What is the preferred way to finance home improvements when preparing to sell your house?
You should look into a home equity line of credit: A home equity line of credit (often called HELOC and pronounced HEE-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house. Because a home often is a consumer's most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses. I'm assuming that when you sell the house you expect to be able to pay off these loans. In that case you need a loan that can be paid off in full without penalty, but has as low an interest rate as possible. My suggestions: sheegaon's reply looks fine to me, a HELOC can usually be set up for a minimal ($50?) fee, and is currently a pretty low rate, mine is 2.5%.  If this doesn't appeal to you, my other suggestion is a 401(k) loan. While this is usually a last resort and 'not' recommended, a short term use may make sense. The rate is low, and you can pay in back in full after moving into the new house. In planning to buy a house, and sort out how to handle the costs of some initial renovations, I've been considering using Lowes and Home Depot credit cards (hopefully this will count differently than the typical credit cards I think you're referring to): http://www.homedepot.com/webapp/wcs/stores/servlet/ContentView?pn=Credit_Center&langId=-1&storeId=10051&catalogId=10053 http://www.lowes.com/cd_Credit+Card+Accounts+from+Lowes_781778798_ You should definitely read the fine print first, as the interest rates can shoot up after the first 6 months if you don't pay the balance in full on some of them. Also, Lowes has a project card that gives you the 6 month no interest (only a minimum payment), and you don't have to pay off the full balance at the end.  This one even has more reasonable rates, so this could be a good way to go. You could take on more work. Pizza delivery, lawn work, babysitting, housecleaning, etc. None of those are much fun, but all are better than opening a credit card bill.
"I encourage you to think of this home purchase decision as a chance to buy into a community that you want your children to grow up in.  Try to find a place where you will be happy for the next 20 years, not just the next 2 or 7 years. In your situation, option 1 seems like a bad idea.  It will create an obstacle to having children, instead of establishing a place for them to grow up in. Option 2 is close to ""buying a house on a layaway plan"".  It offers the most financial flexibility.  It also could result in the best long-term outcome, because you will buy in an established area, and you will know exactly what quality house you will have.  But you and your fiancé need to ask yourselves some hard questions:  Are you willing to put up with the mess and hassles of remodelling?  Are you good at designing such projects?  Can you afford to pay for the projects as they occur?  Or if you need to finance them, can you get a HELOC to cover them? Especially if you and your fiancé do much of the work yourselves, break down the projects into small enough pieces that you can quickly finish off whatever you are working on at the time, and be happy living in the resulting space.  You do not want to be nagging your husband about an unfinished project ""forever"" -- or silently resenting that a project never got wrapped up.  I posted some suggestions for incrementally finishing a basement on the Home Improvement Stack Exchange. If you are up to the job of option 2, it is less risky than option 3.  Option 3 has several risks: You don't know what sort of people will live in the neighborhood 5 - 20 years from now.  Will the homes be owner-occupied?  Or rentals?  Will your neighbors care about raising children well?  Or will lots of kids grow up in broken homes?   Will the schools be good?  Disappointing?  Or dangerous?  Whereas in an established neighborhood, you can see what the neighborhood is currently like, and how it has been changing. Unless you custom-build (or remodel), you don't control the quality of the construction.  Some neighborhoods built by Pulte in the last 10 years were riddled with construction defects. You will be paying up-front for features you don't need yet.  You might never need some of them.  And some of them might interfere with what you realize later on might be better. In stable markets, new homes (especially ones with lots of ""upgrades"") often decline in value during the first few years.  This is because part of the value is in the ""newness"" and being ""up-to-date"" with the latest fads.  This part of the value wears off over time. Are the homes ""at the edge of town"" already within reasonable walking distance of parks, schools, church, grocery stores, et cetera?  Might the commute from the ""edge of town"" to work get worse over the next 5 - 20 years?" Unless u borrow for a house but just get a financial advisor - i highly recommend the co. I work for. Pm me if u want details though it sounds like u may go the diy route which is fine but 9 out if 10 times it takes nonprofessionals longer. I deal with clients and advisors who do this all the time. If it is US, you need to take tax implications into account.  Profit taken from sale of your home is taxable.  One approach would be to take the tax hit, pay down the student loans, rent, and focus any extra that you can on paying off the student loans quickly.  