Came across this nicely-done article published in the Auburn Journal discussing financing options for home renovation projects and thought it worth sharing:

Ringing in the year with renovation? Try these funds
Lenders’ Corner

By: Mike Ferguson
Friday, December 23, 2005 8:51 AM PST

Are you thinking about a home improvement loan to spruce up your house in the upcoming year? If so, you are probably wondering what options are available to get the job done with the lowest cost and the least hassle. Most homeowners have three or four options, and the best one to pick depends on your individual circumstances.

Should you use your credit cards? The advantages are that you may be able to access the money easily and there is no cost to get a credit card. The disadvantages are that the interest is not tax deductible, the interest rate may be higher than home loans, and maxing out your credit cards could have an impact on your credit score.

Is a home equity line of credit the way to go? Usually, most homeowners will get a HELOC - one type of second mortgage - to complete the remodeling. Then, they will refinance their first mortgage to pay off the equity line and their old first mortgage. The pros are that the interest is tax deductible in most cases (see your tax advisor), you may pay interest-only payments on the line of credit, the balance can go as high as 100 percent loan-to-value, you don’t pay interest on the money until you use it, and you can pay down and re-use the balance because it works like a credit card. A minor drawback is that there is typically an early closure fee of $300 to $500 during the first three to five years.

Another alternative is to refinance your first mortgage. The good news is that you can oftentimes pull cash out for the repairs. However, the loan would be based on the current appraised value and you are limited to 80 percent loan-to-value, otherwise you would also have to get a second mortgage or pay private mortgage insurance (PMI) or a higher interest rate to get up to 100 percent financing. If you need more than 80 percent loan-to-value, you may want to take the two-step approach and get a HELOC initially, then refinance your first mortgage based on the appraised value after the home improvements are completed.

A final option is to get a construction loan. Normally, this is the least desirable alternative unless you are doing a major remodeling job where the cost of the improvements takes your loan-to-value above 100 percent of the existing value of your home. These loans take longer, have a lot of paperwork, and typically cost more.

When considering a home improvement project, discuss the options with a loan officer who has been referred to you or whom you have had a good experience with in the past. He or she will be able to guide you through the maze of options.

Good luck on your exciting home improvement project. Merry Christmas!

Mike Ferguson is the owner of Windsor Financial Services located in Granite Bay. His Web site address is www.windsorfinancial.net

The only thing to be added is that the savviest financing option is to combine credit card payment with the use of a HELOC or other home equity loan. First using a credit card as the payment method and then promptly paying the card off with a HELOC check provides numerous consumer protections in the event you end up in a dispute with a contractor or supplier.

Moreover, a sizeable home renovation project can generate a significant credit card rebate or reward. Using a credit card as an intermediate step should be considered by anyone doing a home renovation project.