Home Equity line as emergency fund?

[Mr. Green]

I currently have 40k in 5-year CDs, paying 3%. This is the last bastion of my pre-MMM days when I held a large cash position. I've been considering cashing them in early (and taking the 12 months' interest hit) and investing the money in our Vanguard accounts. I asked my bank about a Home Equity line of credit as an emergency fund and it'll cost me ~$175 plus $12 per $1,000 (county tax), so a 25k line would cost $475 to open. I'm not all that excited about paying almost $500 just to have access to money that I never plan to use. While we're working we have 5k-10k extra monthly. I'm thinking the combination of that, money in bank accounts (~6k), cash we keep on hand (~1k), and credit cards means I'm covered well enough for "emergency fund" purposes. Is there any reason that wouldn't be good enough?

[matchewed]

The "how big should my emergency fund be" question details are a bit lacking in your OP (things like dependency on transportation, health of family and how close they are...etc.). But given the 5-10k excess cash flow I'd personally not have an emergency fund at all. What sort of emergency do you think would cost more than 10k that you'd need to pay off right away?

[Mr. Green]

The "how big should my emergency fund be" question details are a bit lacking in your OP (things like dependency on transportation, health of family and how close they are...etc.). But given the 5-10k excess cash flow I'd personally not have an emergency fund at all. What sort of emergency do you think would cost more than 10k that you'd need to pay off right away?

None, that's why I'm questioning spending almost $500 to have one. We can survive on my wife's salary alone (and she likes her job vs. me not liking mine) and I make almost 4x what she does. I think I'm safe not having one but just thought I'd ask in case someone had considerations I can't think of.

[Another Reader]

During the 2008-2009 meltdown, many HELOCs were canceled by he lenders as too risky.  I would not consider a HELOC an emergency fund.  Credit cards are subject to the whims of the issuers as well. 

I would also be loathe to get out of 3 percent CD's in the current interest rate environment.  It would depend on how much of my liquid net worth that $40k comprised and what else I was doing with the extra $5-$10k a month.  Particularly if that extra money is in addition to maxed out retirement accounts, I would be inclined to put new money to work in the asset markets.  You will contribute $60-$120k every year, and the cash holdings will become a small part of your total portfolio over the remaining term of the CD's.

[Mr. Green]

I would also be loathe to get out of 3 percent CD's in the current interest rate environment.  It would depend on how much of my liquid net worth that $40k comprised and what else I was doing with the extra $5-$10k a month.  Particularly if that extra money is in addition to maxed out retirement accounts, I would be inclined to put new money to work in the asset markets.  You will contribute $60-$120k every year, and the cash holdings will become a small part of your total portfolio over the remaining term of the CD's.

The extra is in addition to maxed out retirement accounts. All the extra immediately goes into brokerage accounts. I essentially have a revolving door of 15k cash on hand, based on the extra every month and the money have in back accounts/cash on hand. I can imagine what emergency we'd have that I'd need more than 15k tomorrow. Given that we have substantial brokerage accounts there's always a withdrawal of investments if needed. I'm just thinking about the remaining 3 years on the CD term, knowing it's highly likely I'd see a better return on my money if it was invested. Those CDs currently represent 6-7% of our liquid networth.

[Villanelle]

During the 2008-2009 meltdown, many HELOCs were canceled by he lenders as too risky.  I would not consider a HELOC an emergency fund.  Credit cards are subject to the whims of the issuers as well. 

I would also be loathe to get out of 3 percent CD's in the current interest rate environment.  It would depend on how much of my liquid net worth that $40k comprised and what else I was doing with the extra $5-$10k a month.  Particularly if that extra money is in addition to maxed out retirement accounts, I would be inclined to put new money to work in the asset markets.  You will contribute $60-$120k every year, and the cash holdings will become a small part of your total portfolio over the remaining term of the CD's.

This is a pretty broad statement.  I think a lot of this depends on the amount of the HELOC vs. the amount of equity. 

OP, are the CDs laddered, or all on the same 5 year term with 3 remaining? I probably wouldn't pull the money out, especially if they are laddered, but I might keep out some of it as they mature.   Also, have you shopped around for a better deal on a HELOC? 

[onlykelsey]

During the 2008-2009 meltdown, many HELOCs were canceled by he lenders as too risky.  I would not consider a HELOC an emergency fund.  Credit cards are subject to the whims of the issuers as well. 

I didn't realize that.  I have a 50K HELOC (I have ~200K in equity in the place and plan to prepay my mortgage a bit starting this year) and have been talking myself out of keeping 15K in cash, since I have the HELOC to draw down on.  Shame on me for not reading the documents, I suppose.

[Mr. Green]

This is a pretty broad statement.  I think a lot of this depends on the amount of the HELOC vs. the amount of equity. 

OP, are the CDs laddered, or all on the same 5 year term with 3 remaining? I probably wouldn't pull the money out, especially if they are laddered, but I might keep out some of it as they mature.   Also, have you shopped around for a better deal on a HELOC?

It's 5x 8k CDs, all bought within days of each other. So I don't have to close everything at once but it's not much of a ladder. I'm not a HELOC risk. Our mortgage balance is 150k, the HELOC would be 25k or less, and my wife and I make 250k+ combined per year. Our mortgage is a 15 year note so our equity builds at 10k+ per year. It would probably be the least risky HELOC the bank has.

[Another Reader]

That's not a huge percentage of your net worth.  We have had a very strong bull market and the  PE's and 10 year PE's are very high.  In your shoes I would not throw away a guaranteed 3 percent to put money in a market that appears to be changing right now.  I would look to invest in the best available asset class as each of these instruments matures.  You also can't reproduce that 3 percent safe yield today, and that says a lot.

With regard to the HELOC's, many lenders canceled independent of equity.  There was a lot of risk reduction out of fear or as a result of the lender's own situation.  I had a lot of friends with stable high paying employment and low LTV's that got their HELOC's pulled.  Credit of any kind is extended only when it benefits the lender.  I don't want my source of funds cut off just when I might need it the most.