Issue Date: April 6, 2003
How to pay for your renovations
Most people don't have an extra $10,000 to $50,000 in their checking accounts to finance renovations. But because there's a variety of ways to borrow the money at today's low rates, we asked Keith Gumbinger of HSH.com to hammer out the details:
Cash-out refi
What it is: Refinancing your existing mortgage to lower your rate and withdraw equity (or cash) simultaneously.
Average rate/closing costs: 6% on a 30-year fixed-rate mortgage/2% of the loan.
Best for: People who hold a mortgage at 7% or higher and haven't been in their home more than five years. (Be aware of the costs of extending the term of your loan.)
Where to find a good deal: Your current lender, other local lenders and mortgage brokers. Then try national lenders (e.g., Wells Fargo, Bank of America).
Home equity loan
What it is: A fixed-rate second mortgage with a 10- or 15-year term. You receive one lump sum and start paying immediately.
Average rate/closing costs: 7.51%/ between $300 and $500.
Best for: Homeowners with one-time, lump-sum home improvement projects, particularly those who already have refinanced to 6.5% or less.
Where to find a good deal: Your bank or credit union may have programs for loyal customers. Most of these loans are made by local banks and savings and loans. Fees vary widely, so shop around.
Home equity line of credit
What it is: A variable-rate second mortgage that acts like a checking account. You take out money as you need it and pay interest only on the money you've withdrawn.
Average rate/closing costs: 4.96% (prime plus 0%) is common/generally none.
Best for: People who have long-term needs for the money. If you're doing the kitchen this fall and paving the driveway the following September, it makes no sense to borrow all the money (and begin paying it back) upfront.
Where to find a good deal: You can find prime plus 0% by shopping around. Compare annual fees (which run around $50). And beware of introductory "teaser" rates. They're compelling, but you need to ask, "Then what happens?" Three months of very low interest means nothing if you're paying back a loan over 10 years.
--Jean Sherman Chatzky
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