Should you use home equity to finance emergency repairs?

When you own a home, unexpected repairs are likely. Whether it’s a failed water heater, broken pipes, or something else, repairs can cost thousands of dollars and become a significant financial burden.

As a result, many homeowners turn to high-interest credit cards or personal loans to cover emergency repairs. Alternatively, you can cover the cost of home repairs using a Home Equity Line of Credit (HELOC) or a Home equity loan. According to corelogicThe average homeowner has roughly $270,000 in home equity at the end of 2022, which presents an opportunity for many homeowners to access some of that. Emergency repair money or other expenses.

Not sure how much home equity you can access? And what interest rate? Explore your home equity options now to learn more

Should you use home equity to finance emergency repairs?

There are several benefits that homeowners should be aware of when considering tapping into their home equity to pay for emergency repairs.

Benefits of using a HELOC to finance home repairs

Both home equity loans and home equity lines of credit allow you to tap into your home equity funds that you can use for almost any purpose. A HELOC offers additional benefits, such as:

• Lower interest rates: HELOCs typically come with lower interest rates than credit cards, personal loans and other forms of credit.
• Taking Flexible Loans: A HELOC is unique in that it works like a credit card. You can borrow as much as you need, when you need it, up to your credit limit. Better yet, you only pay interest on the amount you borrow, not your credit limit. A HELOC allows you to complete repairs at your own pace without having to withdraw the entire loan amount and pay interest on the total amount.
• Possible tax deductions: According to The IRSYou may be able to deduct interest charges on a HELOC or home equity loan if you use the funds to “buy, build or substantially improve your home secured by the loan.”

Explore your HELOC options here now!

How to Get a HELOC for Home Repairs

Before you apply for one HELOC, make sure that the amount you can get is enough to meet your needs. Most lenders require you to have at least 15% equity in your home and will limit your HELOC to 85% of your home equity.

Taking out a HELOC is like taking out any other type of loan. You must submit a HELOC application and agree to a credit check by providing necessary information such as your name, social security number and income details.

Lenders will review your eligibility based on your income, debt-to-income ratio and other factors that demonstrate your creditworthiness. If approved, your lender will set your credit limit and loan terms. You’ll usually have access to your funds within a week or two and repay your loan over a period that includes two periods:

• Drawing Duration: You can withdraw money from your line of credit during a draw period that usually lasts 10 years.
• Repayment Period: Once the draw period is over, you’ll spend the remainder of the term, usually 20 years, paying off the loan.

Advantages of using a home equity loan to finance home repairs

Depending on your situation, a home equity loan may offer more benefits than a HELOC.

• Fixed Interest Rate: Unlike HELOCs, which typically have variable interest rates, home equity loans have fixed interest rates. As such, the interest rate remains the same throughout the life of the loan. Fixed interest rates make it easier to manage your debt since your payments don’t change.
• Bulk Payment: If you need a large amount at once, a home equity loan is better than a HELOC Typically with home equity loans, your lender deposits a single, lump sum directly into your bank account, which is helpful if you have a specific project and budget.
• No running debt: If you have a credit card, you know how tempting it is to use it for unnecessary expenses. You run the same risk with a HELOC because it works like a credit card. That is not the case with home equity loans. You’ll have a fixed installment loan, with a fixed repayment date and no temptation to tap into your equity for frivolous purchases.

Research your home equity loan options now to see if it’s worth it for you.

How to Get a Home Equity Loan for Home Repairs

To qualify for a home equity loan, your credit score should be in the mid-600s or higher and you should have at least 15% equity in your home. Your lender will also consider your debt-to-income (DTI) ratio, which measures the amount of your monthly debt obligations compared to your gross monthly income. Generally, lenders prefer to see a DTI ratio of 43% or less on home equity loans.

If you meet the eligibility criteria, the next step is to shop around and compare rates and fees so you get the best loan for your needs. Don’t forget to consider fees and other expenses, which can deduct the amount you need for home repairs. remember, Home equity loan closing costs 2% to 5% of the loan amount.

Once you find the best loan offer, submit your application and be prepared to send proof of income, bank statements and other documents your lender may request. If approved, your lump sum payment can be anywhere from three business days to two weeks after closing.

Other considerations

Remember, home equity loans and HELOCs are secured and use your home as collateral. A repair that costs only a few hundred dollars, such as an HVAC repair, may not be worth the risk of losing your home if you default on the loan.

Also, tapping into your home equity may not make much sense if you plan to sell your home soon. These loan options take time to pay off, usually over a term of up to 30 years, and you may not recoup the full cost of repairs when you sell your home.

Bottom line

Using your home equity can be a great way to pay for emergency repairs or renovations like a kitchen remodel. You may even get a tax break if you can prove that you used the loan funds to improve the value of your home. Even with rising interest rates, accessing your equity can provide an affordable way to repair your home without taking out high-interest loans or credit cards.

As with any credit product, weigh the pros and cons before taking on additional debt and make sure you understand the terms of the loan so you know what you’re getting into. Learn more about your home equity options now here or in the table below.