Warning about HELOC as Emergency Fund
BreadW...@fractious.net
I've always been a little wary about using a HELOC
as one's only emergency fund. It's a nice theory,
but in a real emergency - job goes away, perhaps
home equity is whacked, credit deteriorates, etc -
there was never any guarantee that the bank wouldn't
freeze the line and no further withdrawals against it
just when they are needed - not much of a safety net.
Turns out that some folks HELOCs *are* getting frozen:
<http://www.queercents.com/2008/02/04/countrywide-suspending-equity-lines-of-credit-heloc/>
[and there's a link to an LA Times story dated Feb 1 a little
way down that page, which is an interesting story, too]
which I found from:
<http://www.bargaineering.com/articles/dont-rely-on-credit-as-an-emergency-fund.html>
The bottom line seems to me to be that even if you are
earning less on a savings account than you are paying on
a HELOC, don't use all your savings to pay that thing off.
Do work on paying it down, but that interest difference,
which may be as much as 3 or 4 percent per year (assuming
a high-interest savings like ETrade or HSBC and a HELOC
somewhere around prime) - is the cost of *guaranteed*
liquidity - exactly what one needs in an emergency fund.
And if there are folks out there with no cash emergency
fund but an open and available HELOC - they might be
advised to actually extract enough cash from that HELOC -
now - and park it in cash while they know for sure they
can.
[Oh, and credit cards are probably an even worse
"emergency fund" plan...]
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
Douglas Johnson
>
>I've always been a little wary about using a HELOC
>as one's only emergency fund. It's a nice theory,
>but in a real emergency - job goes away, perhaps
>home equity is whacked, credit deteriorates, etc -
>there was never any guarantee that the bank wouldn't
>freeze the line and no further withdrawals against it
>just when they are needed - not much of a safety net.
My favorite emergency fund is a brokerage margin account. Ready money at low
interest rates when you need it, otherwise it is hard at work for you.
You do need to be careful not to borrow so much you might trigger a margin call.
So make sure the portfolio is well diversified and you don't borrow more than
10% or 15%.
-- Doug
joetaxpayer
BreadW...@fractious.net wrote:
> I've always been a little wary about using a HELOC
> as one's only emergency fund. It's a nice theory,
> but in a real emergency - job goes away, perhaps
> home equity is whacked, credit deteriorates, etc -
> there was never any guarantee that the bank wouldn't
> freeze the line and no further withdrawals against it
> just when they are needed - not much of a safety net.
The Countrywide story contained the quote "In your contract, which has
the heading Home Equity Credit Line Agreement and Disclosure Statement
(“Agreement”) you will find that you have agreed that we may take this
action. Please look for this in your Agreement under the paragraph
heading that reads: “Your Rights to Temporarily Suspend My Loans or
Reduce My Credit Limit” "
So it seems to me this is a good warning for anyone looking to use the
HELOC as you suggest, but not write it off completely. Coincidentally, I
am renegotiating my own HELOC, to bring the rate to Prime-1.25%.
The booklet they sent, states " Under certain circumstances, we can (1)
terminate your line, require you to pay us the entire outstanding
balance in one payment, and charge you certain fees; (2) refuse to make
additional extensions of credit; and (3) reduce your credit limit.
If you ask, we will give you more specific information concerning when
we can take these actions.
So, I will ask, I might not have noticed this otherwise. I thank you for
bringing our attention to this possibility. Of course, it would be
pretty bad if a job loss kills the credit line, then the line itself
would be pointless for that purpose (as an emergency fund in case of
that very job loss).
JOE
BreadW...@fractious.net
> BreadW...@fractious.net wrote:
>
> > I've always been a little wary about using a HELOC
> > as one's only emergency fund. It's a nice theory,
> I am renegotiating my own HELOC, to bring the rate to Prime-1.25%.
That's a great rate. I'm paying prime-0.50
> The booklet they sent, states " Under certain circumstances, we can
> (1) terminate your line, require you to pay us the entire outstanding
> balance in one payment, and charge you certain fees; (2) refuse to
> make additional extensions of credit; and (3) reduce your credit limit.
I think they all reserve (2) and (3) - basically they are
saying that at any time they can freeze what you've already
borrowed and not allow you to borrow more. I'm actually
kind of surprised at (1) though. Now I think I may check
on that one on my own credit line. I'd definitely ask for
more details.
Oddly enough, just after I posted that story, I read Fred
Frailey's "from the Editor" in the current (Mar'08) Kiplingers
where Fred mentions:
Is your job secure? Just in case, have at least half a
year of living costs close at hand. For that purpose, I
keep a substantial home-equity line of credit, untapped.
