When to Pay Cash vs. When to Finance
In general, it is usually better to pay cash for large purchases such as vehicles, real estate and home repairs — but only if you can really afford to.
The reality is that many homeowners either cannot afford to pay for home repairs all at once or simply prefer to stagger the payments to have more wiggle room in their budgets.
If you are dealing with a home emergency (such as a busted pipe in your wall), then you may be able to dip into your emergency savings fund to pay for the cost of repairs. However, if the repair is more expensive than you expected or you are still building up your savings, then financing the repair might be a better option.
There are a few options for financing a home repair or renovation:
- Personal loans. These types of loans are “unsecured,” which means that you do not have to put up your house or any other asset as collateral. Your approval and interest rate will depend on your credit score and other factors. Unlike credit cards, personal loans usually have a small interest rate if you have pretty good credit.
- Credit cards. Using a credit card may be a good option if the repair is not costly and you are able to pay the card balance off quickly before it accrues interest. You may choose to apply for a low-interest credit card or a 0% balance transfer to give yourself more time to pay off the balance.
- Home equity loan. This is similar to a personal loan, except that you put your house up as collateral. This may help you get better loan terms, but it is risky. Since you are essentially borrowing against your property, you could lose your house if you can’t pay the loan back.
- Cash-out refinance. When you refinance your home, you replace your existing mortgage with a new one. A cash-out refinance is similar, except that the replacement loan you get is bigger than what you currently owe on the house, letting you “cash out” the difference.