Two Ways To Finance An Emergency Roof Replacement
You don't always realize that your roof is is going to need replacing until you're catching water in tote boxes and pulling sopping wet insulation out of your attic at 3 am. Since a roof replacement often costs thousands of dollars, it can be difficult to find the funds to cover this emergency. However, since waiting to replace the roof will just cause more water damage, you do need to act quickly and find a way to finance the job. Here are two key options to explore.
Home Equity Loan
It you have some equity in your home, then you may want to take out a home equity loan to cover the cost of your roof replacement. This is a type of loan is sometimes called a second mortgage, since you use some of your home's value as collateral.
To understand how a home equity loan works, it's helpful to think of an example. Suppose you still owe $40,000 on a home worth $100,000, meaning that you have $60,000 of equity in the home. You can borrow $10,000 of that equity to use towards your new roof. Once you take out the loan, you'll owe $50,000 on your home and only have $50,000 of equity.
An advantage of home equity loans is that they often have lower interest rates than personal loans since your home is used as collateral. (If you do not pay on the loan, the bank can take possession of your home). Interest you pay on a home equity loan is tax deductible since this loan is technically considered a mortgage.
The downside to home equity loans is that there are usually closing costs charged when you originate the loan. You can sometimes wrap these costs into the payment, but they still add to the cost of the loan. A home equity loan is also not an option if you do not have substantial equity. Most banks won't let you take one out unless you'll still have 20% of the home's value in equity after the loan.
Home Improvement Loan
If you do not have a lot of equity in your home, then your best option is likely to take out a home improvement loan. This type of loan is offered by many large banks along with smaller local credit unions. To issue the loan, the bank will need to know what improvements you plan to make. A roof replacement will almost always qualify, especially if you have substantial leaks, since it is considered an essential home repair.
Because home improvement loans are unsecured, they usually carry a higher interest rate than a home equity loan. You should definitely shop around at a few banks, assuming you have the time, before taking out such a loan; the banks may offer vastly different rates. It may also be harder to get approved for a home equity loan if you have a lower income or poor credit.
One up side of home improvement loans is that they are often paid back over shorter terms than home equity loans. For instance, you can take out a home improvement loan with a short pay-back period of 5 years. Home equity loans are often paid back over 15 or 30 years—like a typical mortgage. Paying back the loan over a shorter time period may allow you to maintain better control over your finances.
When you need a roof replacement but don't have the funds, taking out either a home equity loan or a home improvement loan is usually your best bet. For more information, contact a professional in your area like those found at General Electric Credit Union.