Author Topic: HELOC as emergency fund  (Read 9992 times)

themagicman

  • Bristles
  • ***
  • Posts: 395
  • Age: 30
  • Location: Atlanta, GA
HELOC as emergency fund
« on: March 13, 2015, 11:56:41 AM »
I am looking into dumping my efund (about 15k) and using my HELOC has my emergency fund. It has a limit of $55k. I am on board with this and think that it is a good idea as my efund money could do much better invested and we have a significant amount leftover each month to cover small items.

My only hesitation is the bank for whatever reason closing my HELOC. What if this happened right before or during a time I needed to use my emergency fund?

I read about HELOCs being closed by bank and I just wanted to make sure that this doesn't happen to me. My question is, is there a decent chance that the bank closes my HELOC for any reason other than my credit score becoming terrible or my home value losing enough money where the HELOC no longer has collateral? Or do they just cancel them for other reasons (Such as to mitigate their risk in a down market)

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3054
  • Location: Emmaus, PA
Re: HELOC as emergency fund
« Reply #1 on: March 13, 2015, 12:15:38 PM »
I recommend that you keep it in cash for now because the stock market is really high.  What I am doing is piling up cash and waiting for the next stock market downturn.  My cash is only like 5%-10% of my total wealth right now so I wouldn't call it a substantial market timing speculation.

When the downturn occurs, I would consider deploying my cash into investments and using a HELOC as an emergency fund.

Market timing: still for fools. That reminds me, I need to move some money out of cash.

Rein1987

  • Stubble
  • **
  • Posts: 149
Re: HELOC as emergency fund
« Reply #2 on: March 13, 2015, 12:19:12 PM »
They can close your HELOC fund (at least mine, from reading my HELOC document) if the home appraisal value drops significantly.

I'd not suggest use HELOC as emergency fund, because when there's bad thing happen (financial crisis..), it's possible your home value drop at the same time. Also, HELOC is not a fixed rate loan. When you need the money, the interest rate might be super high.

themagicman

  • Bristles
  • ***
  • Posts: 395
  • Age: 30
  • Location: Atlanta, GA
Re: HELOC as emergency fund
« Reply #3 on: March 13, 2015, 12:27:21 PM »
They can close your HELOC fund (at least mine, from reading my HELOC document) if the home appraisal value drops significantly.

I'd not suggest use HELOC as emergency fund, because when there's bad thing happen (financial crisis..), it's possible your home value drop at the same time. Also, HELOC is not a fixed rate loan. When you need the money, the interest rate might be super high.

Would it have to be below what I owe plus the credit limit on the HELOC. I only owe about 60k+55k credit limit on the HELOC. So the apprasised value would have to drop below $115k? The house is worth over 200k and I do not see it dipping that low.

Also the HELOC that I have has a fixed rate that adjusts every 5 years

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 7898
Re: HELOC as emergency fund
« Reply #4 on: March 13, 2015, 12:31:57 PM »
I am looking into dumping my efund (about 15k) and using my HELOC has my emergency fund. It has a limit of $55k. I am on board with this and think that it is a good idea as my efund money could do much better invested and we have a significant amount leftover each month to cover small items.

My only hesitation is the bank for whatever reason closing my HELOC. What if this happened right before or during a time I needed to use my emergency fund?

I'm using my LOC [not home equity based] as my EF. When I examine the sequence of events that would cause that to truely be a problem and evaluate the cost of maintaining a large enough EF to make a difference vs. the opportunity cost of that EF money in the market I cannot see the value in holding cash as a EF.

-- Vik

yoga mama

  • Stubble
  • **
  • Posts: 111
Re: HELOC as emergency fund
« Reply #5 on: March 13, 2015, 12:41:36 PM »
It sounds like HELOC as an emergency fund is a reasonable plan for you.  You've probably thought of this but I would also consider keeping one month worth of expenses, your required bills at a minimum, in a savings account where you can easily access it.  Yes, it is cash that is not working for you, but it is worth having a very temporary cashflow to get you through one month.

mschaus

  • Stubble
  • **
  • Posts: 156
  • Location: Chicago
    • blog
Re: HELOC as emergency fund
« Reply #6 on: March 13, 2015, 12:43:04 PM »
HELOC as "emergency fund" is MMM-approved:

http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

And I would agree that in general, once you are at the point where you are saving a stache (such as in taxable accounts or Roth IRA contribution amounts), this is a reasonable thing to do. Your whole stache is an emergency fund. Vik is exactly right about the opportunity cost.

I just remembered I saved a few MMM comment snippets on this subject! Pasted here for your amusement:

-----

Yeah, I’ve always questioned the idea of an emergency fund. It’s a great tool for the financial beginner who lives from paycheck to paycheck, and for whom a broken water heater would make the difference between making ends meet and borrowing via a credit card. But once you get off the ground, your credit card is a monthly buffer and your investment accounts are the emergency fund.