It's a lifeline if I ever need it, and it costs nothing
if I don't.
Of course, in his case, it's probably just fine as a second
or third line of defense. I'm quite certain he's got a
substantial taxable portfolio and a bunch of cash he can
tap, and he's probably also got a heap of equity in his
house. I think the most likely reason a HELOC would get
closed or frozen is if one's home equity gets whacked and
the HELOC puts their combined mortgage/HELOC line close
to or over their home's value. If you've got a heap of
equity in the house, or your first mortgage is paid down
(or off!), the chances that they'd shut your credit line
down are probably miniscule.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
--------------------------------------
Chris Cowles
news:8Y2dnTyCa-_nSS3a...@comcast.com...
> The booklet they sent, states " Under certain circumstances, we can
> (1) ... require you to pay us the entire outstanding balance in one
> payment ..."
Wow. I hope those circumstances are limited to stuff like default. Can
they just arbitrarily decide to call the loan?
--
Chris Cowles
Gainesville, FL
joetaxpayer
Chris Cowles wrote:
> "joetaxpayer" <joeta...@nospam.com> wrote in message
> news:8Y2dnTyCa-_nSS3a...@comcast.com...
>
>
>>The booklet they sent, states " Under certain circumstances, we can
>>(1) ... require you to pay us the entire outstanding balance in one
>>payment ..."
>
>
> Wow. I hope those circumstances are limited to stuff like default. Can
> they just arbitrarily decide to call the loan?
I highlighted that paragraph in the disclosure booklet, and will ask
them to clarify. I close Thursday. Currently a zero balance. (As noted,
this closing is to increase the line and drop the rate.)
JOE
HW "Skip" Weldon
>I've always been a little wary about using a HELOC
>as one's only emergency fund.
I too am skeptical of debt used as a primary emergency fund (it might
be Ok as a secondary emergency fund for ultra-large emergencies.)
1. I frequently encounter people with a tight budget (they spend the
monthly income that gets into their checking account.) That means no
cash flow next month to support a new debt. Pushing problems into the
future is no solution.
2. More often than not, my experience is that proponents of debt for
emergency funds (and other reasons) are struggling to live within
their means. What they really want is to spend or invest that money
instead of hold it back for an emergency - and they can't afford to do
both. At least they can't afford to do both without making some tough
choices which they don't want to face. Again, this doesn't apply to
everyone (note the beginning phrase "more often than not".)
-HW "Skip" Weldon
Columbia, SC
beli...@aol.com
> I've always been a little wary about using a HELOC
> as one's only emergency fund. It's a nice theory,
> but in a real emergency - job goes away, perhaps
> home equity is whacked, credit deteriorates, etc -
> there was never any guarantee that the bank wouldn't
> freeze the line and no further withdrawals against it
> just when they are needed - not much of a safety net.
>
> Turns out that some folks HELOCs *are* getting frozen:
An amortizing adjustable rate mortage plus a HELOC is similar to an
option ARM, and in the thread "Study defends option ARM mortgages"
that I started a while ago no one approved of option ARMs. With a
typical option ARM, doesn't the borrower have more control? I think
required payments may depend on changes in home value, but not on
changes in circumstances of the borrower.
I know the argument against option ARMs -- many people have used them
to buy more house than they can afford. But many people benefit from
the convenience of credit cards and pay off the balance monthly, while
others have bankrupted themselves with credit card debt. I think the
option ARMs can be useful for people who are disciplined about money.
joetaxpayer
beli...@aol.com wrote:
> I think the
> option ARMs can be useful for people who are disciplined about money.
I think you are right, my friend.
I think nothing (well, very little) in personal finance is black and white.
I agree with Skip's "More often than not, my experience is that
proponents of debt for emergency funds (and other reasons) are
struggling to live within their means." But of course that doesn't
address those who use it in a much better way, and it may need to better
define 'emergency'. When rates were low (1% T-bill) I used my so called
emergency money to drop my principal and refinance my mortgage dropping
the rate and term. My savings rate is high enough that I would be able
to pay back the HELOC if tapped for things like new heating system,
central air blows up, etc. If my wife or I lost our job, it would be
tight, but my decision has to come from the choice of sleeping better
for having a large cash balance vs knocking years off the mortgage back
end. Much of our portfolio is pre-tax, so even though I have cash there,
my post tax funds are pretty illiquid.
In the end, I'd say every situation is unique, but here BWS's warning
was more about the Lender risk regarding HELOCs than the consumer. An
appreciated warning.
JOE