Hammers, Saws, and Dollars

Before you launch into that big home improvement project, carefully weigh your financing options.

By Mary Rowland

Spring's abloom, and that has many of us thinking about tackling big home projects—whether planting new perennials or shrubs, building a deck, or gutting the kitchen and starting afresh.

Few Americans have sufficient savings in the bank to fund a large remodeling or landscaping project, though, so most of us turn to the bank for a loan, borrowing against the value of the house itself.

Borrowing against your house makes sense for a couple of reasons: First, the interest you pay on these loans is tax deductible, unlike the interest on credit cards or consumer loans; second, if you choose your home project carefully and do a quality job, chances are good that you'll increase your home's value. (For a list of the jobs that return the most value, see "What Pays Off?")

One caveat: If you borrow against your home and fail to keep up the payments, you risk losing your house. So consider carefully how much money to take out. Be conservative.

Some banks allow homeowners who are refinancing their mortgages to increase the amount of their mortgage above what they owe and pocket the difference as cash, a practice known as cash-out refinancing. For example, suppose your house is worth $300,000. Your mortgage is $150,000 and you are planning to refinance at a lower rate. Many lenders will allow you to take $50,000—or even $150,000—out in additional cash when you refinance, according to Jill Holland at Hochberg Holland Mortgage Brokers in New York. However, in most cases, you will pay for that cash-out with a higher rate on the entire mortgage, she says.

Holland suggests, instead, taking a second loan against your house. These come in two flavors. The first is a home equity loan, akin to the old-fashioned second mortgage. With this form of loan, you borrow a specific amount of money for a fixed rate and fixed term. Disadvantages are that home equity loans can carry hefty upfront costs, including a home appraisal and title search.

The more popular choice is a home equity line of credit, which you draw on by check as you incur your home improvement expenses. With this option, you borrow just as much as you need, when you need it. The downside is that the interest rate you're charged floats with the prime rate. So if interest rates rise, as we're likely to see for the second half of this year, a line of credit could cost you more in interest.

HSH Associates Inc. provides detailed, objective information on how much you should expect to pay for a loan. HSH collects data from lenders across the country and publishes it, posting mortgage interest rates daily. Before deciding who will fund that big home project you've been dreaming of, make sure to check with at least three lenders, and study their terms carefully.

What Pays Off?

Remodeling magazine's annual survey compares the costs of home improvements with the increase each one adds to a home's value. These home projects returned the most value in 2003:

Deck addition	104%
Siding replacement	98%
Bathroom addition (midrange)	95%
Attic bedroom	93%
Bathroom remodel (upscale)	93%
Bathroom remodel (midrange)	89%

Check out Remodeling's Web site for details on your situation.

Trick Yourself into Saving More

Successful savers sometimes play tricks on themselves to turn their "spending money" into "savings money." Here are a few of them:

• Pick up a handful of deposit envelopes for your savings account. Every day, put aside $1, $3, or $5 into a box. Once a week—or once a month—empty the box, and drop the envelope into your bank's night depository. You may be surprised how the money adds up each year.
• Whenever you pass up a movie or a cappuccino or a dinner out, put the money in your savings envelope to be deposited.
• Keep track of how much you spend each week for groceries. Then figure out how you can manage to trim that bill by $4 or $12 or $20. Whatever you save on groceries goes into your savings envelope.
• When you eliminate a major expense—like paying off a car—write a check to yourself for half that amount each month and put it in your savings envelope.
• Round up your mortgage payment to the next $10 or $50 or $100. This saves you money in two ways. The additional payment reduces the principal and adds to equity on your home. And you are reducing future interest payments.
• When you've built up some money in savings, say $500, open a certificate of deposit at your bank. But keep saving!

Trim Your Car Insurance Costs

You can save on your car insurance—if you know where to look. Which of the following do you see as possibilities for saving on insurance?

1. Your car is equipped with anti-lock brakes.
2. Your teenager has just gotten a driver's license.
3. You and your spouse are over 50.
4. Your car has an anti-theft device.
5. You live in the inner city and park on the street.
6. Your teenager has completed driver's education.
7. Your teenager is in the top 20 percent of his or her class.
8. Your teenager goes to college 100 miles from home and has no car at school.
9. You park in a garage.
10. You own your home.

Items 2 and 5 will raise your insurance costs. But all the others offer options to save on insurance. If your car has special equipment that makes it safer to drive, like anti-lock brakes or running lights, or if it is protected from theft and vandalism, you can save money. Ditto if you and your spouse are over 50, have clean driving records, good credit, and demonstrate stability such as owning your home or living at the same address for several years.

Teenagers can wipe out your insurance budget. But you'll cushion the blow if your teen gets good grades, takes driver's training, or is at college without a car.

Be sure to tell your insurance agent about any of these factors that could lower your rate. While you're on the line, you may want to pare your premiums by increasing your deductible for collision coverage. Doing so means that you will pay more of the upfront costs if you have an accident. But if you're a good driver, you're betting against the odds of an accident. You can also drop collision insurance on older cars that are already paid for.

Will Power

Three out of four Americans die without a will. Many assume their assets will go to their spouse and children. And they may. But they won't necessarily be divvied up in the way you expect.

If you die intestate—without a will—some of your assets could be frozen in probate, a court proceeding that can last for a few weeks, months, or even years, depending on the state.

In most states, property is split between spouse and children. But one-third might go to your spouse and two-thirds to your children. If your children are minors, your spouse may have to submit a yearly account to the probate court of how he or she spent the money.

If you own assets, you need a will to provide your instructions on how your property should be distributed. You can probably use a simple will, prepared with a software program, if you are under 50, in good health, and don't have more than half a million dollars in assets, according to NoLo Press, publisher of information on do-your-own legal documents.

If you are in this category, your estate will not be taxed by the federal government. Your will should name a guardian for children, list an inventory of your assets, and indicate how you would like them to be distributed.