When To, and When Not To, Use a HELOC as an Emergency Fund
There’s a lot of debate as to whether or not people should be using their HELOC as an emergency fund. Of course, just like everything else in life, this is something that has both benefits and risks attached to it; and it’s those that people have to take into total consideration before they decide to start stashing money away in their home equity line of credit. So, when should you use your HELOC as an emergency fund? And when shouldn’t you?
One of the biggest benefits that comes with using your HELOC as an emergency fund is that it frees up any extra cash that you do have to invest, make home improvements, or make the big purchases that you’ve been saving up for. That’s what makes HELOCs so attractive to so many, but because your house is on the line, only certain people should use this strategy.
In short, those who are in a good financial position should be able to use their HELOCs as their emergency fund and not feel any fall-out of the risks that are associated with it. This is because those in a strong financial place probably will not be tempted to dip into their HELOC fund for extra cash (that’s not an emergency,) and they also likely won’t miss a mortgage or HELOC payment, which could cause them to lose their home.
That being said, those individuals that are not in a strong financial position should never consider using a HELOC as an emergency fund. The first reason for this is that if you miss a payment on your HELOC, you could actually end up losing your home – putting you in a bigger financial crisis than you may have ever dreamed of, and in fact making your poor financial position even worse.
Also, those not in a good financial place also may not have a stable job, steady income, or good credit, and these are all things that will hinder you from getting a credit, even if you have the required equity in your home. Also, remember that the balance on a HELOC can be demanded from the bank at just about any time, and so if you’re not in a place where you can pay that back, again you could possibly lose your home.
HELOCs can in fact be a great alternative to simply just saving up an emergency fund. However, the risks associated with this are far more than the risk of simply not having high yields in a savings account. Be sure that before you use this strategy, you take a lot of time to look at your own situation and make sure that it’s a good decision for you.