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What to Do When You Need a Home Repair You Can't Afford

[Updated: Dec 11, 2020] Dec 17, 2019 by Maurie Backman
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Owning a home doesn't just mean making your mortgage payments, covering your property taxes, and securing homeowners insurance. It also means keeping up with the peripheral costs involved, including maintenance and repairs.

It's the latter expense, however, that can really throw homeowners for a loop. Whereas maintenance is often reasonably predictable, a massive repair issue, like a failing roof or a non-functioning septic tank, could spell trouble if you don't have funds available in the bank to cover it. If that's the situation you're in, here are a few potential solutions to explore.

1. Tap your home equity

If you have equity in your home, you can use it to pay for sudden repairs. Equity refers to the portion of your home you own yourself. If your home is worth $180,000, and you owe $120,000 on its mortgage, the remaining $60,000 represents your equity.

If you have at least 20% equity in your home, you'll generally be eligible for two different financing options: a home equity loan, or a home equity line of credit (HELOC). With the former, you borrow a specific amount and start paying interest on that sum. With the latter, you gain access to a line of credit you can draw down as needed. This means that if you're looking at a $20,000 home equity loan, you'll be liable for interest on that full $20,000. If you take out a $20,000 HELOC and your repair only winds up costing $17,000, you won't have to pay interest on that remaining $3,000 since you never actually borrowed it in the first place.

Home equity loans and HELOCs are relatively easy to qualify for, and the interest attached to them is usually lower than what you'll pay with another type of loan. As such, these options are generally a good first resort if you're stuck having to finance a repair.

Another newer option to consider if you have equity in your home? An alternative equity release product that gives you access to cash without you taking out an actual loan. Take Hometap, for example, which could give you access to up to 20% of your home's equity in cash in exchange for an opportunity to share in your home's appreciation. If your home's value rises, the company makes money. If your home's value declines, the company shares in that loss. But either way, you don't make a monthly payment as you would with a traditional home equity loan. Hometap is just one of multiple companies that offer these alternative equity programs, so it pays to do some digging if you’re in need of money.

2. Refinance with a cash-out option

Refinancing means swapping one loan for another, and you can do it with a mortgage if you're desperate for money (or if you simply want to lower the interest rate on your home loan). If you're staring down a costly home repair, a cash-out refinance is worth exploring. This type of refinance allows you to secure a new mortgage worth more than what you owe on your home. That way, you can use the extra money for other purposes, like covering a repair.

Say you owe $120,000 on your existing mortgage. With a cash-out refinance, you may be eligible to take out a $140,000 loan instead. The first $120,000 replaces your previous balance, and the remaining $20,000 can be yours in cash. You'll pay interest on the entire sum, but you'll get access to money when you need it.

3. Look into government assistance or community aid

If your home needs repairs as a result of a natural disaster, you may be eligible for financial assistance under the Federal Emergency Management Agency (FEMA). And if not, you can see if you're eligible for a local community aid program. Some states or local agencies make funds (both loans and grants) available to homeowners for emergency home repairs, though there are income requirements you'll need to adhere to in order to qualify. You can try researching your options through the U.S. Department of Housing and Urban Development.

Getting stuck with a costly home repair can be stressful and overwhelming, but as you explore your options for covering it, resist the urge to whip out a credit card and call it a day. By charging that expense, you'll likely subject yourself to a much higher interest rate than what you'd pay on a home equity loan, HELOC, new mortgage, or government or community loan.

Finally, before you resign yourself to footing that repair bill yourself, contact your homeowners insurance company and make sure you're not covered for at least a portion of it. If so, your out-of-pocket costs could wind up being far less substantial.

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