The joys of being a homeowner are many, but financing home repairs don’t fall in this category. You can find the perfect home, but things tend to break or get damaged over time. This often occurs during the worst time when you are short of funds. To make it worse, they usually require urgent repair, or else it could end up costing even more if left unattended. Given that your home is a huge investment, it is imperative that you take the necessary steps to keep it in shape and do the required maintenance, especially if you ever want to sell it. If you ever find yourself in a situation that requires urgent home repairs with limited funds, you need to make sound financial decisions.
There are many options to help you finance your home repairs without depleting your savings completely or leaving you destitute. If you are wondering how to pay for expensive home repairs, we have compiled a list of options to help you make an informed decision.
Home Repair Savings
Before you start searching for how to pay for expensive home repairs, you need to have a plan in place for the ‘what if.’ You are predicting the future, which will ultimately happen; you just don’t know the exact time. Having a savings account for your home repairs will save you a great deal of financial burden when you need it the most. Most homeowners abide by a common rule of saving a percentage of the home’s total cost each year and setting it aside for possible repairs. For instance, if you bought your home for $400,000, you can choose to save 0.5% of the money each year for maintenance and repairs. The savings can earn interest and keep your account afloat at all times.
Reasons Home Repairs Are Expensive
Home repairs are generally expensive because of the cost of labor and materials. The costs tend to fluctuate at different times as a result of factors beyond your control. The cost of labor is expensive because you need to hire professionals for the repair job. For instance, if you have a flat roof, you will require a flat roof contractor from a roofing company to do the job. There are a lot of roofers in the industry, but they are all skilled in different areas. You can get away with DIY for some repairs such as residential painting, but for complex jobs, it is best to leave it to the experts.
Ways to Finance Home Repairs
Even the most disciplined saver will tell you that a well-executed savings plan does not always guarantee that you will not need extra funds. Home repairs are highly unpredictable, and prices can shoot up, depleting your savings account in seconds. One repair job could be extremely expensive and once sorted, another home repair job might occur before you top up on your savings account. In such cases, what are your other options? How do you finance your home repairs with inadequate funds? Fortunately, there are a few options at your disposal that can help you get the job done.
Personal Loan
Depending on your home repairs, you might be a bit skeptical about making huge commitments with loan lenders. If the repairs are minor, you can take an unsecured loan and not have to worry about collateral. A lot of lenders require you to use your home as equity to be awarded a loan. Failure to repay a personal loan could land you in trouble with the law as the lender can sue you. Therefore, you need to be extremely careful if you choose a personal loan. Some of the things you need to be aware of before settling on a personal loan include:
Personal loans come with a fixed interest rate. The amount you borrow will be dependent on your credit score, so ensure you have a favorable credit score and only take an amount you will be able to repay.
Your interest rate will be based on how much you borrow and the length of time taken to repay the loan. Therefore, the higher the amount, the higher the interest rate, and the shorter the time taken to repay, the lower the interest rates.
Each lender will have their own terms, so ensure you do your research and compare the terms, interest rates, and payment schedules before you settle on a personal loan.
Home Equity or Line of Credit
Home equity or line of credit is one of the ways to pay for expensive home repairs. Home equity is a loan you take using your home as equity. Usually, you only require up to 20% of the equity of your current home to get awarded a loan. Some of the advantages of using the home equity option are:
The interest rates are usually lower than other loan options. Lenders consider these loans low-risk as borrowers have already proven their ability to earn and repay the amount of their mortgages.
There is no limit on the number of times you can take out the money. For instance, if you have a roof repair now and an HVAC replacement in another two weeks, you can take out the money multiple times from the available limit and pay interest only for the amount you pull.
You become eligible for tax deductions on interest paid which helps you further offset your expenses. You, however, need to be cautious about taking home equity loans as you are using your home as equity. Failure to pay could lead to a foreclosure.
Credit Cards
One way to pay for expensive home repairs is to use your credit card. This is usually an easy way to go as your credit card has a certain limit, and you can borrow money to finance your home repairs and pay when the credit card bill is due. Credit cards are great as they are convenient, but they come with high interest rates. A smart way to go about it is to charge for the home repairs on your credit card in a way that allows you to earn credit card points or cash back. You can also apply for credit cards with special promotions that allow you to pay back the amount at zero interest and at an increased repayment period.
