Find money to fix a vacation home
If you own a vacation home, chances are you can afford the insurance you need to protect it.
But in the real world, your policy may not cover 100 percent of disaster damage. And then there are those deductibles.
So how do you get the money you need to repair the storm damage?
Here are eight options for finding money to fix uninsured damage to a vacation home, roughly in order of expense and advisability.
The upside: By far, withdrawing from a savings account is the easiest option — no forms, no penalties and no interest.
And frankly, at today’s rates, you’re probably not missing much in the way of interest if you’re taking money out of the typical savings account. You can even set up a repayment plan to yourself and have that money automatically redeposited to your savings account.
The downside: Typically, there’s only one: You don’t have that savings if you suddenly need it for something else.
Home equity line of credit on either house
If you want to use a home equity line of credit, or HELOC, you have two options. You can get a line of credit on your primary residence. Or, if you already have a HELOC on your now-damaged vacation home, you may still be able to access it.
But it’s also possible the bank could cut or curtail a HELOC on a now-damaged home, says Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington, D.C.
The upside: Rates are low — often in the neighborhood of prime plus 1 percent, Donnelly says. And you can take only as much money as needed, and only when you need it. If the loan is secured by your primary residence, you can often deduct the interest, he says. And you can usually close in two to four weeks, he says.
The downside: Before you can get an equity-based loan, you have to have some equity. Rates are often adjustable, and while you can often lock in a fixed rate later, it will typically be higher, Donnelly says. There can also be transaction fees for the loan, which can often range from several hundred to several thousand dollars, depending on the lender and your area, he says.
Also, if the loan is based on equity in your primary residence, you’re putting that home at risk of foreclosure if you have another financial catastrophe and can’t make the payments.
Home equity loan on your primary residence
Also called a second mortgage. If your primary residence is worth more than your current mortgage, you might be able to get a loan on that excess value.
The upside: Rates are fixed, and they’re averaging about 6 percent, Donnelly says. The closing period is two to four weeks, he says.
The downside: You have to have equity in your home and good credit. Closing costs run from several hundred to several thousand dollars, depending on where you live, says Donnelly.
Also, you’re taking on another debt with your home as collateral. So if you can’t pay the note — or in this case, both notes — you’re risking foreclosure on your primary home to make repairs on your vacation home. If home values drop, you could end up owing more on the home than it’s actually worth.
Refinance your home, cash out some of its equity and fix your vacation home. Or, in some cases, you might be able to cash out equity on your vacation home — based on what it would be worth after the repairs, Donnelly says.
The upside: Rates are low — about prime-plus-one for the best credit profiles — and can be fixed or adjustable, he says. And you can deduct the interest on your taxes.
The downside: First, you need to have equity in the residence. With a cash-out refinance, lenders often loan up to 75 percent of the home’s value, says Donnelly.
That means you’ll need significant equity to walk away from the table with any cash.
You’ll also need a decent credit rating. And closing costs can eat up anywhere from several hundred to several thousand dollars, depending on the lenders and where you live, says Donnelly. And it could take 30 to 90 days to close, depending on your lender, he says.
The biggest concerns: If you get hit by another unexpected event (job loss, layoffs, unforeseen bills), you’re putting your main home at risk to fix your vacation home. And if home values drop, you could end up owing more than the home is worth.
If you need to cover a couple thousand dollars, it might be tempting to use a loan you already have: a credit card.
The upside: It’s easy, quick and you don’t have to go through an approval process.
The downside: It can sink your credit rating, even as you’re shoring up your second home.
Almost a third of your credit score is determined by how much credit you use each month (whether or not you pay it off). Running up card balances — especially above 20 percent of your credit line — can decrease your score, says Anthony Sprauve, spokesman for myFICO.com, a division of credit-scoring company FICO. It doesn’t matter if you use one card or spread it among several, he says.
An alternative is to use a charge card, with which balances are paid in full every month, because many don’t report balances to the credit bureaus. But you’ll have a pretty short window to repay that money.
Still, if your credit’s good, carrying a larger-than-normal balance for just a few months shouldn’t have too much of a long-term impact, Sprauve says.
If you use a card, charge the expenses themselves rather than using a cash advance that will likely carry a higher annual percentage rate and could have different repayment requirements.
Sometimes called signature loans, personal loans are unsecured advances that are granted based almost solely on your good credit.
These are usually smaller loans (think a few thousand dollars), but some banks may take it as high as the $10,000 range, Donnelly says.
The upside: You’re not putting any assets on the line. You don’t have to specify why you want the money. And because you’re not putting it on credit cards, you don’t have to worry about wrecking your credit rating if you carry it for more than a few months.
The downside: Not all institutions offer personal loans. You need great credit. And rates will be higher than with secured loans, likely in the neighborhood of 9 percent or 10 percent, Donnelly says.
Also, because it’s not a mortgage on your primary home, you can’t deduct interest, he says.
Borrow from your 401(k)
Many plans allow penalty-free withdrawals to repair a primary home, not a vacation home, says Wayne Bogosian, president of The PFE Group and co-author of “The Complete Idiot’s Guide to 401(k) Plans and Providing Financial Education and Advice.”
And a “hardship” withdrawal is “going to be a tough sell if you have a primary residence that is untouched,” he says.
But some plans will allow you to borrow money interest-free.
The upside: You don’t have to give a reason. While rules vary, you can often borrow up to half of your account balance, up to $50,000 — less any 401(k) loans you’ve taken out in the last year, Bogosian says. Rates generally are about prime plus 1 percent or 2 percent and typically have a five-year repayment period, he says.
The downside: Not all plans allow loans. If you leave your job (voluntarily or involuntarily), repayment is due immediately. If you can’t repay it, you’ll owe income tax on the total plus a 10 percent penalty. Not to mention you’ve raided your retirement nest egg.
“I always like to put the 401(k) the last stop on the train,” Bogosian says. “It should never be the first option. Many times it ends up being the first option because it’s the easiest one.”
Borrow from your IRA
Taking money out of your individual retirement account is easy, but it might be wiser to exhaust other options first.
The upside: Your traditional and Roth IRA money is generally available for you.
A Roth individual retirement account is like a savings account: After a certain period, you can always withdraw the money you deposited. While there are no penalties or interest, there’s also no way to replace it because there are limits on just how much you can contribute each year, Bogosian says.
So it makes sense to use it if your Roth IRA is your emergency fund, but not if you’re counting on your Roth IRA for retirement, he says.
With a traditional IRA, “you can always access your money for up to 60 days,” Bogosian says. “But be forewarned, you have to get that money back to avoid taxes and a 10 percent premature withdrawal penalty.”
The one exception to the 60-day rule is if you’re 59 1/2 or older, you’re allowed to make a penalty-free withdrawal, he says. But you’ll owe taxes on any money you take.
The downside: If you’re using an IRA loan to “bridge” a check from an insurer or another loan, ask yourself what happens if you can’t get that money within 60 days.
And last but not least, this is money you’d planned to have earning interest for your retirement. What happens to you if it’s not there for your retirement?
More On Home Repairs:
- Compare interest rates
- Where to find cash after a disaster
- Video: Saving on home improvement
- Should you borrow from your home equity?