How your home can pay for emergency repairs

Emergency repairs are a fact of homeowner life. Maintaining an emergency savings account is a good way to handle the unexpected, and of course there’s homeowners insurance too. But if you don’t have any savings set aside, or if your coverage is falling short, what then? 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 home repairs.

Emergency savings statistics

Emergency home repairs are growing in frequency, particularly as extreme weather-induced damage becomes more common: 78 percent of homeowners dealt with unexpected repairs in 2023, vs. only 60 percent in 2022, insurer Hippo’s “Preparedness Pulse Report” found.

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 increase their emergency savings accounts — or even fund them in the first place.

The most common emergency home repair costs

Emergency repair costs vary tremendously, depending on the size of your home, the area where you live, the nature of the emergency and of course, the extent of the damage. However, some repairs do tend to be more expensive than others, across all regions and homes. 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 December 27, 2022 and January 31, 2023, the National Flood Insurance Program paid an average claim amount of $53,000 for flooding-induced damage. Wildfires alone caused over $3.2 billion in damage across the United States between 2022 and 2023.
• Extreme weather: Extreme weather and climate disasters caused $93.1 billion in damages nationally in 2023.
• 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.

According to Angi’s “2023 State of Home Spending” report, expenditures for emergency home repairs have risen rapidly since the pandemic, from an average $416 per household in 2019 to an average $1,667 in 2023. Natural disasters in several states also contributed significantly to the spike.

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.

Diluting your homeownership stake — turning something you own into something you owe — isn’t something to be done lightly. But, among current homeowners, 55 percent see home improvements or repairs as a good reason to tap home equity, a recent Bankrate survey found.

How to determine your home equity

The ability to tap into your home equity to cover the cost of emergency repairs will depend largely on just how much equity you have available. Equity is the difference between your home’s current fair market value and the remaining amount you owe on the mortgage, or and any other loans you may have against the home.

For instance, if your home is worth $500,000 and the balance on your mortgage is $350,000, that means you have $150,000 in home equity. However, the amount you actually will be able to borrow won’t be all of that. Most lenders will require you to keep a certain amount of your equity, usually 15-20 percent of it, untapped.

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: A homeowners insurance claim should be your first line of defense against damage and destruction. But, before filing a claim with your insurer, look at your policy to see if the damage is covered, understand your deductible and consider how many claims you have filed in the past. Also bear in mind that the timeframe for getting reimbursed can range from 30 to 90 days.
• 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. Building up your emergency savings fund, keeping your credit in good shape and ensuring you’re adequately insured can help you access money when you need it most, says Bankrate insurance writer and licensed insurance agent Shannon Martin. Still, she notes, “some out-of-pocket expenses are unavoidable. Tapping into home equity may help alleviate some of the financial stress homeowners face during catastrophic losses.”

Home equity loans and HELOCs typically come with 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 a lien on the property, which will have to be repaid at once if you sell, eating into any profits you might make.

FAQ

• 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 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.

• 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 to adequately handle 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.