Home Equity Line of Credit at Your Disposal
‘œYou have to be as fully prepared for the dull game as you are for the great game, or else you won’t be prepared for the great one.’ ‘“ Red Barber
Mrs. Micah, one of our ardent, straight supporters, asked me to share a piece of money advice that I think will help others. First, here is her tip: Open bills and pay them right away or use calendar software. Good advice. I handle my bill paying the exact same way. Also, I switched to online bill pay back in early 2006 (which I admit was joining the party late) but I’m a zealous convert. This service lets me automate the process and takes the manual aspect out of it.
So what money tip do I think is worth sharing? Mine is a bit more counterintuitive (as some readers have disputed my reasoning behind the practice) but it works for me and provides peace of mind in our overall financial strategy.
So what is it? I always keep a home equity line of credit (HELOC) at my disposal. My mortgage broker, who I adore, convinced me that this is a grand safety net. Of course, there are costs associated with setting up a HELOC and I’m certain she made a nice commission on this transaction, but in my opinion it is money well spent.
Here’s my thinking: what if I lost my job or Jeanine lost her job or one of us had a health crisis that prevented us from working? Or God forbid our yet-to-be-conceived child is born with special and expensive needs.
When a major emergency strikes it’s usually too late to develop the contingency plan. Sure there’s disability insurance and mortgage payment insurance but disability typically only covers a fraction of one’s income and the latter usually has a laundry list of loopholes like a time period before you get your first payment.
Most lenders will not let you pull out equity if you can’t show income this is why I want access to some of our equity before ever needing it. In a major emergency, after depleting our savings, the HELOC would buy us more time to weather the storm.
I confess that I have a lot of money issues’¦ remember, I’m the amasser and financial hoarder and it’s hard for me to spend it. Money makes me feel safe. Period. Buying stuff has always been secondary. It’s never been about keeping up with what others are wearing, driving or doing. Money in the bank and our HELOC back up plan allows me to sleep in peace at night.
That said, at times Jeanine views our HELOC differently. We’ve been itching to remodel our kitchen (we haven’t yet!) and more than once, she has said, ‘œWhy don’t we use our line of credit?’ After all isn’t that what millions of people did with their equity over the last few years ‘“ use it?! Those types of expenses should be paid for with cash, not financed. Besides our cash is going to making a baby these days. The kitchen will have to wait.
Another time (when we had our first big money fight), a family member asked Jeanine to dip into our line of credit for a loan. It was a double freak out moment for me. As that post explained, Jeanine ended up lending the money out of her personal savings, which still made me wig out, but I had to just let this go. Not all battles are worth winning.
Anyway, having a HELOC is good advice in my opinion. On two of my rental properties I have the same. My contingency plan is padded and in place. I hope I’ll never have to use it, but just knowing it’s there makes me feel better.
What do you think? Do you agree or disagree?
HELOCs make me nervous. But I think you’re using yours responsibly (i.e. not using it at all because there isn’t an emergency). This is what they’re meant for, not for putting in a pool or buying a better car. Getting it available early also sounds like a good move. I hope you’ll never need it!
P.S. Best of luck on the baby-making!
I agree with you. When I was laid off I tried to get a home equity line “just in case” and every mortgage company I went to said it couldn’t be done. When I got employed again I was deluged with offers – the same companies that wouldn’t give me the time of day now competed to give me Rolexes!
One question is how much of a HELOC to create. I took the amount the mortgage company suggested, about 1/2 our equity in the house. My wife thought this was too much – just having that large of a home equity line might affect our credit. What do you think?
We did use the home equity line for our bathroom renovation, and are now busily paying it off. I hate getting the bill (with interest) every month and hope we’ll be done paying it off soon. Meanwhile I’m trying to convince my wife to do without some luxuries because until we pay off the home equity line we’re poor. She’s cooperating to a fair extent – differing approaches to money are a constant sore spot we’ve had to learn to deal with.
Regarding having an open HELOC as an emergency fund, Liz Weston writes in “Deal With Your Debt” (my favorite personal finance book):
“Given how little savings most families have, this is probably a smart idea – if you have the discipline to leave the line of credit alone… If you decide to go forward, this is definitely something you’ll want to have in place before you lose your job. You might still be able to get the line of credit afterward, but you’re likely to pay a higher rate for the privilege.”
So according to Liz, you’re doing exactly the right thing. Later she also discusses using it for home improvements, but that issue is more complicated. I certainly wouldn’t use all those “millions of people” who cashed out their equity as role models. A lot of them now have more debt attached to their homes than their homes are worth.
Mrs Micah: Yes, people definitely need the discipline not to use except for an emergency. Thanks for the baby wishes.
Larry: It’s interesting that you actually tried this while out of work and couldn’t get one. Re: your question about how much… When we bought our house we put 30 percent down and our mortgage broker suggested a HELOC of a little more than half this amount. I’m not sure how she arrived at the number, but your view of half sounds right. Email this link to your wife!
By the way, an unused HELOC will not negatively effect your credit score. It’s the best safety net – I think it was a couple of grand in closing costs, but worth every penny as insurance.
Bill: Glad to hear that I’m on the same page with Liz. Re: home improvements – many people use these lines responsibly for just that (note Larry above), but for me personally, I’m a worrier! I only want it as a backup plan. If I couldn’t work and we ran out of savings, the HELOC would give us the time and flexibility to sell our home and relocate to a cheaper state. I’m willing to wait on the kitchen!
In this week’s Carnival of Personal Finance.