What Roof Financing Options Are Available?

The notion of “saving for a rainy day” really hits home when it’s time to replace a leaky roof. If your household emergency fund can’t cover the full cost, it could be time to consider roof financing options. Nationwide, roof replacement costs range from $5,569 to $11,415, and the overall average cost is $8,349, according to home repair website HomeAdvisor.

Fortunately, there are many roof financing alternatives available, so once you’ve got tarps and buckets in place to stem water damage, consider your choices carefully and pick the one that’s best for you.

1. Home equity loan

A home equity loan, also known as a second mortgage, uses the portion of your home that you own outright — your home equity — as collateral on a loan that you pay back in fixed monthly payments. A home equity loan repayment term generally lasts from five years to 30 years.

You can calculate your home equity by deducting the amount you still owe on your mortgage from your home’s current market value. If you owe $200,000 on a home valued at $300,000, for example, your equity is $100,000.

Lenders typically will only lend you no more than 85% of your home’s value, minus your outstanding mortgage balance. Using the same $300,000 home as an example, that’d be: $300,000 x 85% = $255,000, then $255,000 – $200,000 = $55,000.

Interest rates on home equity loans are typically fixed, so you’ll know before you accept the loan what you’ll pay each month of the repayment term. An advantage to using a home equity loan for roof financing is that you may be able to deduct the interest you pay on the loan from your federal income taxes, as long as you itemize deductions. Consider speaking with a financial professional to find out if this is possible for your individual situation.

However, note that there are a couple drawbacks to using home equity loans for roof financing. They often have a lengthy approval process, comparable to that of a first mortgage, and can take two to four weeks to close. Another disadvantage is that home equity loans can put your house at risk: If you are unable to keep up with your roof-loan payments for any reason, you could lose your house.

2. Home equity line of credit

A home equity line of credit (HELOC) also uses home equity as collateral — but rather than providing a lump-sum loan, it establishes a revolving credit account you can use much like a credit card. As with a home equity loan, a HELOC allows you to access a maximum of 85% of the home’s value minus the remaining balance on your mortgage.

For a length of time called the draw period, which typically lasts 10 years, a HELOC allows you to write checks or use a debit card to make payments against the account’s spending limit, then pay down the balance as quickly or as slowly as you choose, as long as you meet a monthly minimum payment. After the draw period ends, you must pay off the outstanding balance in a lump sum or in a series of fixed monthly payments.

HELOCs often come with variable interest rates and may feature low promotional rates for the first 12 months, after which borrowers can see significant annual increases. That, and the variable-balance nature of all rotating accounts, can make it tricky to predict how much a HELOC will cost you over the life of the account.

If you use a HELOC for roof financing (or any other home improvement project), you may be able to take your interest payments as a deduction on your federal income taxes. As with a HEL, talk to a financial professional to find out if you may be eligible.

3. Cash-out refinance

In a cash-out refinance, you take out a new mortgage on your home, based on some or all of its current market value, pay off your existing mortgage and treat any remaining cash proceeds as a lump-sum loan. You can use the cash to finance a roof or other home repairs, or for any other purpose you choose.

A cash-out refinance can make a lot of sense if you can secure the new mortgage at a significantly lower interest rate than your original mortgage, or if you replace a variable-rate mortgage with a fixed-rate loan.

However, the closing costs and any additional years you add to your payment timeline by taking out the new loan could mean you’ll pay more for your house in the long run than you would have under your original mortgage. Getting a new roof in the bargain may be worth the extra cost, but you should be aware of it.

As with home equity loans and HELOCs, the approval process for a cash-out refinance is much the same as applying for a home-purchase mortgage. Expect to document your income and expenses and close in around 30 to 45 days, though this time period will ultimately depend on your lender.

4. FHA 203(k) loan

If you lack sufficient equity in your home to cover roof financing, one option is a 203(k) mortgage issued through the Federal Housing Administration (FHA). These mortgages are issued by FHA-approved lenders to enable the purchase or refinancing of homes in need of repair, and both fixed- and adjustable-rate loans are available.

There are two types of 203(k) loans — standard and limited. A limited 203(k) mortgage, which covers repairs costing up to $35,000, is probably adequate for most roof replacement jobs.

If your roof requires more work than that, or if you’d also like to finance more extensive structural renovations along with a new roof, you can opt for a standard 203(k) mortgage, which allows you to borrow the lesser of these two amounts:

• 110% of the anticipated value of the home after renovations are completed
• The sum of the home cost plus the cost of renovations

If you pursue a standard 203(k) mortgage, you’ll have to hire an FHA-approved 203(k) consultant to act as liaison between you, the lender and the roofer (and other contractors, if any). The consultant devises a work plan for the project, ensures construction meets proper standards and signs off on the release of funds to the roofer and other contractors.

