All homeowners know the costs of owning a home: a down payment, closing costs, mortgage, insurance. What many overlook, however, is how much it costs to maintain a home for longevity, which means budgeting for inevitable major repairs down the road. From a burst pipe to a leaky roof, you can’t always predict when a major improvement project will be needed, but you can be certain that they will be needed. That’s why it’s important to have some kind of plan for when they happen. If you’re a homeowner, here is some advice on how to prepare for major home repairs.
1. Build a rainy-day fund
No matter what your financial situation is, the best way to pay for home improvements is to do it without racking up tons of debt. Using a credit card should be a last resort because you could end up paying astronomical amounts of interest. Instead, start a rainy day fund where you regularly allocate a certain amount of money for larger unexpected repairs, either through a savings account or by keeping a money jar. Many experts recommend, as a general rule of thumb, that each year you set aside 1 to 3 percent of your home’s purchase price for home repairs. So if you purchased your home for $625,000 (the average sale price in San Diego), you would save at least $6,250 for home repairs each year.
How much you save is up to you, but it’s difficult to say that you will ever have too much in your rainy day fund. While $5,000 is a good goal to push for, since major repairs are inevitable and you can’t always predict them, it may be best to plan on saving indefinitely.
2. Estimate the costs of major projects
While using general rules of thumb can be a good place to start, there’s a more effective way of knowing how much to save for major home repairs: estimating the actual costs. Every big-ticket item of your home (e.g., roof, foundation, HVAC system, plumbing) has a life expectancy, which means you can roughly plan for when it will need to be replaced or repaired and how much it will cost (e.g., the average roof replacement costs anywhere from $1,700 to $8,500). Have your home thoroughly inspected so that you can get an idea of how old each component is, and keep track of it so you can know how much to save. This process requires time and diligence, but it can save you a lot of trouble down the road.
3. Take out a home improvement loan
There may be instances where you don’t have your rainy day fund built up enough to cover a repair. In that case, it’s still ideal to avoid using a credit card. Consider taking out a home improvement loan. These days, you can easily apply for home improvement loans online, and many of them start with an interest rate of less than 5 percent, which is a much lower rate than your typical credit card.
4. Find the best contractor for the money
Another cost of major home repair to consider is contractors. If you carefully choose your contractor for each job, you can save yourself a lot of money and time. It’s important to remember that just because a contractor charges more doesn’t mean they do better work than others. Before you hire someone, ask people you know for referrals, and interview a few different candidates. Look into each candidate’s work experience, and make sure they are licensed and insured. Then you’ll be ready to get estimates from each candidate, compare the costs, and choose your contractor.
Major home improvement projects are part of owning a home, and starting to prepare for them now can ease financial stress later. Start building your rainy day fund today, and have your home inspected so you can estimate the costs of future repairs. If an emergency repair surfaces, consider taking out a personal loan, and be sure to do your due diligence when choosing a contractor.