As a homeowner, maintaining an emergency savings account is a good way to prepare for unexpected home repairs that arise from time to time. With a ready emergency savings account, you can avoid using credit cards for such expenses and accumulating debt. However, if you do not have a dedicated emergency savings account, it may make sense to use your home to repair your home by borrowing against your home equity to cover repair bills.
Emergency Home Repair Statistics
Emergency home repairs are increasingly a reality in homeowners’ lives, especially with the rise in damage caused by extreme weather. However, homeowners are often financially unprepared for these unexpected events, and with rising labor and material costs, it has become difficult for homeowners to allocate or increase emergency savings funds.
Only 48% of Americans say they have enough emergency savings to cover at least three months’ expenses, according to the annual Bankrate Emergency Savings Report.
57% of Americans who did not increase their emergency savings or do not have emergency savings in 2023 cite inflation/rising prices as the reason, while 38% point to having multiple expenses.
More than half (57%) of Americans say they have incurred costs due to extreme weather events – such as hurricanes, tornadoes, wildfires, winter storms, and floods – over the past ten years.
56% of respondents in the 2023 Bankrate survey on financial wellness were “very uncomfortable” with their emergency savings amount.
Most Common Emergency Home Repair Costs
Emergency home repair costs can vary widely, depending on the size of the home, the area you live in, the nature of the emergency, and the extent of the damage. However, some repairs are bound to be more costly than others. Below is a breakdown of some of the most common emergency home repairs and how much they typically cost, based on the latest data from HomeAdvisor.
Repair
Cost Range
Average Cost
Air Conditioning
$100 – $600
$350
Roof
$382 – $1,829
$1,103
Electrical Rewiring
$601 – $2,560
$1,540
Entrance
$830 – $2,789
$1,767
Sewage System
$629 – $2,961
$1,789
Mold Removal/Cleaning
$1,131 – $3,467
$2,299
Foundation
$2,176 – $7,821
$4,998
Common Sources of Damage and Emergency Home Repairs
Natural Disasters: Between 2016 and 2022, the National Flood Insurance Program paid an average claim amount exceeding $66,000. This entire amount may have to come out of your pocket if you do not have flood insurance. Other disasters such as wildfires also have costly consequences.
Extreme Weather: Extreme weather and climate disasters caused $165 billion in damages nationally in 2022.
Termites: Termite damage accumulates gradually, but it can cause a sudden costly disaster: the collapse of part of your home or a fire due to frayed wiring. Repairing termite damage can cost from a few hundred dollars to several thousand depending on the severity of the infestation and the speed of damage detection.
Should I Use My Home Equity to Finance My Repairs?
If you have a significant amount of accumulated equity in your home and you are facing a five-figure emergency repair, tapping into that equity may help finance the repair – especially if it turns into a major renovation.
“Although spending on the remodeling market is expected to decline next year, homeowners still have massive amounts of equity in their homes that could support financing renovations,” according to Abbey Wilm, co-director of the Joint Center for Housing Studies’ Future of Remodeling Project at Harvard University.
$300,000
The average amount of home equity in the typical American home with a mortgage, as of the third quarter of 2023
Source: CoreLogic
How to Tap into Home Equity
There are
There are two main types of tools that homeowners can use to finance emergency repairs, which are home equity loans and home equity lines of credit. A home equity loan is a lump sum that is repaid through monthly installments, and it typically has a fixed interest rate. Home equity lines of credit work like a credit card. They are revolving lines of credit that you can borrow from as needed; you can repay these withdrawals and then borrow money again during a set draw period.
With both, the property is used as collateral for the debt. Is it worth it? Let’s take a look at the details of using home equity to finance emergency repairs.
Advantages of Using Home Equity to Finance Emergency Repairs
There are many benefits to using a home equity loan or a home equity line of credit to cover unexpected home expenses. These benefits include:
Lower interest rates: Secured loans generally have lower interest rates and better terms than unsecured loans. This means you’ll pay less interest on a home equity loan compared to a credit card.
Long repayment schedules: Some home equity loans come with repayment terms of up to 20 years – much longer than most personal loans – making monthly payments more manageable.
