How your home can pay for emergency repairs

As a homeowner, maintaining an emergency savings account is a good way to be prepared for the unexpected home repairs that inevitably arise from time to time. With  emergency savings at the ready, you can avoid using credit cards for such expenses and accumulating debt. But if you don’t have any emergency savings set aside, it might make sense to use your home to fix your home, by borrowing against your home equity to cover the repair 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 while HELOCs provide a credit limit, similar to a credit card, from which you can withdraw money as you need it over time.

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.

Emergency home repair statistics

Emergency home repairs are increasingly becoming a fact of life for homeowners, particularly as extreme weather-induced damage becomes more common. But often homeowners are financially unprepared for these unexpected events and, with inflation driving up the cost of labor and materials, it’s becoming harder for homeowners to earmark or increase emergency savings funds.

The most common emergency home repair costs

Emergency repair costs of course 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 do tend to be more expensive than others. Here’s a breakdown of some of the most common emergency home repairs and how much they typically cost, based on the latest data from HomeAdvisor.

Common sources of damage and emergency home repairs

• Natural disasters: Between 2016 and 2022, the National Flood Insurance Program paid an average claim amount of more than $66,000. That sum 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.
• Extreme weather: Extreme weather and climate disasters caused $165 billion in damages nationally in 2022.
• Termites: Termite damage builds up gradually, but it can cause a sudden costly catastrophe: a collapse of a part of your home or fire sparked by chewed-through wires. 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 my home equity to finance my repairs?

If you have a significant amount of equity built up in your home and are facing a serious, five-figure emergency repair, tapping that equity could help finance the fix — especially if it evolves into a major remodel.

“Although remodeling market spending is expected to weaken next year, homeowners still have massive levels of home equity that could support financing of renovations,” says Abbe Will, associate project director of the Remodeling Futures Program at Harvard University’s Joint Center for Housing Studies.

How to tap home equity

The two primary types of tools that homeowners can use to finance emergency repairs are home equity loans and HELOCs. A home equity loan is a lump sum of money that is repaid via monthly installments, typically with a fixed interest rate. A home equity line of credit functions like a credit card. It is a revolving line of credit that you borrow against as needed; you can repay those withdrawals and then borrow money once again during a set draw period.

Pros of using home equity 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

As with 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. Also, if there’s a drop in your local housing market, you could end up pouring money into your home only for its value to sharply decline. You could even end up with negative equity, meaning you owe more on the home than it’s currently worth.
• 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 the better part of a month or even more. HELOCs tend to be a little quicker, closing in as little as two weeks.

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-backed mortgages: Some government-backed loans, such as an FHA 203(k) loan, 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 using your home to pay for 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 home equity loan or HELOC may be the most cost-effective way to pay the bill in a crunch — especially if it’s in the five figures.

Home equity loans typically come with much more competitive interest rates and a lengthy repayment timeline: They may well be the most affordable option for borrowing a sizable sum. But consider the downsides carefully. This type of financing uses 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.

Frequently asked questions

• What is a home equity loan?

  Home equity loans are a type of loan that allow for borrowing against the equity you’ve accumulated in your home. The funds are provided in a lump sum and the debt is repaid via monthly installments, typically with a fixed interest rate.
  

• What is a home equity line of credit?

  A home equity line of credit is another type of financing that allows for borrowing against the equity accumulated in your home. HELOC funding is provided in the form of a revolving line of credit, which functions very much like a traditional credit card—meaning you can borrow money as you need it, repay the money borrowed and then borrow more money again. The interest rate associated with HELOCs is typically variable and the draw period for the line of credit is limited to a specific period of years.
  

• How to rebuild your emergency savings?

  Some of the most tried-and-true ways to rebuild emergency savings include first creating a budget so that you know how much money you have coming in and going out and can stay on top of spending. It’s also helpful to cut expenses so that you can direct more money to your emergency savings. Automating your savings is another wise step, setting up automatic transfers or direct deposits from your pay to your emergency savings account. Finally, finding a side hustle or additional streams of revenue to increase your income can also help fast track your efforts to rebuild emergency savings.
  

• What percentage of home damage is typically covered by your home insurance?

  If your home is damaged by a covered event such as a fire, hurricane, hail, or lightning, your insurance will pay to repair or rebuild your home. It should pay for most of it — once you’ve met your deductible, of course. However, when taking out your policy, it’s important to purchase enough coverage for the structure to cover the cost of rebuilding the home: Most insurers follow the 80 percent rule, which means that you must insure your home for at least that much of its replacement cost to get reimbursed by the insurance company.  Coverage for personal belongings is generally 50 to 70 percent of the insurance you have on the structure of the house, according to the Insurance Information Institute.