You might not like to think about it (and frankly, who does?), but when it comes to owning a home, stuff can and will break. Water pipes burst. Roofs cave in. The list goes on.
While you never know precisely when a big appliance or HVAC (heating, ventilation, and air conditioning) system is going to conk out, most products do have expected lifespans. For instance, a hot water heater or a dishwasher lasts about a decade, while an HVAC unit lasts an average of two decades.
So, it's smart to have a plan for how you'll manage financially when something big—the furnace, the roof, the plumbing—needs emergency repair. And yes, it is not if, but when.
Thinking about costs
Emergency repairs represent some of the biggest expenses that come with home ownership. In 2015, homeowners spent an average of $2,970 on home improvements, with more than half of that amount put toward repairs or replacements, according to the Joint Center for Housing Studies of Harvard University.
When a home emergency repair hits you, doing nothing until you save the money to cover it is not the best strategy. Untreated home damage can quickly get worse, sending costs, well, through the roof. Over time, one little leaky pipe can lead to structural damage and mold, for example. So what do you do when it happens to you? First we'll look at the not-so-smart ways to tackle unexpected expenses, and then we'll look at better alternatives.
The dubious options
Perform financial triage
One way to finance an unexpected emergency is by putting off other payments. Say you have to shell out $3,000 for an emergency plumbing repair. Normally, that $3,000 would go toward your monthly expenses, including your rent, mortgage and/or your student loan payment. So you might choose to delay paying certain bills if you aren't charged steep penalties for paying late or skipping a payment. But tread carefully: While skipping payments might mean a penalty of just a small fee, mortgages and credit card companies impose bigger penalties. What's worse, late payments can hurt your credit score.
Pull out the plastic
The Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2015 reveals that among people who don't have the cash reserves to cover even a minor emergency (an unexpected $400 expense), 38% would choose to charge the expense on a credit card, and pay it off over time.
While pulling out the plastic can be an expedient solution in a clutch—especially if the tradesperson won't do the work without at least a partial payment—it's not a great idea to leave that debt on your credit card if you can't pay it off by the end of the billing cycle.
For example, if you use a credit card with an average annual percentage rate (APR) of 16.5% to pay an electrician $5,000 for emergency rewiring, and only put $100 toward that debt each month, it will take you about five years to pay off, and you'll pay more than $3,500 in interest. Yikes—that'd be more than half of what you originally charged.
Gamble on lenders of last resort
The Federal Reserve report noted above also found that 16.5% of people faced by a financial hardship, including unexpected expenses, turn to pawn shops, payday lenders, or auto title loans for help. While lower-income homeowners are more likely to turn to these “alternative financial services," 9.3% of people earning over $100,000 a year and faced by hardship do the same. But those options can be worse than choosing to pay for expenses with a credit card.
Many so-called 'risky lenders' sound good based on their advertising. But the Consumer Financial Protection Bureau (CFPB) has warned consumers to be wary of getting burned by high fees and rates, and of having personal property, like a car, seized. Such loans, according to the CFPB can become "debt traps" for some borrowers.
Smarter ways to pay
Insurance or government help
If there is a chance that the repair is covered by your homeowner's insurance or your home warranty policy (if you have one), check with those companies first. If the emergency was caused by a natural disaster, such as an earthquake, you may be eligible for help from the Federal Emergency Management Agency (FEMA).
That emergency fund you were smart to feed
More than half of Americans surveyed for The Role of Emergency Savings in Family Financial Security, a brief published by The Pew Charitable Trusts in 2015, say they could cover an unexpected $2,000 expense using their savings. If you can say the same, that's great! But be sure to take steps to replenish the funds quickly. Unfortunately, repairs can come at any time—even one right after another. So you'll want to be ready.
The bank of mom and dad
If you don't have the savings, asking family members or close friends for a loan might also be an option. Just make sure you pay it back quickly, because a relationship is harder to repair than a leaky roof.
A personal loan
Applying for a personal loan may sound like a hassle compared to just whipping out your credit card. But the days of meeting with a banker to fill out a loan application are gone. Now, you can apply for a personal loan online, upload and sign paperwork digitally, and get funds wired directly to your bank account. Plus, because personal loans are usually unsecured and based on personal creditworthiness, not collateral, you don't have to put your car or your home at risk to get the money you need.
With interest rates starting below 5%, and some lenders offering no origination fees, using a personal loan to pay for an emergency repair can be a much less expensive option than using a credit card. Use SoFi's Personal Loan Calculator to see how much you might save by going this route.
Your home's equity
Like a personal loan, either a cash-out refinance or a home equity line of credit (HELOC) can be a healthier way to borrow money than running up a credit card balance. A cash-out refinance replaces your mortgage with a new one, at a new rate, while a HELOC is a secondary mortgage that you would pay in addition to your original mortgage. A cash-out refinance provides a one-time cash infusion; a HELOC allows you to draw cash over time, which might be helpful if you're not sure of repair time or costs.
The paperwork for both refis and HELOCs may take longer than with a personal loan, which could be a problem if you need to pay for the repairs right away. And both loans borrow against your home's equity, which might not be an option if you recently purchased the home. But if you do have equity to tap, consider the pros and cons of each.
The right option for you depends on your personal circumstances. Should a personal loan be the right one, head to SoFi to see what you may qualify for.