Unscheduled home repairs: Are you financially prepared?

Michele Lerner | Improvement Center Columnist | September 6, 2013

No matter how well you maintain your home, it's inevitable that eventually either age or a manmade or natural disaster will damage some part of your property. Whether you need to pay for something as simple as replacing your water heater or as a monumental as installing an entirely new roof, your wallet will be impacted. Developing a plan to be prepared for these financial disasters can minimize the damage.

Financial experts recommend that homeowners set aside from one to three percent of their home value every year to pay for routine maintenance and as a reserve fund for an emergency repair. For a $300,000 home, that means you should have savings of $3,000 to $9,000 that you can access for home projects. You can estimate how much you may need based on not only the current value of your home, but also the age and condition. Clearly, a new home can be less likely to need major repairs and replacements than an older home that has not been recently renovated.

Repair costs

The amount you need to spend to repair or replace an item in your home varies widely according to the product and according to where you live, since materials and labor costs are different from one community to another. Your chances of getting away with a repair job rather than replacement depend in part on how well you have kept up with routine maintenance as a homeowner.

  • Water heater. Angie's List, a company that reviews local service businesses such as contractors, says that replacing a water heater can cost from $700 to $2,000. Repairing one can cost as little as $200. If you opt for an energy-efficient tankless water heater, it could cost as much as $2,800 to $3,800, depending on your location.
  • Gutters. Repairing gutters costs an average of $200 to $1,000 for a 2,000-square foot home, according to Angie's List . Replacing those gutters can cost $1,200 to $1,500.
  • Roof. Roof repair and replacement costs vary according to the material of your roof and the size, but HomeAdvisor says repairs vary from $200 to $1,400, while a roof replacement costs from $3,000 to $11,725.

Repair or replace? Financing options

Whether you choose to repair or replace your appliances and systems, you'll be better off addressing the cause of the problem rather than trying out a temporary fix with a bucket and duct tape. The cost of repeated repairs or water damage caused by a water heater flood can quickly exceed the amount you would have spent repairing your home in the first place.

Here are some options for finding the cash to handle your home improvement projects:

  • Savings. The best source for funds is your own money, so if you've been setting aside cash for home emergencies, this is the time to use it.
  • Homeowners insurance. Depending on the reason for your repair, you may be able to make an insurance claim. But before you do, be sure your deductible isn't higher than the cost of the repair. Also, remember that making too many insurance claims can raise your insurance premiums. It's best to reserve insurance claims for truly costly damage.
  • Home equity loan. If you have enough equity in your home and good credit, a home equity loan may be an option. Remember that you are borrowing against your home, so if you have any doubt about your ability to repay the loan, don't go this route.
  • Borrow against your 401(k). While the rules vary, most 401(k) plans allow you to borrow up to $50,000 or 50 percent of your vested balance. You'll have to repay the loan, but at least you are paying yourself.
  • Borrow against your life insurance. If you have a permanent life insurance policy, you may have built up cash value that you can borrow. You may have to repay it or just have a reduced life insurance benefit for your beneficiaries depending on your insurance company rules.
  • Refinance. If you have home equity, you might want to do a cash-out refinance to pay for a home repair. Another option is to apply for an FHA 203(k) loan, which allows you to wrap your mortgage and renovation costs into one loan.
  • Credit card or personal loan. Depending on the size of your repair bill, a credit card or a personal loan from a bank or credit union could be a reasonable option, especially if you can repay the loan quickly.

While no one wants to think about a leaky roof or replacing their furnace during a freezing winter season, preparing for the unexpected can help you cope.

About the Author

Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.