home repairs with no insurance
How to Pay for Home Repairs When You Don’t Have Insurance
When you buy a home, it can feel like one of your most rewarding accomplishments. However, it’s important when making that purchase to understand that the cost of home ownership goes well beyond a monthly mortgage payment.
As a homeowner, you have to take into account those expenses that relate to repairs and unexpected scenarios that arise.
One rule says you should count on spending around one percent of the price of your home on maintenance and repairs every year. Of course, this is a broad rule, and it doesn’t take into account individual factors such as the age of a home and the effect when you bought your home had on its price. Of course, there are also unexpected situations that can go well-beyond one percent of your home’s value.
Still, if you were to follow the one percent rule, you would assume you’d need around $2,000 a year put aside for maintenance on a $200,000 home. That’s quite a bit of money.
With homeowner’s insurance, you may have coverage for certain home maintenance costs. For example, homeowners insurance may cover the cost of damage from wind, fire, or hail.
How do you pay for the cost of home repairs when you don’t have insurance, or insurance won’t cover the costs for any reason? Options are available, but each has pros and cons that need to be carefully evaluated.
Relying On a Short-Term Personal Loan
Personal loans have become an increasingly popular option not just to cover home maintenance and repair costs, but to cover a variety of financial needs. Short-term personal loans are typically easier to obtain than a traditional bank loan, and time to funding may be shorter.
The pros of a short-term personal loan include:
- Personal loan rates may be lower than credit card rates if you are a good creditor or have a cosigner. For example, someone with an excellent credit score and stable income may be able to secure a lower rate.
- It’s an installment loan, so you can plan for the monthly payments.
- Easy to apply for and decisions and funding usually happen quickly.
- Repayment terms may be flexible.
Cons of a short-term personal loan include:
- For borrowers with lower credit scores, interest rates can be quite high
- Borrowers have to commit to a monthly payment and taking on the burden of debt
Drawing Upon Your Home Equity
A home equity loan or home equity line of credit (HELOC) are options to pay for repairs or renovations to a home. Home equity loans and lines of credit are also called second mortgages, and they rely on the use of the value of your home, beyond what’s owed on the mortgage.
If you were to speak to a financial advisor, they would probably say the only reason to use this type of financing is to do things that will improve the value of the home.
To determine your home equity, you would take the amount owed on your mortgage and subtract it from the value of the property. Your home is collateral, and some lenders will let borrowers have access to up to 85 percent of the equity in their home.
A home equity loan provides funding all at once, and it’s paid back in installments. With a HELOC, it’s more like a credit card. You have a line of credit available to you, which you borrow and pay back as needed.
Pros of Home Equity Loans
- Interest rates are usually fixed
- You can plan for the monthly payments
- Interest rates may be lower than with credit cards or personal loans because your house is collateral
Cons of Home Equity Loans
- Interest rates are usually higher on home equity loans as compared to HELOCs
- You’re using your home as collateral, so if you default you may lose your home through foreclosure
- Home equity loans typically include fees and closing costs included in the loan amount
Pros of HELOCs
- You use only what you need as you needed
- You don’t have to pay interest on a HELOC unless you use the funds
- HELOCs tend to have lower interest rates than home equity loans
- Approval may be faster with a HELOC than a home equity loan
Cons of HELOCs
- Most HELOCs are adjustable-rate, so you can’t predict how interest rates will change over time
- HELOCS use homes as collateral, so the bank could foreclose if you default
- If your home’s value declines, your lender may reduce the line of credit or freeze it completely
Opening Up a New Credit Card
If you have an unexpected expense or repair, should you open a new credit card? The short answer is maybe, but again there are considerations to keep in mind. If you can find a credit card that has an introductory period with a 0 percent interest rate, this may make it this best option.
For example, some cards will offer 0 percent interest for anywhere from 6 to 18 months. If you can reasonably pay back the cost of your home repairs within that time, a credit card can be the lowest-cost way to pay outside of cash or insurance coverage.
- Credit cards often have sign-on bonuses and rewards programs.
- You can apply for most credit cards online and may be approved within a few minutes.
- It’s revolving credit like a HELOC, so you’re only paying for what you need and use.
- If your credit isn’t excellent, you may pay very high-interest rates.
- You’re accumulating debt which can affect your credit score and using credit cards can create a cycle of debt or poor financial habits.
- Many credit cards include an annual fee.
Read: Cheap House Insurance
Considering a Cash-Out Refinance
A cash-out refinance is when a homeowner replaces their current mortgage with a new loan. The new loan is for more than what’s owed on the house. Then, whatever the difference is between the new loan and the value of the house is cash that can be used for home repairs, home improvement or whatever financial needs the homeowners may have.
To use this option, you do need to have equity in your home. Since the cash-out refinance has a higher loan amount than your original mortgage, you can expect to pay higher interest rates. There are limits to how much the cash-out will be. It’s usually anywhere from 80 to 90 percent of the equity of a home, so you can’t get all of your home’s equity.
- The interest rate may be lower than with a home equity line of credit or home equity loan
- If you purchased your home at a time when mortgage rates were higher, you might get a lower interest rate
- Mortgage interest payments are tax deductible so you may be able to reduce your taxable income
- With a cash-out refinance your home is collateral—if you can’t make payments you may lose it
- You may end up paying a significant amount in fees and closing costs since you’re getting a new mortgage
- If you borrow more than 80 percent of the value of your home, you’ll have to pay private mortgage insurance
Home insurance is an important asset if you’re a homeowner, but there’s always the chance that you may not have it for some reason, or you might have a gap in your coverage. If so, there are other financial options available to pay for the cost of repairs if you don’t have the cash-on-hand. Before making a decision, weigh the pros and cons of each to determine what’s right for you financially, currently and for the future.
By Andrew from LendEDU – a consumer education website and financial resource.