Setting aside some emergency funds comes in handy on a rainy day and gives you control over the emergency situation. While saving for an emergency fund is an ideal scenario, it may not always be possible. Moreover, some emergencies may require more than what you have saved.
As a result, homeowners have the option of using their home equity as collateral to access the home equity line of credit (HELOC). Working the same way as a credit card does, HELOC allows you access to a given sum of money you can borrow and repay with interest. Read on for whether you should it for an emergency.
Emergency Funding: Reasons to Use a HELOC
Saving up large sums of money for emergencies can be difficult. In fact, 56% of Americans cannot handle a $1,000 emergency from their savings.¹ If you find yourself in such a situation, you can use HELOC for an emergency. Here are the reasons why HELOCs can be useful in a crisis.
It Allows You to Access Huge Amounts of Money Easily
Your home equity is the value of your home less the mortgage you owe. The HELOC allows you up to 85% of your home equity. For instance, if your home’s appraised value is $300, 000 and your mortgage due is $150, 000, you can apply 80% of your equity which is $150,000.
In this case, the Heloc is far higher than six months of living expenses saved even if the monthly spending is $5000.
It Allows You to Invest Your Emergency Funds
The best part about HELOCs is that if you don’t take the funds, you won’t need to pay interest for it. So, if you are an investment enthusiast, you can invest your emergency savings. In case you need the funds, you can easily access funds through HELOC.
In addition, you may never need to access the HELOC depending on the kind of tight spot you find yourself in. Some, you may be able to finance without needing large sums of money.
Its Charges Are Lower Compared to Credit Cards
Credit cards are a widely used form of an emergency fund. However, their interest charges are at 16.71% on average as per the Federal Reserve.² This rate is way higher compared to HELOC’s rate which can be as low as 4%.
Although HELOC makes a good emergency fund, you need to bear in mind that it has some risks too. First, the collateral for the loan is your house. This means you risk foreclosing your home if things turn sour and you are unable to pay.
Similarly, you should know that the interest for HELOCs varies depending on the market fluctuations. If the rates rise, it could add struggle to the already existing crisis.
Is HELOC a Good Source of Emergency Funds?
HELOC can be a good way to fund an emergency situation if and when it arises. However, in most cases, it all comes down to personal situations. Take the loan if you are sure you have a stable income source.
“About Mountain West Financial and the CalPATH Home Loan Program
Mountain West Financial is the exclusive lender offering CalPATH, the #1 home loan program for Teachers, Police Officers, Firefighters, and other public employees who serve our local California communities.
You may contact our CalPATH Hotline @ 800-310-7577, seven days a week from (8:30 am to 8:00 pm) or visit our website @ mwfdirect.com. A CalPATH advisor will be standing by to answer (any & all) questions you may have about the home buying or refinance process.
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CalPATH Division Manager
Links to External Sources:
- Emergency covering statistics https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-cover-a-1000-emergency-expense-with-savings.html
- Good credit card APR https://www.forbes.com/advisor/credit-cards/what-is-a-good-apr-for-a-credit-card/