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When you own a home, you’re responsible for more than just your monthly mortgage payment. You’ll also need to cover the cost of insurance, property taxes, maintenance, and repairs.
Repairs can be a doozy, though. For one thing, they can be tricky to budget for. You can take your annual property tax bill and divide it by 12 to estimate how much money to set aside each month for that expense. Still, repairs can be unpredictable, and your regular paycheck may not be able to cover them.
If you’ve run into a repair situation you can’t pay for outright, and you don’t have enough money in savings to cover your costs, then you may be tempted to put that expense on a credit card and pay it off over time. Here are some better solutions to explore.
1. A personal loan
The problem with credit cards is that they can charge exorbitant interest rates, making your debt more expensive to pay off. This holds true even if you happen to qualify for a card with a 0% introductory APR, because if you’re facing a huge repair, chances are you won’t have it paid off by the time the intro period comes to an end.
A personal loan may be a better bet. With a personal loan you can borrow money for any purpose, and you’ll generally pay less interest than you will on a credit card. This especially holds true if you have a good credit score.
2. A home equity loan
A home equity loan, like a personal loan, lets you borrow money for any reason, and you may be able to get a lower interest rate on a home equity loan than on a personal loan. Plus, if your credit score isn’t in the best of shape, a home equity loan could be a better bet.
Personal loans are unsecured, so lenders rely heavily on borrowers’ credit scores to determine eligibility and interest rates. Home equity loans, by contrast, are secured by the homes being borrowed against. If you have a lot of equity in your home, you may have an easier time qualifying for a home equity loan, and at a reasonable interest rate.
3. A home equity line of credit
A home equity line of credit, or HELOC, is similar to a home equity loan, only instead of borrowing a lump sum, you get access to a credit line you can draw from over a preset period of time (usually five to 10 years). If you’re not sure how much your home repair will cost, a HELOC could be a good choice because it gives you flexibility to borrow less or more.
To be clear, with a HELOC, you only accrue interest on the sum you actually borrow. If you qualify for a $10,000 HELOC but borrow $6,000 of that, you won’t pay interest on the remaining $4,000.
Think twice before using a credit card to pay for home repairs
When a home repair strikes out of the blue, it can be tempting to whip out a credit card to solve the problem of paying for it. But remember, credit cards can charge a huge amount of interest, and too high a credit card balance can actually damage your score, making it harder to borrow money when you need to.
You might think charging home repairs on a credit card makes sense due to the reward points or cash back you’ll get. But generally speaking, the interest you’ll pay on that debt will far exceed the rewards or cash back you score. If you’re stuck covering a home repair, it pays to look at a personal loan, home equity loan, or HELOC first, and only use a credit card as a last resort.