Should I go into debt to fix up my home? High interest rates put owners in a bind

You borrowed money when you bought your home. Now you’re borrowing more money to fix it up. Is that a good idea?

One in 5 homeowners has taken on debt to cover maintenance and other “hidden costs” of homeownership, according to a recent survey from Bankrate, the personal finance site.

“The one inevitability of homeownership is that there will be unplanned expenses,” said Greg McBride, chief financial analyst at Bankrate.

Those expenses seem to be rising. Another Bankrate survey found that the average house now costs $18,000 a year to own and maintain, on top of mortgage payments. The tab includes property taxes, insurance, repairs and utilities, and the tab has risen by one-quarter since 2020.

Another study, from the online platform Thumbtack, found that average annual maintenance costs rose about 8% last year, from $6,155 to $6,663.

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“When you’re becoming a homeowner, you’ve got to look beyond the principal and interest of the mortgage,” McBride said. “There’s a lot more to it, in terms of out-of-pocket expenses.”

'Hidden costs' of homeownership are rising, and homes are aging

Homeowners should expect hidden costs to rise further, and not just because of inflation. Most homeowners are locked in to mortgages with rates below 5%. They are reluctant to sell, so they remain in aging homes.

Home maintenance projects come in sizes large and small. Here are a few of the biggest ones, according to HomeAdvisor:

◾ Roof replacement, at an average cost of $9,392

◾ HVAC replacement: $7,000

◾ Foundation repair: $5,017

◾ Whole-house termite treatment: $2,500

When a roof leaks or termites invade, ignoring the problem is not an option.

“To me, a home is the No. 1 most valuable asset of a family,” said Rodney Williams, president of SoLo Funds, a community finance platform. “Maintaining your most important asset should be a top priority.”

The high costs of home repair are one reason why the experts urge us to amass emergency savings. Ideally, we would all have liquid savings sufficient to cover three to six months of living expenses.

But saving money is hard, especially in inflationary times.

Another survey, also from Bankrate, found that most of us don’t have enough emergency savings to cover a $1,000 emergency expense.

When hidden costs arise, many of us borrow

And so, when hidden costs arise, many of us borrow.

Jim Hall, a homeowner in Newport News, Virginia, found himself facing a $42,000 bill to replace a poorly designed heating and air conditioning system, along with the ductwork in his home.

“It was more than I expected to or wanted to spend,” said Hall, who spoke to Bankrate for its report.

Hall had other expenses, including car repairs and a grandson’s tuition. He paid the $42,000 with a financing package that charged no interest for a year. When the year ended, he covered the remaining balance with a home equity loan.

Home equity loans and lines of credit are second mortgages. A home equity loan typically has a fixed interest rate and is delivered as a lump sum, according to NerdWallet, another personal finance site.

A home equity line of credit, or HELOC, typically has a variable rate and acts more like a credit card.

The big problem with home equity loans in 2024, as with conventional mortgages, is elevated interest rates.

The average 10-year home equity loan carries an interest rate of about 8.8%, according to Bankrate.

Interest rates for home equity lines of credit are ranging from 9% to 10%.

The average 30-year fixed mortgage rate, by contrast, is 7.4%: Lower, though not by much.

If you take on a home equity loan at 9% interest, you are falling prey to higher rates, which is precisely why many Americans are holding on to aging homes in the first place.  

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Home equity loans are pricey, but there are alternatives

Fortunately, there are alternatives.

Let’s say you have a $10,000 HVAC bill, and no emergency savings to cover it.

One option is to seek financing from the contractor. Many firms offer 0%-APR financing for 12 months.

“If your HVAC contractor is offering 0% financing, I would take it rather than use my savings,” Williams said.

His reasoning: A 0%-APR loan is a great deal, and borrowing the money allows you to keep your emergency savings to use in a more dire situation.

Another option is to charge your home-repair project on a 0% interest credit card. They still exist, even in the current high-interest environment.

The typical card spares the holder from interest payments for 12 to 18 months. After that, the interest rate soars to 20%-plus, the range of a normal credit card.

One potential downside: 0%-APR credit cards often require good-to-great credit scores, and the card may not come with a credit limit high enough to cover your project.

A third option: Put off your home maintenance project. But that is not such a good idea.

“There used to be a Midas commercial that said, ‘You can pay me now, or you can pay me later,’” McBride said. “It doesn’t get cheaper by waiting.”

How to prepare for unexpected home repairs

Here are some tips, from Bankrate and other sources, to prepare for unexpected home repairs:

◾ Save. By one industry rule of thumb, you should try to set aside enough money every year to cover 1% to 4% of the home’s value: $4,000 to $16,000, for a house worth $400,000.

◾ Keep track of aging systems. An HVAC might last 10 to 20 years, while a roof could last 20 to 30 years. If your roof is nearly as old as you are, prepare to replace it.

◾ Read your insurance policy. Homeowners' insurance doesn’t generally cover routine maintenance. But if you face repair costs from weather or water damage, your policy may just bail you out.

◾ Shop around. One good way to save money on home repairs is to collect multiple quotes. Let the contractors compete to win your business.