Best Financing Options for Home Repairs
If you own your home, you’re responsible for maintaining its condition, and that can put a strain on your wallet. That’s why most experts recommend keeping 1% of your home’s value or $1 per square foot in a savings account to help cover repairs. Homeowners insurance only covers certain perils, so if you break your sink or your roof needs to be replaced due to age, you could be on the hook for the cost. And home repairs can be expensive. In 2020, the average family spent $3,192 on home maintenance costs and $1,640 for emergency projects, according to HomeAdvisor.
You may be able to cover minor repairs out of your emergency savings, but what if you need to replace your furnace or repair your foundation (which can each cost thousands of dollars)? If you’re not sure how to pay for a necessary home repair, borrowing money could be an option.
What are home repair loans?
When you need help financing an expensive fix for your home, you might use a home repair loan, which is an umbrella term for any type of loan used to cover home repairs. Each type of home repair loan comes with its own advantages and drawbacks, and some are easier to qualify for than others. The option that’s best for you will also depend on individual factors, such as your credit score and the amount you need to borrow.
Personal loans are fixed-rate loans with terms ranging from 12 to 60 months. Depending on the lender, you can borrow anywhere from $1,000 to $50,000 or more, and because the cash can be used for almost any purpose, you’ll have flexibility with how you spend it. This can be helpful if you need to consolidate some debt at the same time you pay for your home repair, for example. The other major advantage of personal loans is that the funds are issued quickly, usually within a matter of days.
Most personal loans are unsecured, meaning they don’t require collateral, but it’s possible to get a personal loan secured by your vehicle. These are often called auto equity loans and often come with lower interest rates than unsecured personal loans, especially if you have fair credit. As with most loans, the lowest rates are reserved for the most creditworthy borrowers, but it’s also possible to get a no-credit-check personal loan, often known as an installment loan. These come with much higher rates, but using one can help you build credit so you’ll have better borrowing options in the future.
Most lenders have a prequalification process that allows you to check your rate without hurting your credit, so you can compare options from different lenders. Be sure to pay attention to the origination fee, which will be taken out of the funds you receive, as well as the APR, which represents the total cost of borrowing. If you can, avoid personal loans that have prepayment penalties.
Home equity loans
A home equity loan is a way to tap the equity you have in your home. Essentially, you’re borrowing back a portion (usually up to 85%) of what you already paid in through your mortgage payments. Like with a personal loan, you’ll get a lump sum with fixed interest rates, and terms typically last five to 15 years. If you’re using the money to make a meaningful improvement, such as replacing your HVAC system, rather than a routine repair, the interest is often tax-deductible.
The downside is that you’ll pay closing costs just like you did with your mortgage, and these can run up to 5% of the principal. Your interest rate will also most likely be higher than your first mortgage. And since a home equity loan is secured by your house, if you become unable to keep up with the loan payments, you risk foreclosure.
Home equity line of credit
With a home equity line of credit -- or HELOC -- you tap your home’s equity on an as-needed basis, rather than receiving a lump sum. You can borrow up to 80% or 90% of your available equity, which is the value of your home less what you still owe on your mortgage. Borrowing with a HELOC happens in two stages: During the draw period, you can take out what you need as you go, paying only variable interest on the amount you borrow. Once you hit your maximum or the draw period ends, you’ll begin paying off the entire balance. Some lenders also require a balloon payment at the end of the term.
If you’re strapped for cash right now, it can be helpful to only pay interest during the draw period, but you should make sure you’ll have enough income to cover the payments later on. A HELOC isn’t the best option for people who want predictable monthly payments, since interest rates fluctuate. Some lenders do provide an interest rate cap, however. Like with a home equity loan, a HELOC is secured by your property, so it’s possible to lose your home if you can’t keep up with your monthly payments.
FHA 203(k) loan
Backed by the Federal Housing Administration, a 203(k) loan can be used to purchase and fix up a distressed home or to make repairs or improvements on your existing primary residence. The minimum you need to borrow is $5,000. Lenders frequently charge fees to issue the loan, and interest rates will likely be higher than a traditional FHA mortgage.
