Smart -- and stupid -- ways to pay for your remodel

So if you do borrow against your home, show some restraint and try to pay back the loan as quickly as you can.

Low-equity options

Not everyone has sufficient equity in their homes to borrow against them. Here are some other options:

Title 1 loans. You may be able to borrow up to $25,000 through the Federal Housing Administration's Title 1 program (see link at left). You get the loans from regular banks and other lenders, and the interest rates are negotiable. Your interest payments, though, typically aren't deductible, and you can't use the money for luxuries, like adding swimming pools.

Bottom line: Not a bad choice if you need to make repairs and home equity loans aren't an option.

Construction loans. If the scope of your project is so vast that a home equity loan won't suffice, you may need to consider a construction loan. These short-term, interest-only loans are designed to be replaced by a regular mortgage once the project is completed. They're based on the costs of construction, or the future value of your home, or both.

Bottom line: If you're adding a second story, doubling the size of your home's footprint or gutting your house to the studs and rebuilding, this is probably your best option.

Credit cards. Interest rates on credit cards can be high, and even those low teaser rates can spike upwards if your credit deteriorates -- which it can do almost instantly if you wind up maxing out your cards. Interest generally isn't tax deductible.

Bottom line: Okay for small projects if you can pay off the balance in a few months. If this is your only option for financing, however, there's something wrong with your finances.

401(k) loans. The advantage is you get to pay yourself interest, instead of a bank. The main disadvantage -- and it's a big one -- is that if you lose your job, you have to pay the loan back quickly or owe taxes and penalties on the withdrawal. Your interest payments won't be tax deductible.

Bottom line: Do it only if your job is rock-solid secure. And whose is these days?

Margin loans. Your brokerage typically allows you to borrow against the value of your investments, but a sharp drop in the market could result in a "margin call." That means you either pay the loan back instantly or the brokerage sells the investments that secured the loan. Your interest may be deductible -- consult your tax pro.

Bottom line: If you have substantial resources, this is a possibility. Otherwise, you should use less risky options.

Personal loans. If the loan is secured by your signature, rather than your property, it's a personal loan -- even if your bank calls it a home improvement loan. These tend to have high interest rates (in the neighborhood of 14%). Interest typically isn't deductible.

Bottom line: Use only if the repair is an emergency and you don't have other options.

Contractor financing. Some of the most common home improvement scams involve signing people up for ridiculously priced loans to pay for necessary -- or even unnecessary -- home repairs.

Bottom line: Get your money from an independent source.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

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