------

Reader question: My dilemma is our so-called “emergency fund”. We keep basically 6 months of expenses here, plus we have another $5k (almost) saved in our HSA to pay a medical deductible should disaster strike. Part of me doesn’t like that $25k sitting around earning 1%. I’m tempted to throw part of the $20k into a short-term bond fund and try for a little more return. The other part says “shut up” and don’t worry about return, worry about safety and liquidity. We are debt free, except our mortgage at 4.825%. My job is about as stable as it gets. I am next in line to succeed the current owners, unless the business unexpectedly fails.

MMM June 8, 2011, 10:20 pm

I think your emergency fund is costing you quite a bit of money. Since emergencies bigger than what you could handle with just a credit card, paid back in full with your monthly income, are probably incredibly rare, I would feel very safe having it in a bond fund. In the worst case, you would have to cash it in and it may be worth a teeny bit less than you bought it for. This is much better than your current situation, where you are GUARANTEED to earn several percent less per year on the emergency fund, forever – costing you $600 per year or more in foregone investment gains. Emergency funds are great for people just starting out and living on the very edge. But when your emergency fund is the size of a 2007 Mercedes, things are getting crazy.

---- another MMM comment ----------------

I’ll have to step in here and add an alternate perspective on this Emergency Fund business. I think the Dave Ramsey idea of an emergency fund is silly. Any source of money – stocks, bonds, cash, a car you can sell, a credit card, or a line of credit on your house – will do just fine as an emergency fund.

It is a waste to leave ANY money sitting around in cash not working for you, and I have never done so. Occasionally I have had “emergencies”. Small ones, less than a month’s take-home income, just go on the credit card and get paid off automatically when the credit card becomes due. If there are medium-sized ones, I can easily draw from a $75k line of credit on my house, which costs me nothing to own when the balance is zero. For enormous ones, like the time I had to pay off a $406,000 mortgage on a rental house to avoid a complex legal problem, I just sell some shares. It only takes 1-3 days to get the money.

As for cash – I just checked and I have $17 in my wallet right now. The regular bank account is down to $800 for the rest of the month since I just cleaned it out to buy some the discounted shares available these days in the stock market.

I feel the idea of an emergency fund is valid for people just starting out on a recovery plan from financial ruin – living paycheck to paycheck, such that even a broken refrigerator would normally cause an unpayable credit card bill. But once you have some assets, and especially with low living expenses, your worries are gone forever.

-------------------------

What the fuck!?! I can’t believe people still don’t get this basic concept!!! The reason you should gladly pay 3-4% on your HELOC during emergencies is this: By maintaining an emergency fund, you are paying 5-6% ALL THE TIME (in the form of foregone investment returns) when there are no emergencies.

Emergencies are rare. Most of the time you are running in non-emergency mode. Living a Mustachian lifestyle further lowers the probability of emergencies.

Dave Ramsey’s advice is very effective for simpler people – those who tend to get themselves into debt over and over again. This is the advanced personal finance blog – where the adults who understand statistics and math hang out.

Dave Ramsey is rich because he’s a good entrepreneur and sells a lot of products to people. Mr. Money Mustache is rich (at a much younger age) because he does his math correctly.

-------------------------

Good point – With no high-interest debt, an emergency fund is a much less bad idea. And for those without the flexibility of a home equity line of credit and other assets they could potentially sell and lifestyle changes they could potentially make, having some form of semi-liquid cash becomes increasingly practical. Don’t neglect the power of unemployment insurance, though. Many people today lost their jobs with no e-fund, and have been living off of UI for over a year. That’s why the program exists.

I’ll still never have a cash emergency fund myself, however. Just because stocks are also liquid – you can sell them in one day. “What if they happen to be down when I need to sell?” is the wrong question to ask. Instead, ask, “what direction do stocks go on average? And thus where are they more likely to be if I ever have to sell them in some unpredictable future year?”.

You can’t predict the future, so you bet where the odds are in your favor instead. It doesn’t matter if you lose sometimes.. it matters that over a lifetime you will tend to win more often.

-------------------------

Rein1987

  • Stubble
  • **
  • Posts: 149
Re: HELOC as emergency fund
« Reply #7 on: March 13, 2015, 01:02:02 PM »
They can close your HELOC fund (at least mine, from reading my HELOC document) if the home appraisal value drops significantly.

I'd not suggest use HELOC as emergency fund, because when there's bad thing happen (financial crisis..), it's possible your home value drop at the same time. Also, HELOC is not a fixed rate loan. When you need the money, the interest rate might be super high.

Would it have to be below what I owe plus the credit limit on the HELOC. I only owe about 60k+55k credit limit on the HELOC. So the apprasised value would have to drop below $115k? The house is worth over 200k and I do not see it dipping that low.

Also the HELOC that I have has a fixed rate that adjusts every 5 years

My document said that if the appraisal value * 90% drops below what I owe + heloc, they will close it. In your case, I can see it is fine.

RexualChocolate

  • Stubble
  • **
  • Posts: 222
Re: HELOC as emergency fund
« Reply #8 on: March 13, 2015, 01:02:22 PM »
Good call on eliminating the cash efund.

