How Do You Feel About Having a HELOC?

[Farmgirl]

Okay fellow savers....How do you feel about having a HELOC as opposed to stashing a huge amount of cash? 

Our emergency fund stands at $46K.  We owe $56K on the farm at 4%.  A HELOC will cost us $50 per year just to have it plus 3.5% if we borrowed money.
Uses of the HELOC would be to pay for a big home repair like a septic system or a roof.

Would it make sense to throw the emergency fund at the farm, and use a HELOC for bad emergencies.  Or maybe just half of the emergency fund?  Or maybe not at all?

I was just wondering what your experience was with having a HELOC or if this is just a stupid idea.

[BuzzardsBay]

Don't have one.  Don't want one. 

[onlykelsey]

HELOCs aren't guaranteed, they can be rescinded by the bank like a credit card.  I imagine that they're rescinded most often when markets are bad (ie when you are most likely to need them).  I count my HELOC towards my emergency fund, but at a huge discount.  I value it at maybe 20 or 30% of its face value.

[nottoolatetostart]

Don't have one.  Don't want one.

Ditto

[frugaliknowit]

I just went through this thought process with very similar numbers. 

Decided:  NOT

Think of the worst of the range of possibilities.  Loss of your income or some huge emergency leads you into debt, compounding the stress and the problem.  No thanks.  I will continue to pay the insurance premium (crappy return on emergency money).   Besides, as others said a Heloc is MAYBE a source of emergency funds.

[protostache]

We are in the process of opening one. It's going to replace our "house" reserve fund (about 10% of our overall cash position), allowing us to push that cash into equities. The bank will be waiving the yearly fee as a relationship perk. We don't plan to dip into it frequently, if ever.

My view is that it's an additional layer of flexibility for dealing with things like appliance, HVAC, or roof replacement. Our house is about 10 years old and is going to be due for some of that soon on an unpredictable schedule. Having at least 60 days of float (CC + HELOC) will give us lots of optionality for paying.

[ShoulderThingThatGoesUp]

If I had a major house repair coming up I might open one, but as an emergency fund I don't think it's worthwhile. If you have an emergency they can rescind it.

Not sure why you need such an enormous EF, though.

[lizzzi]

Don't have one, don't want one. I just pay cash for home maintenance, even if pricey. (New heating and cooling system, for example, last month.) If there is some kind of no-interest financing special deal available, I would use that. (Big basement waterproofing project in 2013. Paid it in four monthly payments, no interest or any charges.)  If I needed some really huge amount of money for the house that the H.O. insurance didn't cover (can't think of any examples), I would just sell some of my Vanguard.

[protostache]

If I had a major house repair coming up I might open one, but as an emergency fund I don't think it's worthwhile. If you have an emergency they can rescind it.

Not sure why you need such an enormous EF, though.

They own a farm. I imagine they and other Mustachian small business owners (myself included) find comfort in a big cash position. Income can be hugely variable when you don't have a regular salary.

[Farmgirl]

Thanks everyone!  We do have a good sized cash stash.  Mostly because if we had to get a sand mound septic system, it would cost at least $20K I'm told.  The alpacas borrow money in the summer to buy merchandise for the Fall market season.  Then they pay it back in December.  So we kind of use the cash stash as a "Bank of Us".  It's also for possible car replacement in the future.  That kind of stuff.  My husband has his own business which can vary from month to month.  We've never had to "loan" money to his company, but we have been within a couple of thousand of having to do that at times. 

I'm just getting antsy on getting this house paid off.  Want to leave the cube job!

Again, thanks for your insights!

[Franklin]

I have a HELOC for opportunities and an emergency fund for emergencies.  I try not to mix their purpose.  However, on the occasions where the EF had been depleted it was nice to know the HELOC also existed.

You seem like you want to optimize your cash, but I have to say you are doing pretty good with your current situation.  Maybe you could add the HELOC and just sit on it for a while.  It's always good to have options.

[onlykelsey]

No harm in having one, assuming you're disciplined and your credit score won't swandive.  I just wouldn't really count it as much.  I ended up having to use mine for a 60K roof assessment, and now I'm TERRIFIED they're going to declare it payable any moment now.  I can't imagine how stressed out I'd be if I didn't have other cash, or if I had needed the money for a medical emergency or something.

[Frugal D]

I've had a very good experience with my HELOC.

I established mine with the purchase of my home (my mortgage was written 100% as a HELOC) and it's been great. Our paychecks go directly into the house every month and that has allowed us to pay it down by 50% in just 1.5 years.

I also like that if the market tanks I have immediate access to a lot of cash borrowed at L + 3.50%.

A friend mortgaged his home with a HELOC in 2006 at L + 0.50%. If you know anything about LIBOR's history you would know how well that worked out for him.

I'd say go for it, but be disciplined. 

[Retire-Canada]

Okay fellow savers....How do you feel about having a HELOC as opposed to stashing a huge amount of cash?