The tax is on realized gains when you sell the property.  I think that any equity under the original purchase price is taxed at a lower rate (or zero).  Consult a tax pro in your area. Do not blindly assume buying is better than renting.  Run the numbers.  Rent Vs buy is not a question with a single answer.  It depends greatly on the real estate market where you are, and to a lesser extent on your personal situation.  Be sure to include maintenance and HOA fees, if any, on the ownership side.  Breakeven time on a new roof or a new HVAC unit or an HOA assessment can be years, tipping the scales towards renting.  Include the opportunity cost by including the rate of return on the 100k on the renting side (or subtracting it on the ownership side).  Be sure to include the tax implications on the ownership side, especially taxes on any profits from the sale. If the numbers say ownership in your area is better, then try for as small of a mortgage as you can get in a growing area.   Assuming that the numbers add up to buying:  buy small and live frugally, focus on increasing discretionary spending, and using it to pay down debt and then build wealth. If they add up to renting, same thing but rent small. tl;dr: when everything is going great, it's not really a problem. It's when things change that it's a problem. Finally, home loans are extended over extremely long periods (i.e. 15 or 30 years), making any fluctuations in their value short-lived - even less reason to be obsessed over their current value relative to the loan. Your post is based on the assumption that you never move. In that case, you are correct - being underwater on a mortgage is not a problem. The market value of your house matters little, except if you sell it or it gets reassessed. The primary problem arises if you want to sell. There are a variety of reasons you might be required to move: In all of these scenarios it is a major problem if you cannot sell. Your options generally are: In the first option, you will destroy your credit. This may or may not be a problem. The second is a major inconvenience. The third is ideal, but often people in this situation have money related problems. Student loans can deferred if needed. Mortgages cannot. A car is more likely to be a lower payment as well as a lower amount underwater. Generally, the problem comes when people buy a mortgage assuming certain things - whether that's appreciation, income stability/growth, etc. When these change they run into these problems and that is exactly a moment where being underwater is a problem. Yes, banks still offer combo loans, but it is going to depend on the appraised value of your home. Typically lenders will allow you to finance up to 80% loan to value on the first mortgage (conforming loan amount) and 95% combined loan to value on a HELOC.   I would start by checking with your local credit union or bank branch. They have more competitive rates and can be more flexible with loan amount and appraised value guidelines. "A person can finance housing expenses in one of two ways. You can pay rent to a landlord. Or you can buy a house with a mortgage. In essence, you become your own landlord. That is, insta the ""renter"" pays an amount equal to the mortgage to insta the ""landlord,"" who pays it to the bank to reduce the mortgage. Ideally, your monthly debt servicing payments (minus tax saving on interest) should approximate the rent on the house. If they are a ""lot"" more, you may have overpaid for the house and mortgage. The advantage is that your ""rent"" is applied to building up equity (by reducing the mortgage) in your house. (And mortgage payments are tax deductible to the extent of interest expense.) At the end of 30 years, or whatever the mortgage term, you have ""portable equity"" in the form a fully paid house, that you can sell to move another house in Florida, or wherever you want to retire. Sometimes, you will ""get lucky"" if the value of the house skyrockets in a short time. Then you can borrow against your appreciation. But be careful, because ""sky rockets"" (in housing and elsewhere) often fall to earth. But this does represent another way to build up equity by owning a house." I'm not sure about your first two options.  But given your situation, a variant of option three seems possible.   That way you don't have to throw away your appraisal, although it's possible that you'll need to get some kind of addendum related to the repairs.   You also don't have your liquid money tied up long term.  You just need to float it for a month or two while the repairs are being done.  The bank should be able to preapprove you for the loan.   Note that you might be better off without the loan.  You'll have to pay interest on the loan and there's extra red tape.   I'd just prefer not to tie up so much money in this property.   I don't understand this.  With a loan, you are even more tied up.  Anything you do, you have to work with the bank.  Sure, you have $80k more cash available with the loan, but it doesn't sound like you need it.  With the loan, the bank makes the profit.  If you buy in cash, you lose your interest from the cash, but you save paying the interest on the loan.  