To the likelihood of the banks exiting these product lines, HELOCs/HELOANs are fairly unprofitable for banks lately, given their low yield relative to capital and liquidity costs. That said, I haven't seen much drawback other than just not promoting the product.
 

Spondulix

  • Pencil Stache
  • ****
  • Posts: 640
  • Age: 41
  • Location: Los Angeles, CA
Re: HELOC as emergency fund
« Reply #9 on: March 13, 2015, 01:09:45 PM »
Machaus - those are great nuggets. Do you just keep a doc and categorize by topic?

hamildub

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: HELOC as emergency fund
« Reply #10 on: March 13, 2015, 01:39:55 PM »
ahutch - I don't think anyone on MMM would say cycles dont' exist. The overwhelming stance is that trying to time market "tops" or "bottoms" is futile, and has been proven so with many years of data.
Thus, invest your rediculously large emergency fund, because it is guaranteed to lose inflation and has no potential returns, whereas $$ put to work will end up growing at an average 6-9%, despite market dips and other sky is falling CNBC scenarios.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
Re: HELOC as emergency fund
« Reply #11 on: March 13, 2015, 01:49:32 PM »
You should note that MMM wrote about his disdain for emergency funds when stocks could be bought at a discount.  It's amazing how every time we reach a market top everyone says that cycles don't exist. 

yeah sure if you have a crystal ball and no this is a market top.  the best way is to just consistently invest over time not try to time the market period no questions asked.  and if you had a crystal ball and were using it for marketing timing vs winning the powerball you're just as foolish as your statements on here

OP great idea.  i'd put it in the market. 

MustachianAccountant

  • Bristles
  • ***
  • Posts: 433
  • Age: 42
Re: HELOC as emergency fund
« Reply #12 on: March 13, 2015, 01:57:28 PM »
It sounds like HELOC as an emergency fund is a reasonable plan for you.  You've probably thought of this but I would also consider keeping one month worth of expenses, your required bills at a minimum, in a savings account where you can easily access it.  Yes, it is cash that is not working for you, but it is worth having a very temporary cashflow to get you through one month.

For most people, their HELOC is just as accessible as their checking/savings account.
I could go to my bank account right now, online, and immediately transfer money out of my HELOC into checking.

bacchi

  • Walrus Stache
  • *******
  • Posts: 5547
Re: HELOC as emergency fund
« Reply #13 on: March 13, 2015, 02:14:55 PM »
Reminder: HELOCs were closed or reduced during the financial crisis.

This reminds me of the "I'll just get a part-time job" plan. When you need to do so, it may be all but impossible.

themagicman

  • Bristles
  • ***
  • Posts: 395
  • Age: 30
  • Location: Atlanta, GA
Re: HELOC as emergency fund
« Reply #14 on: March 13, 2015, 02:19:56 PM »
Reminder: HELOCs were closed or reduced during the financial crisis.

This reminds me of the "I'll just get a part-time job" plan. When you need to do so, it may be all but impossible.

Were these closed for reasons besides your home value dropping too low? If that is the only case then I am not worried about that situation but if there are others then I would like to know!

Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1795
Re: HELOC as emergency fund
« Reply #15 on: March 13, 2015, 02:32:33 PM »
Safe bet - dump the EF into your mortgage. It increases the HELOC, saves you interest (saving interest is the same as earning money). Almost every criticism people have can be answered with this strategy. It's optimal for higher interest rate mortgages.

For low rate mortgages I would recommend investing.

bacchi

  • Walrus Stache
  • *******
  • Posts: 5547
Re: HELOC as emergency fund
« Reply #16 on: March 13, 2015, 02:40:56 PM »
Yes. Banks were trying to reduce their debt exposure during 2008/9.

https://bogleheads.org/forum/viewtopic.php?f=2&t=155204

Of course, banks were sued for doing so, especially if there was still positive equity.

https://www.mortgageloan.com/banks-cutting-home-equity-lines-is-it-legal-2956

Quote
Consider a home worth $200,000 that supports a first mortgage of $110,000. Assume the homeowner opens a home equity line of credit for $50,000 against the available equity of $90,000. At that point, the difference between the available equity and credit limit is $40,000. By this interpretation, the lender can reduce the credit line when the home's value falls by $20,000 or a scant 10 percent.

mschaus

  • Stubble
  • **
  • Posts: 156
  • Location: Chicago
    • blog
Re: HELOC as emergency fund
« Reply #17 on: March 16, 2015, 10:09:21 AM »
Machaus - those are great nuggets. Do you just keep a doc and categorize by topic?

I wish -- when I read most of this site, that was one of the topics on my mind so I kept some notes. Would be amazing if someone had an indexed version of how MMM answered the hundreds of questions in the comments over the years.

DoNorth

  • Stubble
  • **
  • Posts: 241
  • Age: 42
Re: HELOC as emergency fund
« Reply #18 on: March 16, 2015, 11:04:27 AM »
I looked into a HELOC, but they were a bit expensive to close and I didn't like the rules so I'm keeping a CC + a little cash on hand for EF.