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How to finance your home renovations

If you’re planning an addition or remodel, you’re not alone. Americans spend around $300 billion annually on renovations, according to the National Association of the Remodeling Industry.

And while some consumers may write a check for their $65,000 kitchen remodel, you wouldn’t be reading this post if that were your situation. So here are pros and cons of different finance options, whether you already own a home or want to buy a property that needs work.

Credit cards

You get a “zero interest for 18 months” offer in the mail with a credit limit high enough to pay for your whole project. Before you sign up and charge thousands of dollars, make sure you understand exactly what the terms and penalties are. At the end of those 18 months, you may start owing 15 or 16 percent on any remaining balance. If you can pay off the amount before the introductory period ends, such an offer may work. But with interest rates so low, it’s a high-risk option without much reward.

Home equity products

Like your original mortgage loan, a home equity loan gives you one sum that you pay off over time. The term is usually shorter than your original loan — five to 15 years versus the typical 30 years — but the interest rate is fixed, resulting in the same steady, monthly payments that you’re already used to.

A home equity line of credit is like a credit card. You borrow what you need, when you need it, up to a certain amount during the time period set by the lender. This offers you more flexibility than a fixed-rate home equity loan.

Home equity loans hold few surprises, but lines of credit often have variable interest rates, and the payments will vary depending on the interest rate and how much credit you’ve used. And when the line of credit expires, you must pay off the balance.

Home renovation loans

If you’re buying a fixer-upper, consider a 203k loan from the Federal Housing Administration. This type of mortgage allows you to borrow funds for renovation costs as part of your mortgage, so you have one loan and one closing. You can use a 203k loan whether you want to take a place down to the studs or just add new countertops.

Whenever you want to borrow money, it’s best to contact a lender to walk you through your options. The methods listed above aren’t the only ways to finance your renovations, and your lender will be able to recommend one that best fits your situation.

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