- I have a $30K LOC [not tied to home equity] with zero balance most of the time
- I have $10K of credit card limits which are free to use for 30 days [my typical end month balance is ~$2K as I use my card for points]
- I have over $500K in various investments....$50K+ of which are tax free to access any time
- my SO and I have uncorrelated work so it's very unlikely we'll both lose our income at the same time
- I can get a simple retail job and cover my cost of living

Holding a big chunk of cash would literally be a waste of money.

[redcedar]

Could you repleshinsh the savings account in a reasonable time? Maybe not all but to whatever point made you feel comfortable? If you have the extra income to do that, I say go for the heloc.

Make sure to be hard, fair but hard, on the lender over any fees including any due if you close the heloc in a few years.

[katsiki]

I realize it's only $50 but you can probably find one that doesn't charge any annual fee.  I have one and like having it available.  I also have a personal LOC with PenFed which also gives me comfort.  I hope to not use either.

[Telecaster]

Part of this discussion should include some philosophy about what is an emergency fund in the first place?   In my view things like needing a new septic system or water heater or new car down road aren't emergencies.  Those are simply predictable (although sometimes irregular) expenses. 

Paying down the 4% mortgage, and then borrowing money at 3.5% in the future seems to be a reasonable good use of funds.   Also you can usually tell a few years in advance that you will need a new roof.   That gives you time to start saving up and perhaps you won't need the HELOC (or as much of it). 

[aspiringnomad]

Setting up a HELOC is one of the best things I've done since picking up on this site. It allows you the flexibility and peace of mind to go full-on investment mode and keep a razor thin emergency cash buffer sitting idly in bank accounts. Go with PenFed and you won't have to pay an annual fee - no need to be current or ex-military, just a small, one-time donation to a veterans organization.

Edited to add that my HELOC interest rate is (slightly) lower than my investment property interest rate, so it's an especially good deal for me. It would save me money to draw from the HELOC to pay down the investment property but I prefer shoveling every last dime into the stock market.

[FIRE me]

I had one for years, paying the $50 annual fee and I never once used the credit. I canceled it a few years back and I do not miss it.

[K-ice]

Okay fellow savers....How do you feel about having a HELOC as opposed to stashing a huge amount of cash? 

Our emergency fund stands at $46K.  We owe $56K on the farm at 4%.  A HELOC will cost us $50 per year just to have it plus 3.5% if we borrowed money.

I love my HELOC!

We have a HELOC and an emergency fund that varies from about $3000 to $15,000 depending on my investment stash.

I love the HELOC. It gave us the flexibility to "pay-off" or not renew a mortgage on a rental when we were not happy with the renewal terms.

Us "No we do not want to auto-renew, can you give us this advertised rate?"
Bank "No sorry that is only for new customers."
Us "OK, we will just pay off the mortgage and move banks."

We also helped family close on another rental property using our HELOC. Basically lent them money for 30 days so they could close the deal.

We did needed a new roof recently, paid cash (not HELOC) as we let the EF build as we knew that "emergency" was coming.

I do not think it is a good plan to use your HELOC for emergencies.  So if you know your septic tank will cost $20K keep that in your emergency fund. But put the remaining savings towards your mortgage. 

Do you pay your credit card 100% every month?

I think you need to be very responsible to have a HELOC. I also wouldn't trust the variable rate and I would lock in any portion I couldn't pay off in one year. But I really can't believe the flexibility it offers and the large amount of cash I have access to when that great real-estate deal comes along.

My HELOC is almost large enough to make a cash offer on the average single family home in my city. Acquiring more real-estate is a goal of mine so accessing all current equity will help with that.

[CupcakeGuru]

We had a HELOC, used it once and paid it off quickly. We kept it open for the "just in case" times. During the housing crash, our bank cancelled it. Thank goodness we didn't need it, but I don't want to be dependent on something that can be rescinded so easily. We now have an EF of about 5-7 months and I sleep way better at night knowing that I can access it at any time.

[Farmgirl]

Wow!  I knew I came to the right place to ask about HELOC!

Telecaster:  You have a good point.  What is an Emergency Fund?

I think the definition varies greatly between individuals.  For us, the Emergency Fund is really for the purchase and repair of big ticket items that we would rather not pay interest on, loans to buy alpaca merchandise for the Fall to sell, and truly emergency issues dealing with occasional lack of work in my husband's business. 

Our investments (other than the farm) are pretty modest.  We can make at at slightly under 4% SWR, SS when my DH becomes eligible in 3 years, and side work we pick up.  Paying off the farm is the number 1 issue in making that scenario work.  We will be sitting on an expensive to us property, but at such time that we are too old, sick or tired, we can sell it and find something smaller or cheaper, or rent.  We're not ready for that hopefully anytime in the near future.

Thank you all for your input.  You all gave me some information to chew on.  Thinking that the HELOC would be very useful if you are buying rental property or actively investing...and are much younger than us, so that you have time on your side if something goes awry.  At our advanced age, I'm thinking that aside from saving 1/2 percentage point, it might not be the right move for us.  Mostly because our income right now varies more greatly than I would like.

