You've decided to remodel your lake home. Short of paying cash, how are you going to finance it?

Before you do anything, determine your goals and long-term plans, says Joe O'Kane, general manager of Wealth Enhancement Mortgage Services. He asks: "Are you remodeling to sell or staying long-term? Do you have a lot of equity? Is the cost of the remodel going to be substantially greater than your existing home lien?"

One option is to refinance your existing mortgage. If you can save money by lowering your interest rate, this may be a good option. But don't forget to factor in closing costs and other fees, which can make refinancing cost-prohibitive. O'Kane adds that refinancing may not be a wise choice for homeowners who are planning on selling, or those who already refinanced at a lower rate. In those cases, he says, "It may make more sense to finance your remodel with a home equity loan or home equity line of credit."

A home equity loan, sometimes called a second mortgage, allows you to borrow against the equity in your house without changing the terms of your original mortgage. Although interest is tax-deductible, you may pay a higher rate than you would by refinancing your mortgage. A fixed-rate home equity loan is a straight loan, amortized over a set period of time.

Another way to borrow against the equity in your house is a home equity line of credit, in which a lender provides immediate funds at no cost.

Because interest rates are adjustable, it may be more difficult to set a budget. On the flip side, says O'Kane, "It's flexible. You can use it as a revolving line of credit, running it up and paying it down." A home equity loan and home equity line of credit both use your house as collateral. If you don't pay your debt, you could lose it.

Choosing the best way to finance your remodel can be a confusing process, so make sure you find a broker who truly understands your goals. Simply shopping for the best rate can be a big mistake, says O'Kane. "Like anything, you should be getting comprehensive advice."

By Nancy Pias