Source
r/personalfinance•
Nuli

Financing large home repairs.

I need to have a sewer line replaced in a house I just bought. It's going to cost about $15K to replace it. I could pay that in cash but it would use most of my emergency fund. The plumber is offering financing but it's via a credit card company offering a 0% interest rate for a year on a credit card which isn't something I've ever seen before. The last time I financed something was a car purchase 11 years ago so I don't know if things have changed in the mean time but it just seems strange. Is this normal now? What kind of other options are available for financing a large amount quickly?

Posted Oct 23, 2014, 3:58 AM UTC

110
joelhardi•

Well, you can look at the paperwork on the credit card -- that may be totally for real. I mean, short-term interest rates now are pretty much near zero, so the credit card company's cost of carrying $15K for a year is pretty low, and banks often have cash bonuses of $200-400 for opening a card account. It's worth it to them to pay those kinds of customer acquisition costs to get a new account.

As long as you pay off the balance before the 12 months it would be a way to finance for free. Or at least push the problem along for a year at which point you'll have more equity and/or savings and can reassess and will have plenty of time to decide what is best for you.

That really sucks about the sewer line.

EDIT: Curious so I checked, current 1-year LIBOR is 0.54%, so the card company's cost to carry $15K for a year is $81. Of course you still have to apply for and qualify for that. But assuming it works you're not getting a cheaper loan than free!

1
NuliOP•

Any idea what kind of potential problems I'd be looking for? How bad would getting this card and then closing it within a few months be for my credit? Better or worse than getting a HELOC?

1
joelhardi•

I would guess there might be some short-term damage (maybe a hit of 10-30 points that fades out after a few months) but don't claim a lot of expertise there. Also, you don't necessarily have to close the card, just pay off the balance.

I don't have an opinion on credit impact vs. the HELOC option (was thinking you're probably only at conforming 20% equity since you just bought, and may not even be able to draw that much equity out).

I think if you are planning to repay the 15K over a longer time (say 3-5 years) to preserve cash for possible contingencies, and you can get the HELOC now, might as well just do that, rates have just fallen back to historic lows.

But the main reason I wrote in the first place was just to comment that you shouldn't necessarily dismiss the card out of hand just because it seems weird (I know more about account acquisition in the card industry than I do mortgage ... in that area I'm just a dude with a mortgage). As a comparison, 50,000 air miles is $500 (internal accounting probably half that) and that bonus is super common. So in comparison, no interest for a year, the bank is actually getting your account relatively cheap.

With new rules from CFPB, card agreements must be more straightforward, there won't be crazy "gotchas" just read the agreement and see what the rate and annual fee (if any) are.

1
KingSurlyDave•

Most HELOCs are adjustable rate mortgages tied to an index (typically Prime). Depending on qualifications and loan to value, it could be as low as Prime + 0 or 1%. They have a cap of 18'ish percent, so its very much like a credit card, just one the bank has some (theoretical) measure of security via your house. Most HELOC payments are based on a percent or so of the balance, or the interest on your balance at the time. Most HELOCs have a 10 year draw period (where you can pull money out) followed by a 15 year repay period (where the balance is frozen and the payments are adjusted to pay off the loan in 15 years...adjusting as Prime adjusts of course). Most charge a yearly fee of around $75.00 or so (typically waived the first year). Most have a "cancellation fee" if you close the account within the first X years (typically 3-5). That fee is usually around $500.00

Interest from a HELOC might be tax deductible (consult your tax professional).

Otherwise it functions just like a big ol' credit card. Most banks will issue you a debit/visa and/or a checkbook. They can periodically check up on your value to make sure you're not upside down or getting into a larger default category, at which point they may cut your available credit or end your draw period prematurely.

Hope that helps!

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csguydnWiki Contributor•

How fast could you rebuild your emergency fund if you use some of it to pay off your repair?

Did you do an inspection? How was something like this not caught?

1
NuliOP•

We can rebuild in about six or eight months.

Did you do an inspection?

Yup, inspection was fine. This is something that became a problem after we bought it. I could go with a cheaper option to "fix" it a couple times a year but I'd like to fix it once and be done with it.

2
csguydnWiki Contributor•

Personally I would use my emergency fund, keeping enough in there to cover any insurance deductibles on the home/auto side of things, and then I would dramatically/rapidly rebuild this.

I would not take out a HELOC for this, nor would I put it on credit.

1
robert_bradley•

I'd get a HELOC. They're free to set up, and you can borrow on demand at low rates.

0
NuliOP•

I put 20% down on the house I just bought so most of what I looked at wouldn't give anything past 80% of the value of the house. I have a second home that I theoretically have equity in but it hasn't been appraised in years so I'm not certain.

I saw a couple places that offered HELOC up to 85 or 90% of the homes value but I don't know how those differ from the more standard loans. Do you know much about HELOCs?

1
WhuddaWhat•

Given the recent purchase and minimal liquid funds, I'm guessing there's no equity to tap.

1