Type of loan

Pros

Cons

Loan against retirement account (e.g. 401k) You pay yourself the interest on a loan against your 401k. You lose the interest you could be making if it was invested. If you lose your job, most loans require you to pay the loan back immediately.
Home Equity Loan Usually tax deductible. Lump sum is paid to you at the start so you have flexibility of what you do with the money. A second loan to manage. Shorter term than a standard mortgage. Requires that you have sufficient equity in your home. You have to pay interest on the entire loan amount even though you may not need the money to pay for remodeling right away.
Home Equity Line of Credit You only borrow the money you need at the time, so finance charges are lower at the beginning. A second loan to manage. Shorter term than a standard mortgage. Requires that you have sufficient equity in your home.
Construction Loan Good for larger remodel projects and if you don’t have enough home equity to take a loan to cover construction costs. Higher interest rate than home equity loans. Not tax deductible. Usually short term until construction is complete then replaced with a new first mortgage.
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Loan from the contractor Available to most homeowners. High interest rates. Not the best terms. Can lock you into working with a specific contractor. Not recommended.
Refinance and cash out You only have a single loan for your home. Usually tax deductible interest. A single larger loan will usually have the lowest interest rate. Requires that you have sufficient equity in your home. You have to pay interest on the entire loan amount even though you may not need the money to pay for remodeling right away.
Credit Cards Most homeowners have this as an alternative. High interest rate, not tax deductible.
Your savings The least expensive way to pay for your remodel. Make sure you don’t use all of your savings. Always have some available for emergency.

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