our everyday life

What Kind of Loan Can I Use to Fix My House?

by Fraser Sherman

One way to improve your home is to borrow against your equity. Equity is the value of your house untouched by the mortgage. A $180,000 mortgage on a $220,000 house gives you $40,000 in equity. Borrowing against equity makes it possible to get a lower rate than credit cards or commercial loans.

Cash Out Refi

A cash-out refinance is two loans in one. One loan refinances your mortgage at a lower rate. The cash-out part borrows against your equity, giving you a loan you can use for anything you want. One option is to spend the money on improving your house. Note that spending the money on something fun instead -- like wedding costs or a vacation for example -- could be a mistake, as you'll be paying off the loan over the life of the mortgage.

Home Equity Loan

If you're happy with your mortgage as is, consider a home equity loan, also known as a second mortgage. With a home equity loan, you borrow against your equity in the house but leave your current mortgage untouched. If you plan to make a series of small improvements, gradually, you might prefer a home equity line of credit. This allows you to borrow money only when you need it, up to the maximum line of credit you establish.

Title I

Banks won't usually let you borrow against all your equity without charging a high rate. If your equity is slim, a Title I loan can help. The loans are insured by the Federal Housing Administration, so the bank can lend the money at no risk. You can use the loan for any improvement that makes your home more livable, such as wheelchair ramps or new, built-in appliances, but not something purely for fun, such as a swimming pool. If the loan's under $7,500, you don't need to put up any security.

Things to Consider

If you take out a second mortgage, you'll have to pay some closing costs and fees along with the interest, increasing the cost of the loan. A bigger problem if you can't pay off a second mortgage or cash-out refi is that you've given the lender the right to foreclose on your house. If your improvement increases the value of your home, that can rebuild your equity. That reduces the chance of your house sliding "under water," worth less than the loans against it.

About the Author

Author of two film reference books, "Cyborgs, Santa Claus and Satan" and "The Wizard of Oz Catalog." Published in Air & Space, Backpacker, Newsweek, The Writer, and multiple trade journals (can fax samples if requested, don't have them available digitally)