Can I rely on my home equity to finance large home repairs?

Question

There are certain "big ticket" home repair items with long expected lifetimes, such as your furnace or your roof, that could fail suddenly before that lifetime is up and need immediate replacement. They age, and you think, "Some day I'm going to need to replace that, and it's not gonna be cheap."

It's easy to foresee that you will incur these expenses but difficult to predict exactly when that day will come. The goal is to save up to replace these things before they fail, but if a furnace with a 10-year expected lifetime and a 5-year extended warranty dies in its 6th year of service, I think most homeowners would be caught unprepared for the expense of replacing it. If that happens, it feels like an emergency—but my understanding of the "emergency fund" has always been that it's intended to cover regular living expenses if you suffer a loss of income (see also: What expenses should be covered by an emergency fund). These are completely different types of risk and it doesn't seem prudent to mix them up.

Homeowner's insurance is great for certain expenses but doesn't cover things that just wear out sooner than expected and it's hard to pull five, ten, fifteen thousand dollars out of thin air. I'm slowly saving up money in a budget category separate from my emergency fund for the inevitable cost of replacing the roof (which in my case is closer to its end of life than the furnace), but:

1. I don't know that I will definitely save up enough money to replace the roof before the end of its useful life span, without robbing the emergency fund.
2. I'm really not wild about the idea of having that much more cash sitting idly in liquid accounts, on top of the money I save toward the emergency fund, vehicle replacement, a vacation, dental work, etc.
3. I have 28% equity in my home based on an assessment from three years ago when the market was still in the toilet; a ridiculously conservative estimate of the home's value today would put us at 45% equity, but even at the old valuation there's enough "there" for a new roof.

My question is whether it's reasonable to rely on my home equity to cover these large repairs when the time comes, instead of saving for them directly or financing them through the installer? Is this what equity is for when you have a working-class income and lifestyle?

I'm concerned about the costs associated with a second mortgage, HELOC or FHA 203k but I'm also concerned about the opportunity cost of holding significantly more liquid assets at a time in my life when I'm trying to make retirement (and 529) savings my first priority.

(Note: There's a similar question here that asks about home renovation rather than necessary repairs.)

Answer 1

Personally, I'd use my emergency fund first. It is unlikely (though possible, of course) that I will entirely lose my income at the same time I need to replace my roof or my furnace. I'd rather pay my emergency fund back with installment payments than pay off a HELOC to my bank. The lost interest on my emergency fund, which, after all, should be in cash, is much less than the cost of the loan. I could even set up an amortization schedule in a spreadsheet and charge myself interest when paying back into the emergency fund.

That said, if I didn't have the cash in my emergency fund, I'd rather borrow against the house than finance with a contractor. If they'd even do that, which is unlikely--I've never dealt with a roofer or heating contractor that required anything but full payment at time of service. Home equity borrowing is generally the cheapest kind.

I'm firmly in the camp of those who look at home ownership as a consumption decision rather than an investment. If the value goes up, great, but I just build in about 1% of the cost of building a new house (excluding the land price) into the housing budget each year, right along with mortgage interest, property taxes and basic utilities. Usually, that's enough to cover the major wear-and-tear related repairs (averaged over 3-5 year periods, anyway).

Answer 2

Yes, a HELOC is great for that. I just had my roof done last month (~$15K, "ugh") and pretty much every major contractor in my area had a 0% same-as-cash for at least 12 months. So that helps - any balance that I don't bank by 11/15/2015 will be on the HELOC.