Homeowners with cash may find it tempting to pay outright for their home improvements. While it may be cheaper in the short run to finance your project with cash, if you’re the type of person who would not be averse to putting that cash to work in a stock mutual fund, you might want to reconsider. That’s because, over time, compounding can make that $20,000 investment double or even triple, a sum many times more than the interest you will pay on the loan.
Remember, home mortgage interest is tax deductible and interest on the first $100,000 of a home equity loan or line is usually also tax deductible. What does this mean? Well you pay about one-third of your income in state and federal income taxes. So, for example, if you are considering a loan with a 6 percent interest rate, in effect you are only paying about 4 percent after taxes.