Let’s face it: things happen that affect our credit rating that are beyond our control. Medical bills, an injury or illness, being laid off or having a company closure, or even just hard financial times for other reasons can lead to a poor credit score.
If you own your own home, these circumstances may have forced you to cash in a great deal of your equity. When you need to do home repairs, especially if you are in the process of rebuilding good credit, and you don’t have equity in your home, financing home repairs can be a challenge. Here are five ways to finance those repairs.
While it is not ideal, you can sometimes get a personal loan for home repairs with no equity in your home. Some lenders even offer specific types of loans, like roof financing for bad credit.
The disadvantage to this type of loan is that the interest rate is usually higher than a home equity loan, and the term is shorter which means that payments are higher. Be sure to review your family budget carefully, and make sure you can afford the payments for the entire term of the loan.
When you get a personal loan specifically for a project, don’t be tempted to use that money for anything else. If the project goes under budget, apply that “extra” money to pay down your balance. Use any “new” money you get, like a tax return or a raise at work, to pay down your loan as well.
These steps will keep you on track.
Depending on the type of project you are doing, you can qualify for a construction loan. These types of loans are usually reserved for large remodeling projects or renovations, and the money from them often has to be managed.
These are short term loans, and usually will get refinanced into your mortgage once the project is complete, as the goal of the project should be to increase the value of your home. If not, the loan will usually have to be paid off quickly.
Also, the money in these loans is usually released in stages as each part of a project is completed. You will have to work with contractors who are willing to wait for these payments unless you can pay cash for them, and replenish your own funds later, not a common scenario.
If the home repairs you are doing are not extensive remodels, or won’t in some way increase your home values, you probably won’t qualify for this type of loan. While they are unsecured initially, they are typically secured later on by the value of your home.
Borrow from Your 401(k)
Most 401(k) programs will let you take out a loan against your balance and pay it back over five years, usually through payroll deduction. You will be charged interest, but you are paying it to yourself and it goes back into your retirement account.
This is usually not as much interest as you would have earned if you had left the money invested, but it is a better option than paying interest to a bank or lender.
The limitations here are two-fold. The first is that you can only borrow against the balance you are vested in, which means the funds you get can be limited. Secondly, if you should quit your job during the period of the loan, or if you were laid off or fired, the balance would become due immediately.
Still, this can be a better way to finance home repairs than others if you have a large enough balance. The interest you pay goes towards your retirement, and the loan is secured by your own accounts. As long as you don’t make this a habit, this can be a great way to both borrow and save.
Friends and Family
While not ideal, if you are in a tough spot where you need to do repairs right away, this may be an option worth exploring. However, asking friends and family for money is never pleasant, and doing so can be stressful. Here are some tips.
- Set a realistic timeline to pay them back. Don’t be unrealistic in what you can afford, the same as you would be with any other loan.
- Make every effort to pay on time. Treat this like you would any other bill.
- Offer to pay interest. Although the family member or friend may turn you down, the offer shows you are keeping this strictly business.
- Have a written agreement. Be sure terms are clear and there is no confusion by putting things in writing.
- Be prepared for a no. Some people are not comfortable lending money to those who are close to them, and so may simply tell you no.
Treat this like any other business deal, and keep the business you are doing separate from your personal relationship as much as possible.
While also not ideal, if you can get a low or zero interest credit card, you can use it to finance your home repairs. The key is to manage this money wisely.