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Whether you want to update a kitchen or bathroom or embark on a whole-house renovation, remodeling can be an excellent way to increase your home's value. However, it's important to choose the right type of financing. Without carefully considering your options, you may pay far more over time than necessary.

A Home Equity Loan
A home equity line of credit available from your bank or credit union taps into the equity you've built to pay for your remodel. This type of loan usually provides a lower rate of interest than an unsecured loan and a much lower rate than you'd be charged on most credit cards. Additionally, the interest on a home equity loan is usually tax-deductible, up to a maximum of $100,000 (check with your tax expect), depending on how much equity you have in your house. It's easy to get carried away when you think about how much equity you may have available to borrow from. But remember that you may lose your house if you take on more debt than you can repay.

A New Construction Loan
Another way to obtain funds to complete your major remodel is by paying off the existing current mortgage with a construction loan. With this method, you take out a new loan to pay off the old mortgage and request funds to complete the remodel based on future finished value of your remodel.

Contractor Financing
There are some contractors who can provide you with financing. Do your homework and check to see that their offer is as good as a loan arranged through independent financing. Additionally, you want to hire the person you think is going to do the best job for you, not the one who will be providing you with the funds to do the work.

Credit Cards
Steer clear of financing any major remodel via your credit cards. The high interest rates can quickly put you deep in debt. Instead, use your credit cards to purchase small ticket items - lighting, plumbing fixtures, furniture - that you can afford to pay off each month. A major danger in using credit cards to fund your remodel is that large and growing credit card balances will drive down your credit score, and may preclude you from obtaining the best loan terms when you apply for new permanent financing.

For many the best answer is to refinance by paying off the existing loans, and taking out enough money to complete your remodeling project. This option is preferred when rates are low, allowing you to obtain a new low fixed rate permanent loan. This is a good alternative to obtaining an adjustable rate Home Equity Line of Credit.

As of March 2008 there is a temporary increase in loan amount limits for conventional home loans (almost doubled in some areas). Conventional (FANNIE Mae & FHA) have better terms than other types of financing. This can make a big difference in the interest rate you will pay.

Find Local Financing
In addition to asking friends and families for recommendations, click here to contact a local financial professional in your area. We've taken the guesswork out of finding the right home financing expert.

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