In the last five years, values of homes throughout the United States have increased dramatically. With that, the American public has resorted to an unprecedented amount of borrowing against their homes. People have used their home equity to consolidate debt, buy vacation homes, and buy more real estate. A few smart people have done something even better with their equity – put it aside for emergency use.
While a home equity loan has a fixed repayment schedule that isn't too flexible, a home equity line of credit, or HELOC, is perfect for emergencies. You can apply for one when times are good and you don't need the money. Then, if you find yourself in need of cash at some time in the future, you can borrow against your equity on an as-needed basis. The more flexible repayment terms and the fact that you only need to withdraw funds when you need them make a line of credit great for emergency use.
As good as a HELOC can be as an emergency tool, it should not be your only emergency tool. It would be nice to be able to withdraw cash from your credit line should you lose your job, for instance. But even a HELOC needs to be repaid, and sooner or later, you will have to start repaying the loan. Another concern would be that home values might decrease, which could affect your ability to borrow against your home.
A line of credit would make a good component of a thorough emergency plan, but it should be just one component. A HELOC should not considered a replacement for a good, old fashioned savings account. Nor should it be considered a replacement for long term investments, such as a mutual fund or a 401(K)-retirement plan. Instead, a HELOC should be just one piece of a good financial package.
If things are going well for you and you have a reasonable amount of equity in your property, you should consider applying for a home equity line of credit. Even if you do not have a use for the money now, you can save it for that theoretical "rainy day." Just don't make it your only umbrella.