Tax advantage: The interest on a home equity loan is often tax-deductible, provided the money is used for significant home repairs, renovations, or improvements.
Disadvantages of Using a Home Equity Loan for Emergency Financing
As with any financial product, there are also drawbacks to consider when using a home equity loan or home equity lines of credit.
Potential loss of home: Your home is the collateral backing the debt. This means if you fail to repay, the lender can foreclose on your house. Also, if the debt is still outstanding when selling the home, you’ll have to pay it off immediately from your proceeds.
Reduced equity: Borrowing against your home’s equity means you’re lowering your ownership stake – which can be a potential issue if you want to refinance your mortgage in the future. Additionally, if there’s a downturn in the local housing market, you may need to pour money into your home only for its value to sharply decline. You might even find yourself with negative equity, which means you owe more than the home is currently worth.
Timeframe for financing: A home equity loan may not be the fastest way to access cash in an emergency, as the entire process, from application to funding, can take most of the month or longer. Home equity lines of credit may be a bit faster, as they can close in as little as two weeks.
Other Home Repair Financing Options
If you need to cover the cost of an emergency home repair and do not want to borrow from a home equity loan or home equity lines of credit, consider the following options:
Home insurance claim: If you have the time to wait for the claim to be processed and paid, a home insurance claim can be a cost-effective option. You’ll need to ensure your insurance provider covers the repair and what your deductible is before considering this.
Personal loan: If you don’t have a strong credit history or much equity in your home, a personal home improvement loan might be a more feasible option. Personal loans are typically faster and easier to obtain than home equity loans, but interest rates are relatively higher, especially if you have poor credit.
Loans
Government-Supported: Some government-supported loans, such as the FHA 203(k) loan, VA renovation loan, and USDA Section 504 home repair loan, can assist with minor repairs or major renovation projects. If you’re in an emergency and your home is uninhabitable, you may not have time to get one of these loans, but they can be a viable option if the repair is not urgent and you qualify.
The Final Word on Using Home Equity for Emergency Repair Costs
Unexpected home repair costs can add up quickly. If you don’t have emergency savings set aside for such expenses, a home equity loan or a home equity line of credit may be the most cost-effective way to cover the bill in an emergency—especially if it’s in the five-figure range.
Home equity loans typically come with more competitive interest rates and long repayment terms: they may be the most cost-effective option for borrowing a large sum. But be sure to carefully review the downsides. This type of financing uses your home as collateral, will take time to obtain, and will reduce the equity you have built up in your home. It will also be another lien on your home that must be paid off if you sell it, impacting any profits you may make.
Frequently Asked Questions
What is a home equity loan?
Home equity loans are a type of loan that allows you to borrow against the equity you have accumulated in your home. The funds are provided in the form of a lump sum that is repaid in monthly installments and usually has a fixed interest rate.
What is a home equity line of credit?
A home equity line of credit is another type of financing that allows you to borrow against the equity you have accumulated in your home. The funding is provided as a revolving line of credit, functioning like a traditional credit card—meaning you can borrow money as needed, repay borrowed funds, and then borrow again during a designated draw period. The interest rate associated with home equity lines of credit is usually variable, and the draw period for lines of credit is limited to a specific time frame.
How can I rebuild my emergency savings account?
Some of the best tried-and-true ways to rebuild your emergency savings account include creating a budget so you know how much money you have coming in and what you are spending. It’s also helpful to cut back on expenses so you can direct more money into your emergency savings account. Setting up an automatic transfer for your savings account is another smart move, by arranging automatic transfers or direct deposits from your paycheck into your emergency savings account. Finally, finding a side job or additional sources of income can also help speed up your efforts to rebuild your emergency savings account.
What percentage of home damage is typically covered by homeowners insurance?
If your home is damaged due to a covered event like fire, hurricane, hail, or lightning, insurance will cover the costs to repair or rebuild your home. Most will cover it—as long as you meet your deductible, of course. However, when taking out your policy, it’s important to purchase enough coverage for the structure to cover the cost of rebuilding the home: most insurance companies follow the 80 percent rule, meaning you should insure your home for at least this percentage of the rebuilding cost to receive compensation from the insurance company.
Source:
https://www.aol.com/home-pay-emergency-repairs-193347109.html
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