- Experts recommend saving 1% to 4% of your home’s value per year for repairs and maintenance.
- Keep your home repair emergency fund in a separate high-yield savings account.
- If you don’t have the money and need to pay for home repairs, consider a home equity line of credit (HELOC) or home equity loan.
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When you buy a home, you don’t plan on spending over $US20,000 on repairs.
But life happens. The roof leaks, squirrels get into the attic, and plaster cracks. I didn’t have the cash to cover these repairs, and as it turns out, my experience wasn’t unusual. Three in 10 homeowners aren’t prepared for maintenance, according to a report from NerdWallet.
The best way to avoid my mistakes is with a home repair emergency fund. Here’s exactly how much you need and why.
Why your home repair fund is non-negotiable
There’s a big mental shift when you go from renting to buying. “You own property now. That means you’re on the hook for ongoing maintenance and repairs,” says Kathleen Boyd, a financial planner in Long Beach, California.
Before buying a home, it’s easy to think of rent checks as your only housing expense. But once you own property, there are many more costs to plan for. You may have to repair your roof, clean gutters, fix broken appliances, and trim back trees. When your HVAC or plumbing fails, it may cost thousands to replace. “If you’re not prepared, it could put you into financial ruin,” Boyd warns.
It may be tempting to put off basic repairs and maintenance, but this often backfires. Ignoring a termite problem or leaky roof will only get more expensive over time. “It’s like a medical issue. If you have a toothache and don’t do anything about it, the problem is only going to get worse,” says Boyd.
How much to budget for home repairs and maintenance
“Everyone needs a financial plan for their home,” says Lindsay Youngbauer, a financial planner and vice president of diversified trust in Nashville, Tennessee. Home repairs are unpredictable, which can make them difficult to budget for. Often, you won’t know if you have saved enough until you get the bill.
She recommends saving at least 1% to 4% of your home’s value per year, depending on its age. This should be separate from your regular emergency fund of three to six months of living expenses. So if you own a brand new home worth $US300,000, try to save at least $US3,000 per year. To track ongoing maintenance, Youngbauer suggests making a checklist. It’s the best way to make sure you cover everything.
Boyd notes the 1% to 4% rule isn’t perfect. “Depending on where you live, you could be over-saving or under-saving based on market value alone,” she says. Still, it’s a decent place to start when you have no idea how much to budget for repairs.
Another tactic is keeping a spreadsheet of all possible repairs and maintenance. Your original home inspection report may have the age of each major system. Boyd says this makes it easier to predict how long you have to save before replacing each one. She says HomeAdvisor.com is an excellent resource to compare costs.
Where to keep your home repair fund
Both Youngbauer and Boyd agree it’s important to keep your home repair emergency fund handy – which means you should leave the money in cash. You should look beyond brick-and-mortar banks for higher interest rates. Make sure there is FDIC insurance up to $US250,000. Boyd recommends high-yield savings accounts like Ally Bank or American Express.
How to pay for repairs if you didn’t set money aside
Sometimes, major systems fail without warning – your air conditioning quits mid-summer or the water heater bursts on the coldest day of the year. Replacing them may cost several thousands of dollars, depending on the size of your home.
Unfortunately, these are things you can’t ignore. If your home repair fund is too low or doesn’t exist, it can be tough to come up with the money. Luckily, you do have a few options.
Youngbauer says many folks tap their home’s equity to pay for repairs. You can do this by applying for either a home equity line of credit (HELOC) or home equity loan. The interest rate depends on your creditworthiness, which is one possible downside. The biggest risk is losing your home if you can’t pay it back. “If your mortgage payment is already too high, adding to your debt could be a problem,” she warns.
If you decide to pay for repairs with home equity, it’s critical to make sure your payoff plan is realistic. Before applying, review your monthly budget. There needs to be enough wiggle room for another ongoing expense.
Don’t get caught off guard
Homeownership is a big responsibility. As soon as you get the keys, start saving for your home repair emergency fund. To stay ahead, save money every month, for as long as you own the home. As problems arise, take care of them promptly. “By ignoring routine maintenance, your home could actually decline in value,” Youngbauer says.
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