If you’re only making minor repairs or improvements, opt for a limited 203(k) loan, which is capped at $35,000. If you’re making structural changes or need to borrow more than that, you’ll need to choose a standard 203(k) loan, which requires you to hire an approved consultant to coordinate the rehab project with a licensed contractor. You won’t be able to DIY your repairs with a standard 203(k) loan.
If your repair is an emergency, an FHA 203(k) loan may not be the best option, since the application process can take longer than other types of financing. But if you need to make a major structural repair, a 203(k) loan will allow you to borrow more money at a lower interest rate than other types of financing.
FHA Title 1 loan
You can get an FHA Title 1 loan even if you don’t have equity in your home. While larger loans are typically secured by your home, if you need $7,500 or less, you won’t need to put forth collateral. To get a Title 1 loan, you need to work with a HUD-approved lender, and you can only use the funds for home repairs or improvements that make your home more “livable and useful,” such as replacing appliances, installing new plumbing or HVAC systems, or installing energy-saving upgrades.
Title 1 loans are issued by private lenders and backed by the Federal Housing Administration. To be eligible, you must have a debt-to-income ratio of 45% or less, along with a few other requirements. But there’s no minimum credit score required, and interest rates are generally low.
Many contractors partner with lenders to offer financing options to their customers. Often, you won’t even have to pay interest if you can repay the loan within a short term, typically 12 to 18 months. However, some contractors build financing fees into the cost of the project, so you might be charged a premium if you go this route. You should always compare contractor credentials, reviews, and rates before signing a financing agreement. While contractor financing can be convenient for small projects, terms are generally shorter than with other loans, so it may not be ideal for more expensive repairs.
Are there alternatives to home repair loans?
Most options for home repair loans are either secured, which means there’s a risk you could lose your home, or only offer low rates to people with good credit. Because borrowing can be risky and costly, you should consider other options before taking out a home repair loan. If the repair isn’t urgent, consider reevaluating your budget to save extra money rather than borrowing. If it’s an emergency, consider asking friends or family for help; they likely won’t charge you steep interest rates and can be more flexible with repayment. You might also consider one of the following options:
Cash-out refinancing allows you to replace your current mortgage with a larger loan and keep the difference as cash. Because you’re increasing the principal, you’ll have a higher monthly payment, but you’ll receive a lump sum that you can put towards needed repairs. That lump sum is typically no more than 80% of your home’s available equity. It’s also possible to get a lower interest rate when you refinance. However, you’ll pay closing costs when you go this route.
A reverse mortgage is a way for homeowners age 62 and older to borrow against the equity in their homes. This can be a good option for someone who has already paid off their mortgage and wants to receive payments from the lender to use for home repairs. You’ll pay closing costs and possibly even mortgage insurance premiums, but you won’t need to repay the loan until you sell your home or pass away, and you won’t need to pay taxes on the money you receive.
If you have good credit, you may qualify for a credit card with a 0% introductory APR, which can be helpful for financing minor repairs that can be paid off within the interest-free period. Typically, you can avoid interest for 12 to 18 months with these cards. For a larger repair that you need to pay off over time, you’ll likely be better off with a personal loan. That’s because once the introductory period ends, the average credit card APR is about 15%, while the average APR on a personal loan is about 10%.
HUD assistance programs
In some instances, low-income homeowners may be eligible for grants or interest-free loans from the Department of Housing and Urban Development. Check to see if you’re eligible for local home improvement programs before you shop around for home repair loans.
How to prepare for future repairs
Home repairs are inevitable, and the best way to prepare for the expense is to keep a fully-stocked emergency fund. You should have your homeowner's insurance deductible amount stashed away in addition to cash for noncovered repairs. Experts generally recommend saving 1% of your home’s value for unexpected repairs, but if you know about repairs that will be necessary in the future, you should start saving now. Keep an eye on the life of your appliances and other features of your home so you can be financially prepared.