In general, the interest rate on the loan will be higher than the return on the cash equivalent.   A fourth option would be to pay the $15k up front as earnest money.  The seller does the repairs through your chosen contractor.  You pay the remaining $12.5k for the downpayment and buy the house with the loan.  This is a more complicated purchase contract though, so cash might be a better option.   You can easily evaluate the difficulty of the second option.  Call a different bank and ask.  If you explain the situation, they'll let you know if they can use the existing appraisal or not.  Also consider asking the appraiser if there are specific banks that will accept the appraisal.  That might be quicker than randomly choosing banks.   It may be that your current bank just isn't used to investment properties.  Requiring the previous owner to do repairs prior to sale is very common in residential properties.  It sounds like the loan officer is trying to use the rules for residential for your investment purchase.  A different bank may be more inclined to work with you for your actual purchase. From a slightly different perspective, in my experience of buying a house you will find some unexpected costs due repairs that need to be made which were overlooked during the home inspection etc. You will need some financial cushion to fall back onto for these unexpected costs so for that reason alone I'd try to pay off as much of the credit card debt as I can. No. As long as you live in the house for 3 years, it's yours to keep. Financing has nothing to do with that. The buyer discloses the financing arrangements to the seller because it makes his offer more attractive. When a seller receives and accepts an offer, the deal does not usually close until 30 to 60 days later.  If the buyer cannot come up with the money by closing, the deal falls apart.  This is a risk for the seller. When a seller is considering whether or not to accept an offer, it is helpful to know the likelihood that the buyer can actually obtain the amount of cash in the offer by the closing date.  If the buyer can't acquire the funding, the offer isn't worth the paper it is printed on. The amount of the down payment vs. the amount of financing is also relevant to the seller.  Let me give you a real-world example that happened to me once when I was selling a house.  The buyer was doing a no-money-down mortgage and had no money for a down payment.  He was even borrowing the closing costs.  We accepted the offer, but when the bank did the appraisal, it was short of the purchase price.  For most home sales, this would not be a problem, as long as the appraisal was more than the amount borrowed.  But in this case, because the amount borrowed was more than the appraisal, the bank had a problem.  The deal was at risk, and in order to continue either the buyer had to find some money somewhere (which he couldn't), or we had to lower the price to save the deal.  Certainly, accepting the offer from a buyer with no cash to bring to the table was a risk. (In our case, we got lucky. We found some errors that were made in the appraisal, and got it redone.) Whenever you put less than 20% down, you are usually required to pay private mortgage insurance (PMI) to protect the lender in case you default on your loan.  You pay this until you reach 20% equity in your home.  Check out an amortization calculator to see how long that would take you.  Most schedules have you paying more interest at the start of your loan and less principal.  PMI gets you nothing - no interest or principal paid - it's throwing money away in a very real sense (more in this answer).  Still, if you want to do it, make sure to add PMI to the cost per month. It is also possible to get two mortgages, one for your 20% down payment and one for the 80%, and avoid PMI.  Lenders are fairly cautious about doing that right now given the housing crash, but you may be able to find one who will let you do the two mortgages.  This will raise your monthly payment in its own way, of course. Also remember to factor in the costs of home ownership into your calculations.  Check the county or city website to figure out the property tax on that home, divide by twelve, and add that number to your payment.  Estimate your homeowners insurance (of course you get to drop renters insurance, so make sure to calculate that on the renting side of the costs) and divide the yearly cost by 12 and add that in.  Most importantly, add 1-2% of the value of the house yearly for maintenance and repair costs to your budget.  All those costs are going to eat away at your 3-400 a little bit.  So you've got to save about $70 a month towards repairs, etc. for the case of every 10-50 years when you need a new roof and so on. Many experts suggest having the maintenance money in savings on top of your emergency fund from day one of ownership in case your water heater suddenly dies or your roof starts leaking.  Make sure you've also estimated closing costs on this house, or that the seller will pay your costs.  Otherwise you loose part of that from your down payment or other savings. Once you add up all those numbers you can figure out if buying is a good proposition.  With the plan to stay put for five years, it sounds like it truly might be.  