Home ownership entails a lot of extra expenses. First time homebuyers make the mistake of thinking that as long as they can afford their mortgage, the rest is smooth sailing. This is hardly the case. Aside from dealing with high utility bills and unexpected expenses, home improvement projects are inevitable. Within time, the home will require a new roof, windows, flooring, and so forth. Moreover, if buying an older home, modernizing the property may result in a large expense.

Building a cash reserve to cover the expense of home improvements is ideal. Due to rising costs of living, many homeowners earning decent salaries are unable to save money. As a result, home improvement projects necessitate financing. There are several financing options available, each with their own set of advantages and disadvantages.

Home Equity Loan and Home Equity Line of Credit - Using a home's existing equity to finance a home improvement project is a top choice for homeowners. Getting approved for a home improvement loan without sufficient collateral is difficult. Even if a person is able to meet the banks requirements for an unsecured loan, the interest rate is very high. For this reason, many choose to secure the funds using their equity.

With a home equity loan, homeowners receive a lump sum for the approved amount. On the other hand, a home equity line of credit functions as a revolving credit account. The spending limit is determined by borrower's credit, income, and equity. Rather than receive a lump sum, money can be freely withdrawn from an account. Home equity loans and lines of credit are repaid by submitting monthly payments to the mortgage lender.

Even though home equity options provide enough funds to complete a home improvement project, the risk of foreclosure is high if the homeowner can't afford the additional monthly expense.

Mortgage Refinancing - Refinancing a mortgage loan and accepting a cash-out option is another method for financing a home improvement project. As homeowners pay down their mortgage balances, and home prices appreciate, the property gains equity. Homeowners can create a new loan, and borrow against the equity build up. Unlike home equity loans, the homeowner does not make two payments. Instead, the money borrowed is included in the new mortgage balance.

The downside to a refinance is the possibility of increased mortgage payments. Furthermore, if taking advantage of temporary inflated home equity, borrowers may be creating an upside-down mortgage if home prices decline.