Purchasing a home is always a gamble. You never know what unexpected repair bills will crop up, but you will likely face an emergency home repair at some point in your life. Preparing for the worst is both an investment in your property and a hedge against the hit your finances may take when the roof needs repairing or a major appliance needs replacing.
Saving for a Rainy Day
There are many approaches you can take when saving a rainy day fund. There’s the 1 percent rule, which says you should set aside 1 percent of your home’s purchase price (homes in Rochester have been selling for an average price of $139,000) for maintenance and repairs. It’s a well-known formula, but it doesn’t account for fluctuations in the cost of home maintenance. Another point to consider is that the price of your house and the costs of home repairs aren’t necessarily related variables.
You can also save by assessing the average cost of major home repairs, from replacing a furnace to repairing a foundation (this repair averages $5,838), and saving based on those projections. To be adequately prepared, it’s important that you understand how much you’ll need to put in your emergency fund. Regardless of how you choose to prepare, keep your emergency funds secure in a high-interest savings account.
The first thing you should do if a home emergency occurs is to carefully check your homeowners insurance policy. Some natural causes, such as tornadoes and lightning strikes, are usually covered, while damage from flooding, sewage backup, and construction work damage may not be covered. If your repair is covered by insurance, you should be in good shape, so make sure you’re very familiar with the details of your policy.
An emergency savings fund is generally considered the best way to prepare for any unexpected home maintenance costs, but it doesn’t always work for everyone. If you need cash for an emergency, a personal loan can be a good option. As an unsecured loan, there’s no need for collateral, and you can usually rely on an interest rate that remains steady through the life of the loan. Additionally, you don’t necessarily have to go to a bank. There are other lending options (such as SoFi and Lending Tree), and some will extend loans to people with bad credit.
Home Equity Line of Credit
A home equity line of credit (HELOC) can be an attractive alternative if you prefer the option of withdrawing cash as needed over time instead of in a lump sum. A HELOC gives you flexibility if you’re not sure how much a repair will cost or how long it will take. And since you’re using your home as collateral, you can expect a lower interest rate than with other loan options.
A credit card should probably be your last-resort option for financing an emergency home repair. Your credit limit may not be high enough to handle the entire cost of a major emergency repair. Depending on your interest rate, you could wind up paying off a large portion of the repair costs in credit card interest, which is a bad scenario for your debt situation.
On the other hand, if your card charges 0 percent interest for a certain period, that may allow you to spread the overall expense out over multiple payments. It gets even better if your card offers reward points and other benefits. Otherwise, your savings, a personal loan, or HELOC would be preferable options in these situations.
A well-stocked rainy day fund is usually your best option for financing an emergency home repair. If you haven’t been able to set aside enough money for major home maintenance repairs, it’s in your best interest to know what other alternatives are available.
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