Should you use home equity to finance emergency repairs?
When you own a home, unexpected repairs are likely to happen. Whether it's a failed water heater, broken pipes or something else, the repairs can be costly to the tune of thousands of dollars and become a significant financial burden.
Consequently, many homeowners turn to high-interest credit cards or personal loans to cover emergency repairs. Alternatively, you could cover home repair expenses using a home equity line of credit (HELOC) or a home equity loan. According to CoreLogic, the average homeowner held roughly $270,000 in home equity at the end of 2022, presenting an opportunity for many homeowners to access some of that to finance emergency repairs or other expenses.
Not sure how much home equity you can access? And at which interest rate? Explore your home equity options now to learn more.
Should you use home equity to finance emergency repairs?
There are multiple advantages homeowners should be aware of when considering tapping into their home equity to pay for emergency repairs.
The 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's equity for funds you can use for almost any purpose. A HELOC delivers additional benefits, such as:
- Lower interest rates: HELOCs usually come with lower interest rates than credit cards, personal loans and other types of credit.
- Flexible borrowing: A HELOC is unique in that it operates similarly to a credit card. You can borrow only as much as you need, when you need it, up to your credit limit. Even better, 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 withdrawing the entire loan amount and paying interest on the total amount.
- Potential tax deduction: According to the IRS, you may be able to deduct the interest charges on HELOC or home equity loan if you use the funds to "buy, build or substantially improve your home that secures the loan."
Explore your HELOC options here now!
How to get a HELOC for home repairs
Before you apply for a HELOC, make sure the amount you could receive 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's equity.
Taking out a HELOC is similar to taking out other types of loans. You must submit a HELOC application, providing essential information such as your name, Social Security number and income details and agree to a credit check.
The lender will then review your qualifications based on your income, debt-to-income ratio and other factors demonstrating your creditworthiness. If approved, your lender will set your credit limit and loan terms. You'll typically receive access to your funds within one or two weeks and repay your loan over a term that includes two periods:
- Draw period: You can withdraw money from your line of credit during a draw period that typically lasts 10 years.
- Repayment period: Once the draw period expires, you'll spend the remainder of the term, usually 20 years, repaying the loan.
The benefits of using a home equity loan to finance home repairs
Depending on your circumstances, a home equity loan may offer more advantages than a HELOC.
- Fixed interest rate: Unlike HELOCs, which typically have a variable interest rate, home equity loans feature fixed interest rates. As such, the interest rate remains the same during the life of the loan. Fixed interest rates make your loan easy to manage since your payment doesn't change.
- Lump sum payment: If you need a large amount all at once, a home equity loan is better than a HELOC. Typically with home equity loans, your lender deposits a single, lump-sum payment directly into your bank account, which is helpful if you have a specific project and budget.
- No ongoing borrowing: If you have a credit card, you know how tempting it is to use it for non-essential expenses. You run the same risk with a HELOC since it operates like a credit card. That's not the case with a home equity loan. You'll have a fixed installment loan, with a specific payoff date and no continuing temptation to tap into your equity for frivolous purchases.
Research your home equity loan options here 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 like 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 and compare rates and fees to ensure you get the best loan for your needs. Be sure to consider fees and other costs, which can cut into the amount you need for home repairs. Remember, closing costs on home equity loans range from 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, the time frame to receive your lump sum payment could range 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. It may not be worth the risk of losing your home if you default on the loan for a repair that only costs a few hundred dollars, like an HVAC repair.
Also, tapping into your home's equity may not make much sense if you plan to sell your home soon. These loan options take time to repay, usually with terms of up to 30 years, and you may not recoup the full cost of repairs when you sell your home.
The bottom line
Using your home's equity can be an excellent way to pay for emergency repairs or for renovations like a kitchen remodel. You may even receive a tax break if you can prove you used the loan funds to improve your home's value. Even with rising interest rates, accessing your equity can provide a cost-effective way to repair your home without taking on high-interest loans or credit cards.
As with any credit product, carefully weigh the pros and cons before taking on additional debt and ensure you understand the loan terms so you know what you're getting into. Learn more about your home equity options here now or in the below table.
