Home repair loans: Financing options when an emergency happens

Young man renovating an atticImage: Young man renovating an attic

In a Nutshell

Home repair loans can come to the rescue when an unexpected emergency strikes. This type of financing is designed to help homeowners deal with repairs when they might not have the cash on hand to cover expenses.
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If you’re renting a place and your hot water heater gives out, a call to the landlord might be all it takes to start the necessary repairs. But when it’s your name on the mortgage, home maintenance probably falls on your shoulders.

The average U.S. homeowner spent $7,560 on home improvements in 2018, according to a HomeAdvisor survey. Of that, $416 was home emergency spending. That’s notable since the Federal Reserve found in a 2018 survey that 12% of Americans would be unable to cover a $400 surprise expense.

Funding an unexpected home repair can be stressful if you don’t have the cash on hand to cover it. You may be considering a home repair loan to cover the costs. We’ll go over what a home repair loan is and when it may make sense for your situation.

What is a home repair loan?

A home repair loan is a general term and may refer to a personal loan used for home repairs or another type of loan, such as a home equity loan. If you need money to cover a home repair, here are a few types of loans you may want to consider.

Personal loans

Your credit helps determine whether you qualify for a personal loan and the interest rate you may receive. The better your credit history and credit scores, the more likely you are to be approved for a loan with a competitive interest rate.

Personal loans are often unsecured — meaning they aren’t tied to collateral — and are considered installment loans. If approved, you’ll receive a set amount of money to pay back over a fixed period of time.

You can apply for personal loans through a number of institutions, including banks, credit unions, consumer finance companies, online lenders and peer-to-peer lenders.

An unsecured personal loan may be an attractive option for home repairs because your house isn’t pledged as collateral. So if things go sideways, you aren’t at risk of losing your home.

You may also be able to land a better interest rate with a personal loan than you would by using a credit card.

Home equity loans

Your home itself may be used to unlock financing for a home repair. A home equity loan is a secured loan that uses your home as collateral to secure the loan — your borrowing power is directly linked to the amount of equity you have in your home. Equity is how much your property is currently worth, minus any mortgage debt you owe.

Homeowners are usually limited to borrowing no more than 85% of their equity in the home. For example, if your home is worth $350,000 and your mortgage balance is $250,000, you’ve got $100,000 of equity. That means the most you could borrow would likely be $85,000.

Since a home equity loan amount is disbursed as a lump sum, it may make the most sense for people who have a general price tag in mind for a large home repair, like a new roof. Just keep in mind that home equity loans can come with fees.

And if you default on your loan, you’re at risk of losing your home.

Home equity lines of credit

A home equity line of credit, or HELOC, is similar to a home equity loan but is structured a little differently. But like a home equity loan, you need to use your home as collateral for the loan. Instead of getting a lump sum of cash, you’re issued a line of credit. This can provide flexibility since you can borrow over a period of time, rather than as a lump sum. Qualifying homeowners can typically borrow up to 85% of the equity they have in their home.

HELOCs can set a draw period — a fixed period of time set by the lender during which you can borrow money from your account. When the draw period ends, you might be able to renew your line of credit. If you aren’t able to renew your line of credit, you won’t be able to borrow more money on the line of credit.

In some ways, HELOCs are similar to credit cards because you can borrow different amounts (up to your credit limit) and repay as you go. One caveat is to be mindful of your budget. If you get in over your head and borrow more than your budget can absorb, you’ll be putting your home at risk of foreclosure.

Should I get a home repair loan?

This isn’t a one-size-fits-all question. Deciding whether to explore home repair loans boils down to several factors.

  • What do you need the money for? Is it something that can’t be put off? A busted HVAC or burst pipe, for example, aren’t things you can usually ignore.
  • What’s your current financial situation? Review your budget and make sure you can afford the new monthly payments of a home repair loan without putting yourself in financial hot water. If you don’t have much wiggle room in your budget and it’s not an emergency repair, consider holding out. One option is earmarking cash windfalls — like tax refunds or work bonuses — for home repairs.
  • What interest rates do I qualify for? Less-than-stellar credit may set the stage for higher interest rates. Again, it comes down to how badly you need the money. Replacing your carpets with wood floors isn’t exactly an emergency, so you have time to take steps to move your scores in the right direction before applying for home repair financing.
Home improvement loans: Which type is best for you?

What are my alternatives?

Before you start applying for home repair loans, look over your homeowners insurance policy to see if any portion of your repair is covered. If not, here are some other options worth considering.

Cash-out refinance

A cash-out refinance is when you use home equity to refinance your existing home loan with a new, larger mortgage. You can receive the difference and put it toward your home repairs. It may sound simple enough, but do the math beforehand because you could end up with a higher interest rate with refinancing. You may also be on the hook for closing costs.

Credit cards

Credit cards can be tempting, especially if you already have one in your wallet. If you qualify for a low-interest introductory offer on a new credit card and can afford to repay the purchase during the promotional period, it may make financial sense to use it for an emergency home repair.

But keep in mind that maxing out your cards could affect your credit scores. How much you owe in relation to your available credit limits — your credit utilization ratio — makes up 30% of your FICO score. If you must carry a balance from month to month, you should aim to keep it below 30% of your credit limit.

Community programs

Check your local Department of Housing and Urban Development office or website to see if any grants or community-based programs are available. The HOME Investment Partnerships Program, for example, can help cover repairs for low-income homeowners.

What’s next?

When all is said and done, the right home repair financing for you has everything to do with your personal financial situation, including how much equity you have in your home, your monthly budget and the extent of home repairs you need to complete. You’ll also want to think about whether your home improvement project is a remodel that can wait versus an emergency repair.

Either way, having a healthy emergency fund can put you in a position where you don’t need to rely so heavily (or at all) on a home repair loan. Squirreling away a portion of every paycheck for an emergency home fund can serve you well. Start small and rest easy knowing that every dollar saved now is a dollar less you’ll have to borrow down the line.

About the author: Marianne Hayes is a freelance writer who has contributed articles to Credit Karma. Read more.