What Kind of Loan Can I Get to Remodel My House If It's Already Paid For?

Most homeowners dream of the day when the house is paid for. The problem is that about that time you want to do some major remodeling and that will take money. If you don't have a mortgage and you're not saddled with huge debt from expensive cars or other big purchases, you have some good options. In some cases, your choice will depend on how much you want to borrow.

You'll have the most flexibility with a home equity line of credit. This is a loan, secured by the equity in your house, which can be up to 85 percent of its value if it's paid for. You don't borrow a set amount but take out money as you need it for the work. You'll pay interest only on what you've borrowed; if you got a $20,000 credit line but took out only $10,000, your loan amount is $10,000.

A home improvement or home equity loan is another option. This also is secured by the equity in your house but you borrow a set amount and for a fixed term, with regular monthly payments. It will require more paperwork than a line of credit but usually will be for a longer period and so payments may be easier. It may be a good option if you're doing a really big and expensive project.

You also can refinance your home with a "cash out" mortgage. You'll go through the same mortgage procedure you went through when you bought the house but take out the cash you need for the remodel. You'll have regular monthly payments but usually at a lower interest rate than either a credit line or home equity loan, and you can get a loan for a longer term. This would be a good financing option for a complete renovation.

You also might consider a construction loan. This is essentially an interest-only line of credit that you tap as you need to pay for the remodel, but it's tied to completion of the remodeling. You'll have to get some permanent financing or find another way to pay it off when your remodeling is done.

You'll have the most options with a line of credit. You usually have a time limit for repayment, but you can make a lot of different payment arrangements. Some lines are "balloons," in which you pay interest only until you pay off the base amount. Others have minimum payments, usually just the interest, but allow you to pay as much as you want over that amount so you can time your payoff.