Owning a home doesn't just mean making your monthly mortgage payments and covering your property taxes. It also means grappling with a host of unknowns.
We're talking about emergency home repairs, and they can run the gamut from a burst pipe to a damaged roof to a busted septic tank. The costs involved can vary, too, but in general, emergency home repairs don't tend to come cheap.
Unfortunately, a new survey from HomeServe reveals that a large number of U.S. homeowners are sorely ill-prepared for a home-related emergency. A whopping 35% have either less than $500 or no money at all set aside for emergency home repairs. And more than half of households with an annual income of under $50,000 are in the same boat -- they either have no savings earmarked for home repairs, or less than $500 for that purpose.
Seeing as how 58% of homeowners have had an emergency repair pop up over the past 12 months, that doesn't paint a settling picture. If you're lacking funds to cover a home emergency, it's imperative that you amass some cash reserves -- before the next repair sneaks up on you.
Why you need emergency savings
As a homeowner, it's crucial that you set funds aside for emergency repairs. If you don't, you may have no choice but to resort to costly credit card debt the next time something in your home needs fixing. And that, in turn, can cost you a boatload of money in interest, not to mention damage your credit score, depending on the amount of debt you rack up.
And if you’re expecting your homeowners insurance policy to pick up the tab for emergency repairs, think again. Your policy won’t pay for repairs that result from wear and tear on your home over time, so if your heating system suddenly goes kaput in the middle of winter, but it’s 15 years old, chances are, that bill is entirely on you, since these systems only last so long. The same holds true if your pipes corrode or warp over time, leading to water damage -- your insurance policy won’t pay for that, which is why you need money of your own.
Furthermore, while it's sometimes possible to borrow against your home to cover an emergency repair, that option generally only exists if you have at least 20% equity in your home. Equity refers to the portion of your home that you own outright, and you can calculate it by taking your home's current value and subtracting your mortgage balance. If your home is worth $200,000 and you owe $160,000 on your mortgage, you have $40,000 worth of equity, or 20%. In that case, a home equity loan or line of credit may be on the table, and while you'll still pay interest on whatever amount you borrow via either option, the rate in question will generally be much, much lower than what a credit card will charge you. But if you don't have equity in your home, getting an affordable loan becomes far more difficult.
As a general rule, you should have an emergency fund with enough money to cover at least three months of essential living expenses. This applies whether you're a homeowner or not. But if you do own property, and you have that much money or more in the bank, there's a good chance it'll suffice in covering a moderate home emergency (maybe not a $25,000 repair, but a $4,000 bill should be manageable). And that's a very good start.
Of course, building emergency savings isn't easy, especially when the bulk of your money goes toward ongoing living expenses. But if you make an effort to cut back on non-essential expenses (like restaurant meals, cable, and rideshares) for a period of time, you'll slowly but surely accumulate some savings. Similarly, if you're willing to hold down a second job for, say, a year, you can bank your earnings to establish that safety net.
No matter what specific tactic(s) you use to build some emergency savings, it's crucial that you find a way to store some amount of cash in the bank. Doing so could save you a lot of money, and a world of stress, the next time an urgent home repair arises.