Cash-Out Refinancing
Cash-out refinancing is another excellent way to pay for expensive home repairs. Your existing mortgage is turned into a bigger mortgage. As a result, your current home loan is replaced with a newer and bigger loan. Depending on the market value, you may make a profit after the difference is calculated, and this is how to pay for expensive home repairs in an intelligent way.
Cash-out refinancing is quickly gaining popularity among homeowners as it is seen as a lucrative business. The great thing about cash-out refinancing is that an entirely new mortgage is created with its own repayment schedule, interest rates, and terms. Therefore, you are more likely to reap the benefits if mortgage rates have gone higher since the time you bought your home. Some of the benefits of cash-out refinancing include:
Tax implications – since mortgage loans are tax-deductible, the interest can be written off. However, this only applies to home improvement projects. Since your loan was to do home repairs in the first place, it is a win-win situation with tax deductions and an increased home value.
Positive impact on credit score – If you use the money from cash-out refinancing to pay off your credit card debts, your credit score has the potential to rise and could lead to lower borrowing rates in the future. This is good for you, as you cannot cash out refinance every time you need a home repair. It is always good to secure more financial avenues for future use as home repairs are varied and occur often.
Lower interest rates – If you bought your home at a time when the interest rates were high and cash-out refinance when the interest rates are lower, you end up saving a lot of money.
FHA Title-1 Loan
Another option, if you are wondering how to pay for expensive home repairs, is getting an FHA title-1 loan. Depending on the value and size of your home, you can take a maximum amount to help you cover the expensive home repairs. The amount you require will also determine whether your home will be required as collateral. Some of the benefits of this type of financing are:
The loans are offered at a fixed rate so you don’t have to worry about fluctuating interest rates during your repayment period as yours will remain unaffected.
They allow a higher debt-to-income ratio. Most financial institutions will be skeptical about awarding a loan if your debt to income ratio is higher, but such limitations do not exist in this type of financing.
Applicants with low and no credit scores are eligible for loans. Unfortunately, most people with low credit scores are shunned by other institutions or have to consult credit repair companies to get higher credit scores.
Homeowners Insurance Claim
Home repairs can be unexpected. That is why home insurance is necessary to help you cover the expenses in your time of need. However, you need to have an insurance policy before the repairs to claim for damages. Since you will be paying a certain amount every month, your insurer will assess the extent of home repair damage and the costs to cater for the damage. They can decide to cover part of or the entire repair cost depending on a few factors.
The majority of insurers do not cover catastrophes such as hail damage, but some of the damage in your home that requires repairs can be covered. However, lawyers can help you understand the insurance policy before proceeding to avoid any problems when it’s payout time. This can be a way to pay for expensive home repairs by filing a claim and getting compensation without undue financial burden resting solely on you.
The advantage of making a home insurance claim is that they can recommend contractors and negotiate on your behalf for affordable costs during repairs. If your roof is damaged, they can recommend roofing contractors they have worked with before or their own residential roofer who will do a solid job.
Government Home Repair Loans
If you are wondering how to pay for expensive home repairs, you can also get help from your government. The government offers repair home damage loans at subsidized interest rates with an extended repayment period compared to other lenders. You only have to be eligible to apply for the government loan, and you are good to go. Citizenship, proof of house ownership, and residing within a certain area are some of the conditions you need to fulfill before you are awarded a loan. In addition, the government only offers home repair loans for a selected number of home repairs. Although limited, this is a good option of how to pay for expensive home repairs at reduced costs.
A safe and comfortable home is a basic need. Therefore, it is essential to keep your home in perfect condition at all times. Since home repairs are inevitable and can be costly, having a financial backup plan is recommended because, if left unaddressed, you risk attracting higher repair costs. There is a wide range of financing options to pay for your expensive home repairs. You have to look through the available options and choose those that make sense in the long term. Options such as cash-out refinancing can be beneficial in catering for home repairs and acquiring low interest rates on your initial mortgage.