Homeownership comes with many expected costs, then it comes with unexpected home repairs. You know you have to make a down payment, a monthly mortgage, insurance premiums, taxes and so on. However, not all costs associated with owning a home are so predictable. You also have to consider major home repairs that come out of nowhere, which can seriously upset your budget.
Whether it’s a damaged roof, a flooded floor, or any other kind of emergency, having a financial plan in place will make the whole situation much less stressful. Here are a few different ways homeowners can prepare for the costs of unexpected major repairs.
Save Up
As with any expense, it’s ideal to pay for emergency home repairs without racking up tons of credit card debt. The best way to achieve this is by starting an emergency repair fund, which is essentially a personal savings account. Whether you keep a cash jar at home or use a bank account, set aside a certain amount of money each year or month. Some experts suggest allocating 1 to 3 percent of your home’s value to your emergency repair fund each year. That is, if your home is valued at $230,000, you would put at least $2,300 per year in your fund. Others recommend saving 10 percent of your mortgage payment each month.
If you already have an emergency repair fund, keep building it until you hit at least $5,000, which is enough to cover many common home repairs. However, there are some repairs that cost much more than $5,000, so it’s a good idea to keep saving indefinitely if you can work it into your budget. Plus, if you keep saving, you won’t be back where you started if another repair comes your way before you’ve built the fund back up.
Cash Out
Another option for paying for major home repairs is to use the equity in your home. For instance, many homeowners can pursue refinance options such as cash-out refinancing, which is when you replace your current mortgage with a new loan that has a higher balance. If you go this route, you will receive the difference between your old and new loan balances, which will provide you with cash for remodel projects. Most cash-out refinancing is done through either a conventional, FHA, or VA cash-out. Do your research to figure out which one best fits your needs (and what you qualify for).
Get a Personal Loan
Another way to pay for major home repairs that won’t result in credit card debt is to take out a personal loan. This can be helpful if your emergency fund is not built up and you don’t want to refinance your home. You can find personal loans — specifically for home improvements — that are easy to apply for online. Also, many of them start at under 5 percent interest.
Carefully Choose Your Contractors
Finally, the contractors you use for each job can make a big difference in how much the repair will cost. You obviously don’t want to go with someone who is way outside of your budget. On the other hand, if you simply go with the cheapest contractor you can find without looking into their reputation, you could end up having to pay someone else to fix their shoddy work. Get referrals from friends and neighbors, interview a few different candidates, and make sure the contractor you choose is licensed and insured.
You may not be able to predict every major home repair, but it doesn’t mean you can’t be prepared for when they do. Start your emergency repair fund now and keep building it to provide a cushion for the future. Look into cash-out refinancing and personal loans as other options. Lastly, be selective when choosing contractors. Financially planning for inevitable home repairs will save you a great deal of stress when the time comes.
Guest Author: Suzie Wilson
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