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Best ways to finance home repairs

Fixing up your home can be a smart investment

Last updated: March 01, 2015 09:00 AM

Fixing up your home makes sense from a financial standpoint. That’s because the IRS rewards certain types of loans for home improvements with special tax treatment, making that type of borrowing quite attractive. Joint and single filers can deduct interest on debt of up to $1 million that’s used to buy, build, or improve a first or second home; if you're married but file separately you can deduct up to $500,000.

Mari Adam, a certified financial planner in Boca Raton, Fla., says a home equity line of credit (HELOC) can often be the best type of loan to pay for home repairs and improvements. Though the interest rate floats, it is usually lower than for other types of loans. A $50,000 ­HELOC at, say, 4 percent—the average rate in late fall for borrowers with stellar credit, according to Bankrate—would actually cost just 3 percent after factoring in the tax deduction, assuming a marginal tax rate of 25 percent.

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Adam says that although a fixed-rate home equity loan gets the same tax treatment as a HELOC, its interest rate is usually higher. Annual percentage rates were around 6 percent when we checked in late fall. But Bankrate showed one lender—First Trust Bank—that offered a lower rate (3.49 percent annual percentage rate) than that of the average HELOC.

Editor's Note:

This article also appeared in the March 2015 issue of Consumer Reports magazine.

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