Should I Take out a Home Equity Line for Home Repairs?
When you need to make major home repairs or you want to remodel a room, you may be tempted to cash the equity out of your home to cover the expenses. This can be a tricky decision, especially if the repairs are necessary to maintain the safety of your home.
The home equity loan was designed in part to help you cover home repairs and other unexpected expenses. However, every time you take money out of your equity, you are putting your home at risk. You are also extending the amount of time it will take you to pay off your home.
If you bought your home planning to renovate it, you should ensure that your purchase price is low enough to make the renovations worth it. If a necessary repair has only recently come to your attention, you should consider your options before taking out a home equity line of credit. Here are some steps to take as you work to make a decision.
Is It Really Necessary?
The first question to ask yourself is if you really need to make the changes right now. If you find out after an inspection that your wiring is faulty, or that your plumbing is not up to code, or your roof is leaking and threatening the safety of your home, then you may not have a choice about taking out a loan to cover the repairs.
If you decide the repairs are necessary, you should shop around for the best deal on a contractor, and set a firm budget for the repairs. Avoid dipping into your borrowed funds for anything other than your needed repairs.
If you are tired of an ugly bathroom or kitchen, you can save up the money in a sinking fund and pay for the remodeling with cash. The risks and strain you put on your finances by taking out a home equity line of credit isn't worth it to simply make a room less ugly. Remember, you will end up paying more for your repairs over time if you have to borrow the money to complete them.
Start Small and Save
If the repairs are not immediately necessary, you may be able to chip away at the work while you save up money for a complete remodel. Break the project down into stages and prioritize the ones that will make the biggest difference in your comfort level. If possible, doing some of the basic fixes yourself should help you save money on your remodel.
For example, if you want to remodel your kitchen, you could start with refinishing or painting the cupboards. Saving up for paint will be easier than saving up for a full remodeling project, and it's a fairly simple job that most people will feel confident doing. Hopefully, the repainted or refinished cupboards will help improve the kitchen enough so you can stand to cook in it while you save up for more remodeling work.
These smaller projects can help you create a welcoming space while you work on saving up enough money to cover your dream remodeling job.
Make Sure You Understand the Risks
If you think you might need a home equity loan, you need to clearly understand the risks of taking out the loan. If you default on the payments, you can lose your home, even if you're keeping up with mortgage payments.
A home equity loan will let you borrow money against your equity over and over again. This means you can borrow the money, pay it off, and then borrow it again. This makes it tempting, but dangerous, to rely on your equity as an emergency fund. A home is most people's biggest investment, and any time you take out a home equity loan, you are putting that investment at risk.
Also, interest rates on home equity loans can be higher than on traditional or second mortgages. If you borrow too much, you may find yourself in a situation where you can't sell your home, even if you want to move.
Find the Best Rates
If you know the risks and you still determine that you need to take out a home equity loan, you should carefully shop around for a loan with good interest rates and terms. The lower the interest rates the better, but you also need to understand how the payments will work. Generally, you will have a minimum monthly payment that is a percentage of what you currently owe on the loan. This means that, as your balance increases, your minimum monthly payments do, too.
In many ways, these loans work in the same way as a credit card. If you borrow too much, you may have a difficult time keeping up your payments, and then you run the risk of losing your home. You should strive to borrow as little as possible and pay off your home equity loan as quickly as possible. This will prevent you from losing your home in the event you lose your job or face another financially difficult situation.
Make the Most of the Money You Borrow
When you remodel your home, it is essential to carefully research the company that you hire to complete the repairs for you. Take the time to have at least two different quotes on the work. Research the companies. Ask for referrals from friends and check for any complaints about the company on the internet.
Do not pay the entire cost upfront, and make sure to have everything in writing before the work begins.
If repairs need to be made as a result of a flood or a fire, be sure to involve your insurance company in the process. The insurance company may pay for you to stay in an apartment or hotel, or it may help to cover food costs while the repairs are being made. How much your insurance covers depends on your insurance plan, but it is worth looking into, because it may save you money during a stressful time.