needs. A Title 1 loan can't be used for past renovation costs or luxury items, but is an ideal form of home improvement financing for low-income or disabled homeowners.

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