5 ways to pay for emergency home repairs

If your home furnace is faulty, your basement is flooded, or your windows need replacing, don’t panic. When it comes to paying for emergency home repairs, you have options. Here, we cover five of them.  

1. Use a home equity loan or a HELOC

A home equity loan and a home equity line of credit (HELOC) are two different financial products with some similarities. Each type of loan allows you to borrow against the equity in your home. 

With both kinds of loan, your home acts as collateral. Collateral is a financial safety net for the lender—if you can’t repay the loan, the lender could sell your collateral to recover its losses. Having this financial safety net means lenders typically offer home equity loans and HELOCs at lower interest rates compared to other kinds of loans. 

To help you better understand how how home equity loans and HELOCs work, it may help to know the key differences:

Achieve’s home equity loan combines the best features of HELOCs and home equity loans. When your loan is approved, you get the full amount at a fixed interest rate. Then you get a draw period during which you can pay your balance down and borrow more, up to your loan limit, as often as you want to, still at the same fixed interest rate you got when your loan was finalized. After the draw period, you’ll enter a repayment period and can’t borrow any more.

If quick funding is important to you, ask your lender how long it takes to fund a HELOC or home equity loan. 

How either loan impacts your home equity depends partly on how the money is used. Equity is the difference between your home’s value and the amount you still owe on any mortgages, including home equity loans and HELOCs. Using the funds to improve your home might increase your home's value. 

2. Apply for a personal loan

Taking out a personal loan to pay for home repairs is another option. Most personal loans are unsecured. Personal loans typically offer lower interest rates than credit cards and may be easier on your budget. Here are some of the factors lenders consider during the loan approval process:

• Credit score. FICO credit scores range from 300 to 850. Each lender decides what minimum credit score they require. A higher score is more likely to help you qualify for a lender’s best offer. 

• Credit history. Your credit history offers lenders a peek into how well you’ve managed your credit accounts in the past. 

• Income. Lenders need to see that you have a steady income that will allow you to repay the loan. Some lenders set a specific income requirement.

• Debt-to-income ratio. Your DTI compares your monthly housing and debt payments to your monthly income. For example, if you have a monthly income of $5,000 and you spend $2,000 on housing and minimum debt payments, your DTI is 40%. A lower DTI implies that you can handle your current financial obligations on the income you make. A higher DTI could mean that your budget doesn’t have room for another payment. 

3. Set up a payment plan with the contractor

Once you’ve found a contractor to perform the work, ask if they offer financing. A large contractor may finance the job themselves or partner with a lender. If they do have a financing plan, make sure you understand the terms.

• Typically, contractors require a down payment of 10% to 33%. Find out how much your contractor charges upfront. 

• What's the interest rate, and is it fixed?

• Are progress payments due at certain stages of the project?

• When is the final payment due? Is it upon completion, or after a satisfactory inspection?

• What are the repayment terms? In other words, how long do you have to repay the loan?

Even if your contractor offers a reasonable payment plan, take time to check out others. There may be a better deal available.

4. Use a credit card strategically

If the cost of repairs is reasonable, there are a couple of strategic ways to use a credit card to cover the expense. For example, if the final bill comes out to $4,000, you might:

Use your credit card with the lowest interest rate

Let's say your best card has an APR of 18% and you can afford to repay $200 a month. You could clear the debt in two years and spend $791 in interest (if there aren’t other charges on the card). 

Apply for a credit card with a 0% promotional rate

If your credit score is good or excellent, you might qualify for a credit card with a 0% promotional interest rate. Typically, these cards offer 0% for a set period—often 12 to 21 months. At 0% interest, you could clear a $4,000 debt in 18 months at $222 per month without paying a penny in interest. 

Using a credit card may be worth considering if the cost of repairs is relatively low and you have access to a card with a manageable interest rate, especially if you don’t typically carry a balance. If you’re already struggling to get rid of your credit card debt, adding to it could make your financial situation worse.

5. Tap into an emergency savings fund

If you've managed to tuck away money in an emergency fund, that's great. It means you could access funds without needing to borrow. Once you've covered the cost of repairs, your only job is to rebuild your emergency fund. While experts suggest you aim for enough money in an emergency account to cover three to six months' expenses, any amount can be helpful. The more you save, the less you'll ever have to borrow. 

Homeownership is still part of the American Dream, even when things are breaking down around you and it doesn’t feel very dreamy. Making repairs as needed is a smart way to care for what could be your most valuable asset. Maintenance helps your home maintain its value, and that helps you build equity that adds to your net worth. It may be a hassle at the time, but it's worth it in the long run.