Fees for writing up job specs for FHA-approved consultants range from $400 for repairs of $7,500 or less to $1,000 for jobs that cost more than $100,000. Consultants may charge additional fees for inspections conducted at various milestones in a project. You can find a full list of fees and a list of FHA-approved consultants at the FHA website.

If your credit score is 580 or higher, you qualify for the minimum 3.5% down payment required for a 203(k) mortgage; if your score falls below 580, you’ll have to put down 10% of the amount you’re borrowing.

5. FHA Title 1 loan

Another option if you lack sufficient equity to borrow against your home is a Federal Housing Administration (FHA) Title I loan. These fixed-rate loans are designed to fund home improvements that substantially improve the home’s basic livability — a roof repair will likely fit that description. These types of loans are available through FHA-approved lenders.

To qualify, you’ll typically need a debt-to-income ratio of 45% or less – meaning you spend no more than 45% of your monthly gross income on consumer debt such as credit card bills, student loans and car loans. If you borrow more than $7,500, you must offer your home as collateral, via a deed of trust or your mortgage. That means that, as with a home equity loan or mortgage refinance, defaulting on an FHA Title I loan could cost you your home.

6. Personal loan

If you use a personal loan to finance a roof repair, you’ll likely pay a higher interest rate than you’d get on a home equity loan, as these loans aren’t secured by any collateral. Annual percentage rates (APRs), which reflect interest rate and origination fees of typically 0% to 6% of the loan amount, can range from 9.3% for applicants with credit scores of 760 or higher to 22.16% for applicants with scores from 640 to 679.

Personal loans are unsecured, meaning there’s no asset backing them. That’s why lenders generally charge higher interest rates on them. On the upside, because personal loans aren’t secured by your house, if you ever find yourself unable to keep up with your roof payments, a personal loan won’t put your house at risk.

7. Contractor financing

Many roofing contractors have relationships with lenders and offer loan packages that can help you finance a new roof. Terms and rates vary depending on the contractor and your credit, but the process can be relatively quick — typically a credit application that can be done online or over the phone.

These quick-approval loans are typically a form of unsecured personal loan or credit card, packaged for home-improvement use. It’s wise to study their terms before you accept the loan, paying special attention to whether the loan features an introductory “teaser” interest rate. If so, make sure you understand what the new rate will change to after the introductory period ends, and how the new rate will affect your monthly payments.

If you’re considering contractor financing, it can’t hurt (and won’t take too much additional time) to apply for other personal loans for the sake of comparison. Rate shopping is always a good idea when you’re seeking a loan for any purpose.

8. Credit card

Financing a roof with a credit card should probably be your last resort. With average APRs on new cards hovering around 19.33%, according to the Federal Reserve, putting a new roof on your credit card(s) would likely be a very costly option.

If your roof repair estimate is fairly low and you can pay down a big chunk of the total cost within a year or so, financing the roof with a new credit card’s introductory 0% APR could be a good workaround if better options aren’t available. If you can pay off the entire balance within the promotional period (typically 12 to 18 months), you’ll have managed an interest-free loan, but any balance remaining after the introductory period will be subject to the card’s standard interest rate.

What to consider before choosing roof replacement financing

The sooner you get your roof fixed, the better, but don’t let haste cloud your judgment. Do the following to make sure you’re getting the absolute best deal.

Get multiple quotes

It pays to shop around. Ask neighbors, friends or family to recommend good roofing companies, and have several inspect your roof and submit estimates. Along with their proposal, have each contractor provide a certificate of insurance and proof of workers’ compensation insurance.

Before settling on any contractor, check online reviews to make sure there aren’t outstanding complaints about the roofer’s work performance.

Look at what’s included in each proposal

Once you have quotes in hand from contractors you’re comfortable with, compare the proposals carefully.

Each should include a lump-sum proposal that covers all expected costs. Most pros will also include a unit cost per square foot to cover unexpected damage. If, while preparing to replace your shingles, the contractor finds a rotted sheet of plywood that needs replacement, the unit price gives you an idea what the additional cost of that would be.

The following costs are typically itemized in a proposal:

• All labor and materials
• Any building permits required by your county, city or town (obtaining these permits is the contractor’s responsibility, not yours)
• Cleanup and disposal of all debris and waste

Use your home warranty if you have one

A home warranty is kind of like an insurance policy — you pay for it hoping you’ll never need it. The annual premium varies depending on your plan and your home state, but should cover you if a major home system breaks down. The typical cost, according to Home Advisor, can range anywhere from $219 to $1,704 per year.

If your roof damage is covered, the only additional money you should shell out is for a service fee to file a claim, usually to the tune of $50 to $100. Again, every policy is different.

Find out if insurance will cover any repairs

After you have a clear idea of what you’re up against in terms of repairs, check with your insurance company to see if it’ll pick up any portion of the tab — however, whether it does or doesn’t will be dependent on your policy. Many policies will cover a leak caused by a weather-related event like high wind or hail but not repairs caused by age or general wear and tear, but every policy is different and specific exclusions may apply.