I'm not arguing against it, just laying out all the factors for you. The NYT Rent Versus Buy calculator lays out most of these items in terms of renting or buying, and might help you make that decision. EDIT: As Tim noted in the comments below, real monthly cost should take into account deductions from mortgage interest and property tax paid.  This calculator can help you figure that out.  This question will be one to watch for answers on how to calculate cost and return on home buying, with the answer by mbhunter being an important qualification "If I have a house that its market value went from $100k to $140k can I get HELOC $40K? Maybe - the amount that you can borrow depends on the market value of the house, so if you already have $100k borrowed against it, it will be tough to borrow another $40k without paying a higher interest rate, since there is a real risk that the value will decrease and you will be underwater.   Can I again ask for HELOC after I finish the renovation in order to do more renovation and maybe try to end up renovating the house so its value raises up to $500k? I doubt you can just ""renovate"" a house and increase its market value from $140k to $500K.  Much of a house's value is determined by its location, and you can quickly outgrow a neighborhood.  If you put $360k in improvements in a neighborhood where other homes are selling for $140k you will not realize nearly that amount in actual market value.  People that buy $500k houses generally want to be in an area where other homes are worth around the same amount.   If you want to to a major renovation (such as an addition) I would instead shop around for a Home Improvement Loan.  The main difference is that you can use the expected value of the house after improvements to determine the loan balance, instead of using the current value. Once the renovations are complete, you roll it and the existing mortgage into a new mortgage, which will likely be cheaper than a mortgage + HELOC. The problem is that the cost of the improvements is generally more than the increase in market value.  It also helps you make a wise decision, versus taking out a $40k HELOC and spending it all on renovations, only to find out that the increase in market value is only $10k and you're now underwater. So in your case, talk to a contractor to plan out what you want to do, which will tell you how much it will cost.  Then talk to a realtor to determine what the market value with those improvements will be, which will tell you how much you can borrow.  It's highly likely that you will need to pay some out-of-pocket to make up the difference, but it depends on what the improvements are and what comparable homes sell for." "There are basically two ways to get value out of an appreciating asset such as a home: (a) Sell it and take the profit. In the case of a home, you presumably still have to live somewhere, so unless you buy a cheaper home to replace it, this doesn't get you anywhere. If you can get another house that is just as nice and in just as nice a location -- whatever you consider ""nice"" to be -- than this sounds like a winning option. If it means moving to a less desirable home, then you are getting the cash but losing the nice home. You'll have to decide if it's worth it. (b) Use it as collateral for a loan. In this case, that means a second mortgage, home equity loan, or a home equity line of credit. But this can be dangerous. House prices are very volatile these days. If the value of the house falls, you could be stuck with debts greater than your assets. In my humble opinion, you should be very careful about doing this. Borrowing against your house to send the kids to college or pay for your spouse's life-saving operation may be reasonable. Borrowing against your house to go on a fancy vacation is almost surely a bad idea. The vacation will be over within a couple of weeks, but you could be paying off the debt for decades." Using cash to purchase a home allows you access to certain deals that mortgage buyers cannot take advantage of.  These are typically distressed properties and need to be moved off the books quickly.  Think of things like foreclosures and auctions. This does not mean that it gives you an advantage with every house on the market.  While you may be able to close quickly, with cash, some buyers may choose to wait for the (presumably) higher offers of mortgage buyers.   There are complications to purchasing in cash then mortgaging to replace that cash.  Namely, how was that cash invested?  If one were in mutual funds or stocks, with the money, one will have to pay capital gains tax on any profit.  If those investments increase in value, during the time the money is tied up, what do you do then?  Do you buy at the higher value or hold it back and dollar cost average it in? "Take a look at FolioFN - they let you buy small numbers of shares and fractional shares too.  There is an annual fee on the order of US$100/year.  You can trade with no fees at two ""windows"" per day, or at any time for a $15 fee. You are better off leaving the stock in broker's name, especially if you live overseas.  Otherwise you will receive your dividends in the form of cheques that might be expensive to try to cash.  There is also usually a fee charged by the broker to obtain share certificates instead of shares in your account."