Home ownership can be a wonderful, freeing experience in that you can truly make your home your own and do what you want with it. However, the flip side of this is that you’re responsible for making necessary repairs and paying for the associated costs.
Whether you’ve been planning to make a repair for some time or the damage was completely unexpected, even a minor home repair can be quite expensive. Some of the more extensive repairs, such as roof replacement or foundation restoration, can even cost $10,000 or more! This means that if the repair is urgent, you might need more funds than what you currently have available.
A home repair can easily become a financial burden that leaves you stressed and unsure of what to do. There are options, however, and in this article, we’ll cover five options you should consider if you’re currently wondering how you’ll pay for an expensive home repair.
First Things First: Check Your Homeowners Insurance and Disaster Relief
Before you consider any additional options, first determine whether your home repair is covered by your homeowners insurance or some form of disaster relief. Check your insurance policy and determine whether the damage done to your home is covered, then file a claim accordingly. Homeowners insurance exists for exactly this reason and is there to be used when you need it most.
If your homeowners insurance either denies your claim or doesn’t cover your situation, you’ll want to consider whether the cause of the damage to your home was a natural disaster, such as a hurricane, flood, or wildfire. When natural disasters cause widespread home damage, it’s not unusual for government agencies such as the Federal Emergency Management Agency (FEMA) to offer funds to cover home repairs when insurance doesn’t pay for the damages.
If homeowners insurance or natural disaster relief don’t apply to your home repair, then it’s time to consider additional options.
Option #1: Tap Into Your Home Equity to Pay for Home Repairs
One of the most common ways to pay for an expensive home repair or renovation is to tap into your home equity. Home equity is the amount of your home’s value that you own. To determine your home equity, simply take the value of your home and subtract the amount you owe on your mortgage.
This dollar amount is wealth that you own, and you have several options available to tap into it and acquire the funds you need to pay for your home repair. You can, for example, use a portion of your home equity as collateral to secure a line of credit or loan from a bank.
Home Equity Loan
A home equity loan, sometimes referred to as a “second mortgage,” is a secured loan that uses a portion of your home equity as collateral. As a home equity loan is secured, you can usually expect a lower interest rate compared to an unsecured personal loan.
Home equity loans are most ideal when you know exactly how much money you’ll need to cover the cost of the repair, as you’ll receive all your funds in one lump sum. You’ll then make monthly payments for the term of the loan, which will cover both the loan principal and the interest on the home equity loan.
Home Equity Line of Credit (HELOC)
A HELOC is a line of credit that uses a portion of your home equity as collateral. As they are secured, a home equity line of credit will usually have a lower interest rate compared to other lines of credit. With a line of credit, you’ll be approved to borrow up to a certain amount, and you can draw on the funds as you need them.
Since you only take out money as you need it, your monthly payment will vary and depends on your current balance. A home equity line of credit is most ideal when you aren’t certain how much the repair will cost or want the option to perform the repair or renovation in stages, only paying for contractors, equipment, and supplies as you need them.
This HELOC calculator can give you an idea of what a home equity line of credit could look like for you.
Option #2: Get a Cash-Out Refinance on Your Home’s Mortgage
Another option that involves tapping into your home equity is a cash-out refinance on your current mortgage . With this option, you can extend your current home loan to provide you with additional funds if you have enough home equity to use as collateral. You’ll receive these additional funds as a lump sum and can then use them to pay for your home repairs.
A cash-out refinance makes the most sense when current mortgage rates are lower than your present mortgage’s interest rate. If you’re able to lower your interest rate enough, your monthly payment might not even increase that much despite taking out additional money. If current mortgage rates are higher than what you currently have, however, it might be better to consider a HELOC or home equity loan.
In addition to taking out money to cover an expensive home repair, you might also be able to use a cash-out refinance to consolidate some of your other debt into one monthly payment. This is especially beneficial if it allows you to eliminate or reduce revolving debt, such as credit card debt.
Option #3: Apply for a Personal Loan
If you haven’t yet built up enough home equity to take advantage of a HELOC, home equity loan, or cash-out refinance, your next best option might be a conventional personal loan. As a personal loan is unsecured, the interest rate is likely to be higher than a home equity loan’s, but a personal loan can still be a great, affordable way to pay for an expensive home repair.
With a personal loan, you’ll need to know the total cost of your home repair when you apply. If approved, you’ll receive your funds in one lump sum, which you can then use to cover the cost of the repairs, whether you intend to do it yourself or hire contractors.
After receiving your personal loan funds, you’ll then make monthly payments for the term of the loan that cover both the loan’s principal and interest.
Option #4: Save for a Repair with a Savings Account
You also have the option to simply save up the money you need over time. The main downside to this approach is that, depending on your income relative to your expenses and the cost of the home repair, the saving process could take months or even years.
Putting the money you need into a savings account can speed up the savings process, as a savings account will earn interest on your balance over time. While savings accounts do not earn interest as quickly as something like a money market account, they also tend to have lower opening deposits and are extremely low-risk, as your money isn’t subject to the ups and downs of the stock market.
A high-yield savings account is an even better option than a conventional personal savings account. You’ll earn a higher interest rate on your savings, allowing you to reach your savings goal and afford your expensive home repair much more quickly.
Option #5: Credit Cards—But Have a Plan to Repay
If you aren’t able to tap into home equity, qualify for a personal loan, or wait while your savings build up, then a final option for paying for a home repair is using a credit card. This is an option that should only be used after careful consideration, however.
As revolving credit, most credit cards have higher interest rates than forms of installment credit like home equity loans and personal loans. If a credit card is your best option to pay for an expensive home repair, then make certain you go into it with a plan for how you’ll pay the balance down. Put a certain amount from each paycheck toward the credit card balance and always aim to pay more than the minimum due. You can also use a credit card payoff calculator with your budget to determine how much you’ll need to pay each month in order to pay off the balance of the home repair, effectively treating the credit card like a personal loan with a set term.
If you’re responsible and prepared, a credit card can be a solid option to pay for an expensive home repair without having to wait for your savings to build up first.
Other Options to Pay for an Expensive Home Repair
Depending on the situation with your home, your income, and your location, you might have additional options available to pay for your home repair. For example, many municipalities have financing programs available to help in-need residents with home repairs they otherwise couldn’t afford.
There are also federal government loans and grants available, such as Title I property improvement loans from the Department of Housing and Urban Development (HUD) or Section 504 home repair loans and grants from the Department of Agriculture. These home improvement loans have strict requirements, so not everyone will qualify, but it’s always worth exploring your options.
Paying for Your Home Repair Doesn’t Have to Be Stressful
An expensive home repair can be difficult for anyone to afford, but that doesn’t mean finding the solution has to be stressful. Hancock Whitney can help you determine what financing option makes the most sense for your home and financial situation.
Whether you need to tap into your home equity, take out a loan, or open a new credit card, our bankers can help you find a solution that works for you. Contact us today and get started on the path to improving your home.
