Using home equity to finance emergency repairs

Even the best-maintained homes encounter emergency damages from time to time — and, in between their increased frequency (due to more extreme weather conditions) and increased repair costs (due to inflation), these damages are getting more expensive. So it might make sense to use your home to fix your home, by borrowing against your equity stake to foot the bills.

Both home equity loans and lines of credit (HELOCs) allow you to tap your home’s equity (the amount of the property you own outright). Home equity loans are lump-sum installment loans that typically come with a fixed repayment period. HELOCs provide a credit limit, similar to a credit card, from which you can draw as needed over time, paying a variable interest rate.

With each, you’re putting the property up as collateral for the debt. Is it worth it? Let’s look at the particulars of using home equity to finance emergency repairs.

The most common emergency home repair costs

Emergency repair costs vary tremendously, depending on the size of your home, the area where you live, the nature of the emergency and the extent of the damage. However, some repairs are more expensive than others. Here’s a breakdown of some of the most common emergency home repairs and how much they typically cost.

Other common emergency home repairs

• Natural disasters: As of 2021, the average flood claim payout from the National Flood Insurance Program was $44,401. That could all have to be paid out of pocket if you don’t have flood insurance. Other disasters like wildfires have costly ramifications, as well.
• Termites: Fixing termite damage can cost a few hundred dollars to several thousand depending on the severity of the infestation and how quickly the damage is discovered.

Should I use home equity to finance my repairs?

If you have a significant amount of equity built up in your home and are facing an emergency repair, tapping that equity could help finance the fix.

“Although remodeling market gains are expected to cool significantly next year, homeowners still have record levels of home equity to support financing of renovations,” says Abbe Will, associate project director of the Remodeling Futures Program at Harvard University’s Joint Center for Housing Studies.

Two caveats to tapping equity, though: Home equity loans and HELOCs are secured: Your home acts as collateral. That means you run the risk of losing your home if you default on the debt. Your level of equity can change depending on the housing market, too, so you could end up pouring money into your home only for its value to sharply decline.

Pros of using a home equity loan to finance emergency repairs

There are many benefits to using a home equity loan or HELOC to cover the costs of unexpected home expenses. They include:

• Lower interest:  Secured loans typically have lower interest rates and better terms than unsecured ones. That means you’ll pay far less interest on the home equity loan than you would on a credit card.
• Long repayment timelines: Some home equity loans come with repayment terms as long as 20 years — much longer than most personal loans — which can make the monthly payments more affordable.
• Tax advantage: The interest on a home equity loan is often tax-deductible, if the money’s used to repair, rebuild or substantially improve the home.

Cons of using a home equity loan to finance an emergency repair

Like any financial product, there are also drawbacks to consider when using a home equity loan or HELOC.

• Potential to lose your home: Your home is the collateral backing the debt. Meaning if you fail to repay, the lender could foreclose on it. Also, if the debt’s still outstanding when you sell the home, you’ll have to immediately repay it out of your proceeds.
• Decreased equity: Borrowing against your home equity means you’re decreasing your ownership stake — a potential problem should you want to refinance your mortgage down the road.
• Funding timeline: A home equity loan may not be the quickest way to access cash in an emergency as the entire process, from application through funding, can take at least two weeks and often longer.

Other home repair financing options

If you’re needing to pay for an emergency home repair and don’t want to take out a home equity loan or HELOC, consider the following options:

• Homeowners insurance claim: If you have time to wait for a claim to be processed and paid out, a homeowners insurance claim could be a cost-effective option. You’ll need to ensure that your insurance provider covers the repair and how much your deductible is before you consider this.
• Personal loan: If you don’t have strong credit or a lot of equity in your home, a personal home improvement loan might be a more accessible option. Personal loans tend to be quicker and easier to get than home equity loans, but the interest rates are relatively higher, especially if you have poor credit.
• Government-insured mortgages: Some government-backed repair loans, such as a 203(k) mortgage, a VA renovation loan or a USDA Section 504 home repair loan, can help with both minor repairs or major rehabilitation projects. If you’re in an emergency situation and your home isn’t habitable, you might not have the luxury of time to obtain one of these loans, but they can be a viable option if the fix isn’t urgent and you qualify.

Final word on financing emergency repairs

The cost of unexpected home repairs can add up quickly. If you don’t have emergency savings squirreled away for such expenses, a loan may be the most cost-effective way to pay the bill in a crunch.

Home equity loans typically come with competitive interest rates compared to credit cards and a lengthy repayment timeline, which can make them an affordable option. But consider the downsides carefully. This type of loan requires using your house as collateral, will take a while to obtain and will decrease the equity you’ve built in your home. It’ll also act as another lien on your home, which will have to be repaid at once if you sell, eating into any profits you might make.