How to Pay for Home Remodeling

ANSWER: Having some equity in your home may sound like a quaint notion these days, but it still makes the best financial sense. Plus, in today's rocky housing market, it may even be required for borrowers with less-than-perfect credit. "If you can't afford that, you shouldn't be buying the house," says Fort Lauderdale, Fla., planner Benjamin Tobias.

Now the tricky part — do you finance these renovations by taking on more debt or selling stocks when the market is down? Numerous factors come into play: how long you plan to stay in the house, whether you can comfortably afford the additional payments, and your outlook for your investments. Over the long haul your stock investments should yield enough to make taking on the additional debt worthwhile, but in the short term, all bets are off. Taking out a home-equity line of credit (HELOC) will give you the greatest flexibility, says financial planner Patti Houlihan, of Reston, Va. Rather than a home-equity loan, which gives you a fixed rate with regular monthly payments that begin immediately, a HELOC works more like a credit card. It has a variable rate, but you tap it only when you need it — a likely perk during remodeling projects. (Both are tax deductible on loans up to $1 million if used for home-improvement projects.) This way you don't incur any debt until you need to pay your contractor, and you can take some time to see if your portfolio reaches a place where you're comfortable taking some profits.

QUESTION: I'm 26 with a new job that offers a 401(k) but no match. Should I look elsewhere for my retirement savings?
— Cassandra Milton, Dallas

ANSWER: Look to the Roth IRA. Roths are funded with after-tax dollars, which means you won't get a tax break now, but withdrawals taken during retirement are gloriously tax free. You'll also have considerably more investing choices. The only drawbacks: Maximum contributions are limited to $5,000 in 2008, and eligibility starts to be phased out for singles with incomes of $101,000.

Don't dismiss your 401(k) altogether, though. "There's still a big value in making pretax contributions," says Indianapolis-based financial planner Elaine Bedel. Your portfolio grows tax deferred over the years, and that tax advantage is a significant benefit. Also, the sheer convenience of having withdrawals taken automatically from your paycheck — and the inconvenience of trying to tap it prior to retirement — means you'll likely accumulate a sizable nest egg. So once you've exhausted your Roth contributions, turn back to your 401(k).

QUESTION: I'm currently paying 8.5% on my car loan and would like to refinance. Do rate cuts by the Federal Reserve affect auto-loan rates?
— Stephanie Levy, Mount Vernon, N.Y.

ANSWER: Sadly, no. Auto-loan rates aren't affected much by moves by the Fed; many are tied more closely to shorter-term Treasurys. In September 2007, before the Fed went on its rate-cutting spree, the rate for a four-year used-car loan was 8.4%, according to Bankrate.com. Today it's 8.1%.

If your circumstances have changed, though, you might consider refinancing. If your credit score has improved since you took out your loan, for instance, you can likely lower your rate, says Jesse Toprak, senior industry analyst at Edmunds.com. To find the best deal, check with your local bank or credit union and online lenders like E-Loan. No matter what, don't extend the term of your loan — that will negate any savings you achieve.

Even with a lower rate, this won't be life-changing money: Refinancing an 8.5% $20,000 four-year auto loan to, say, 7.25% would result in a savings of $12 each month — or $562 in interest over the loan's lifetime. Still, having a little extra gas money isn't a bad thing.