How to Pay for Spring Fix-Its: 3 Financing Options to Consider'/

Not only was there a major rainstorm outside your house—but inside, too. (Are you cursing yourself for never cleaning out your clogged gutters?)

So while your yard was happy for the big drink, you’re left with quite a bit of damage to your walls and floors. Enough so, that the bill for the repair work exceeds the amount you have set aside in savings.

So how are you going to pay for it?

Here, three good options for accessing cash, along with what you should know about each:

Home equity loan

The pros:

  • You are charged a fixed interest rate that will not increase.
  • The loan’s term is almost always shorter than your mortgage.
  • The interest rate is less than most lenders charge for a personal loan.
  • In most cases, interest is tax-deductible.
  • You receive all your funds upfront.

The cons:

  • The interest rate is typically higher than what you’d be charged for a home equity line of credit (HELOC).
  • A home equity loan isn’t revolving debt so you can only borrow a specific amount that is paid upfront.
  • The bank can foreclose on your home if you fail to pay back the money.

Home equity line of credit

The pros:

  • You have the flexibility to use the line at any time since it is revolving debt—you can borrow, pay it back, and then borrow again, provided you’re still within your draw period.
  • The interest rate is usually lower than that of a home equity loan.
  • You only pay interest on the amount of money you actually borrow (not on the total amount of the line).
  • Interest is usually tax-deductible.
  • You may be able to make interest-only payments.
  • You can easily tap your funds by writing a check or using a debit card.

The cons:

  • For many HELOCs, the interest rate is variable and based on the prime rate, so it could climb in the future.
  • Some banks charge borrowers an annual fee.
  • You may have to pay a cancellation fee.
  • The bank can foreclose on your home if you fail to pay back the money.

Refinance your mortgage

The pros:

  • Because interest rates still hover near historic lows, you’ll probably land a lower interest rate than what you’re charged for your current mortgage; as a result, you’ll have a cheaper monthly payment.
  • You could switch from an adjustable-rate mortgage (ARM) to a fixed-rate one.
  • The interest rate is usually lower than what is available with personal loans and home equity loans.
  • You might be able to reduce the term of your loan.

The cons:

  • The balance of your principal will increase since you will need to cash out a portion of your equity to pay for the repairs.
  • The total length of your loan might increase.
  • You may have to pay closing costs.
  • You must have good credit in order to get the best interest rate.
  • The bank can foreclose on your home if you fail to pay back the money.
  • You will probably need to remain in your house for several years to break even on the money you spent to refinance.

Regardless of which option you choose, the one thing you shouldn’t do is use a credit card. Why? If your funds are tight right now, you certainly can’t afford the hefty interest charges (which are probably substantially higher than any housing loan) you’ll accumulate by not paying your bill in full when it’s due.

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Published April 22, 2013 Updated: February 18, 2014
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