Christ Yoder
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You never know when a financial emergency may arise, whether it’s a leaking roof, a broken car engine, or a medical issue that causes you to miss work and rack up countless invoices. This is why you should always have access to cash in the blink of an eye, and this is where your emergency fund Between.
Ideally, your emergency fund should contain enough money to cover essential living expenses for three to six months. And you’ll often hear that the best place to store your emergency cash is in a savings account, where your capital is protected against losses.
But what if you have the option of using your home as a source of money? If you have enough equity in your home, you can apply for a Home Equity Line of Credit, or HELOC, and get cash flow for the future. The question is: can this really replace an emergency fund?
How HELOCs Work
Equity refers to the percentage of your home that you actually own, and you can determine what your equity is by taking the current value of that property and subtracting what you owe on its mortgage. For example, if your house is worth $ 200,000 and you owe $ 120,000 on your mortgage, you have equity of $ 80,000.
Once you have equity in a property, you can borrow against him through a home equity loan or a HELOC. With the first one, you borrow a lump sum in cash and then start paying it back. With a HELOC, you don’t necessarily borrow money up front. Rather, you get a line of credit that you can draw on when you want or need it. For example, you could get a HELOC worth $ 20,000, which allows you to withdraw all or part of that amount if necessary.
Can your HELOC be your emergency fund?
While HELOCs are a great way to access cash in the blink of an eye, yours shouldn’t replace a real emergency fund housed in the bank. On the one hand, when you press your HELOC, you become responsible for the interest on the money you borrow. And unlike home equity loans, which typically carry fixed interest rates, interest on HELOCs is often variable, meaning you might find yourself having to pay a lot of extra money to have the privilege of accessing. to this line of credit.
Another thing to consider is that the amount you are allowed to borrow through your HELOC could change if the value of your home goes down. And the window of time to withdraw a HELOC isn’t unlimited – you can only get five years from the time you’re approved, which means you’re out of luck if a major disaster strikes five years and two months later. On the other hand, if you deposit a lump sum in the bank, you have the peace of mind of knowing exactly how much money you have, and that it is available to you indefinitely (as long as you don’t withdraw it, fine. sure).
Finally, while it is relatively easy to qualify for HELOCs, provided you have the equity in your home there, and they typically charge a lot less interest than what you will pay on a credit card or even a Personal loan, you should know that if you don’t pay back what you borrow, you risk losing your home to foreclosure. Granted, it’s a risk whether you’re using your HELOC for emergency fund purposes or to do renovations, but it’s something to think about.
While it is not a bad idea to secure a HELOC and use it as extra protection against the vagaries of life, this HELOC should supplement an existing emergency fund rather than replace it. If you have a lot of equity in your home, you may want to consider saving three months of living expenses in the bank rather than six months and then getting a HELOC as well. This way you will have some with cash on hand, coupled with a way to access more if the need arises.
