Need Home Repairs? You May Not Need to Raid Your Emergency Fund

Jene J. Long

There’s a reason it’s common wisdom to sock away three to six months’ worth of living expenses in a savings account. You never know when a financial emergency might strike, and if you keep enough money in the bank, you won’t have to rack up costly debt to cover an unplanned bill.

It’s especially important for homeowners to have a solid emergency fund, because when you own property, there’s always the potential for something expensive to break. And even seemingly minor home-related issues can cost many hundreds of dollars, which your regular paycheck may not cover.

If you’re looking at home repairs and you have an emergency fund, you may be thinking of withdrawing money. After all, that’s what emergency savings are for. But before you raid your savings for home repairs, consider some affordable alternatives.

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Can you finance home repairs affordably?

Putting home repairs on a credit card that charges 20% interest makes little sense when you have enough money in savings to cover your costs. But if you borrow against your home, you might pay a lot less interest on the sum you borrow. And that allows you to keep your emergency savings intact for another time.

When it comes to borrowing against your home, you have options. You could take out a home equity loan, borrowing a lump sum you pay off in equal installments over time. With a home equity loan, you might qualify for an interest rate of around 6% on the amount you borrow, based on today’s rates, much lower than what a credit card might charge.

Similarly, you could take out a HELOC (home equity line of credit), and get access to a line of credit you can draw from as needed. HELOC rates can be lower than home equity loan rates, and right now, you might pay under 4% for a HELOC. But be careful, because HELOC rates can be variable — you might start out with a competitive rate that eventually climbs.

Finally, you can look at a cash-out refinance. With a regular mortgage refinance, you take out a new home loan to cover your existing mortgage balance. With a cash-out refinance, you borrow more than your existing mortgage balance and use the remaining cash for any purpose — in this case, home repairs. Given today’s refinance rates, you could pay under 3% interest depending on your loan term, and that’s an affordable way to finance home repairs while preserving your emergency savings.

An emergency fund is for covering unexpected expenses. But if you’re looking at a huge home repair — one that could virtually wipe out your savings — you may want to explore options for borrowing affordably before you empty out your bank account. That way, you aren’t forced to scramble the next time you’re stuck in a financial crunch.

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