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When it's time to sell a house and the real estate agent is on the way, invariably the water heater decides to breathe its last and floods the hall. With a few thousand dollars worth of work needed to sop up the mess, should a homeowner consider tapping the property's equity for repairs? Or should the repair be charged to a credit card?
Lenders say it's a balancing act that depends on a number of factors. Most importantly, homeowners should consider how much time remains until the sale is expected close and whether the home already is listed, which can keep lenders from making the loan.
Use credit cards for a quick fix
"If it's really close to when they're going to sell the house, it's probably better to just put it on the credit card and pay it off," says Stephen Graham, a senior vice president in Crestar Financial Corp.'s direct lending office in Richmond, Va.
Add four to six months to the equation, though, and a homeowner should take advantage of what home equity offers.
"From a borrower's perspective, then it's going to make sense to get a home equity line of credit because rates are typically lower and it's a pretty easy process to go through these days," Graham says. And most customers will find that the interest on the line of credit is tax deductible.
For example, a customer who plans to sell a home in two months and needs $5,000 worth of repairs could probably obtain a home equity line of credit with a rate of between 8.5 percent and 9.5 percent. That would result, before the sale, in payment of only about $79 in interest, and total monthly payments of about $149.
But, Graham says, the customer also will be paying between $400 and $800 to cover the costs of setting up the line of credit, bringing the cost of two month's use of the money to nearly $1,000. Finally, borrowers are required to pay off the credit line upon selling the house.
If you've got the time, use an equity line
The same customer could instead put that $5,000 on a credit card with a 2 percent minimum payment and a 14.96 percent interest rate. In that case, the borrower would have made $198 in payments, including $123 in interest. With more expensive repairs and more time until the actual sale date, though, the results can be entirely different.
Six months before the sale, $20,000 worth of work would cost about $1,800, including $933 in interest with a credit line. Most banks also will waive costs and fees on a loan of $10,000 or more. At the higher credit card rate, that same customer would have racked up $1,472 in interest with total payments of $2,400.
"The benefit of putting any type of work on a credit card is that you don't have to go shopping around for a lender, and you can get the work done immediately," says Steve Rhode, president of Debt Counselors of America in Rockville, Md. "But you may be paying the highest possible interest rate and it can be the most expensive way to finance."
Get an equity line before listing the house
As for getting that line of credit, a borrower generally does better on time and fees by going to his own bank for the loan.
Crestar's Graham says homeowners should make sure the loan is secured before listing the house with a real estate agent. If they've already done so, a bank will likely find out during the approval process and take steps to ensure the loan will earn it some money -- or refuse to cut a deal at all.
"A lot of lenders will not do a loan if they know the house is on the market," says Graham. If they do, he adds, they'll probably tack on fees, such as a point, or 1 percent of the outstanding loan.
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