You guys are the best!  I appreciate all of your thoughts on this.

[I'm a red panda]

How do you feel about a second mortgage? Would you have taken this out before they re-branded and changed the name?  It seems people tend to feel a lot more comfortable about a HELOC vs. a second mortgage. It's the same thing...

(So me- nope, wouldn't do it unless the situation was dire.)

[Fishindude]

I keep a $100,000 HELOC available at the bank but rarely use it and probably won't renew it next go round.
Last time I used it was to purchase a $40,000 piece of equipment, then paid it off in a couple months.

In years past, we used it to buy cars.  Would usually pay them off within a year.
Pretty handy to just be able to call the bank and tell them to put $XX,XXX in the checking account, if you need to make a large purchase.

[Vagabond76]

Okay fellow savers....How do you feel about having a HELOC as opposed to stashing a huge amount of cash?

- I have a $30K LOC [not tied to home equity] with zero balance most of the time
- I have $10K of credit card limits which are free to use for 30 days [my typical end month balance is ~$2K as I use my card for points]
- I have over $500K in various investments....$50K+ of which are tax free to access any time
- my SO and I have uncorrelated work so it's very unlikely we'll both lose our income at the same time
- I can get a simple retail job and cover my cost of living

Holding a big chunk of cash would literally be a waste of money.

Well aren't you special.

[RetiredAt63]

Isn't what Retire-Canada posted both an answer to the question and the sort of financial picture we aspire to?  On the forums he is not special, but in RL he is.

In other words (less politely), why the snark?

Okay fellow savers....How do you feel about having a HELOC as opposed to stashing a huge amount of cash?

- I have a $30K LOC [not tied to home equity] with zero balance most of the time
- I have $10K of credit card limits which are free to use for 30 days [my typical end month balance is ~$2K as I use my card for points]
- I have over $500K in various investments....$50K+ of which are tax free to access any time
- my SO and I have uncorrelated work so it's very unlikely we'll both lose our income at the same time
- I can get a simple retail job and cover my cost of living

Holding a big chunk of cash would literally be a waste of money.

Well aren't you special.

[Axecleaver]

I think the definition varies greatly between individuals.  For us, the Emergency Fund is really for the purchase and repair of big ticket items that we would rather not pay interest on, loans to buy alpaca merchandise for the Fall to sell, and truly emergency issues dealing with occasional lack of work in my husband's business. 

Farmgirl,

Your EF is less like a traditional personal emergency fund and more like a business holding a cash position. The majority of your needs for that cash are short term cashflow issues, mostly related to the cyclical nature of farm business. After I was in business for two years, my bank manager (likely watching the revenue flow-through on my business checking account) contacted me to offer a $50k unsecured line of credit. The only catch was that they required I sign a separate agreement to personally guarantee it, in addition to the business guaranteeing it (which was fine, I don't intend to default).

I have short term cashflow needs when onboarding a new employee, or chasing new business. These opportunities require a couple months of salary to be fronted while I wait for the A/R to catch up. Very similar to loaning your Alpacas money until they can pay you back. Previously, I'd just kept a cash balance in the checking account, but now I'm planning to keep the cash balance lower and leverage the LOC if I need it.

Using the HELOC isn't much different. You might also approach your bank to discuss a business line of credit, and offer to secure it with the house (or other property) for a better rate. With the time your husband has spent in the business, it should be approved. Another idea would be to look for banks who deal with farmers, they would be more familiar with your industry's cashflow needs and might have better deals available.

[I'm a red panda]

In years past, we used it to buy cars.  Would usually pay them off within a year.
Pretty handy to just be able to call the bank and tell them to put $XX,XXX in the checking account, if you need to make a large purchase.

It would make me really nervous to buy a car using my house as collateral to the loan.   Car loans are usually phenomenally low interest rates already.

I've only ever paid cash for a car though, so maybe I'm missing something.

[aspiringnomad]

For a bunch of aspiring early retirees, people here can be quite risk adverse. I guess it depends on your life situation, but MMM endorses a HELOC as a "springy" emergency fund and if you're responsible about it (which 99% of Mustachians probably would be) it's an incredibly cheap way to keep many financial options open, and nearly all your dollars working for you. I have a 15 year mortgage and quadruple my LOC in home equity at the moment, so I see very little risk to having it there. In my view, it's somewhat similar to credit card travel hacking - a sort of glitch in the financial matrix for those responsible enough (and in this case with enough home equity) to use it wisely.

[Dicey]

DH and I are buying a series of rental houses. Our primary home has no mortgage, but every one of the rentals does. We are working with a new (to us) landlord-friendly lender, who specifically warned us not to open a Heloc. Seems lenders have to count those open lines of credit as if they were maxed out, even if you owe nothing on them, when calculating whether or not you can "afford" the next mortgage.
I'm grateful that we have a shit-ton of cash that allows us to put 25% down on each rental (i.e. having cash lets us seize this down-market opportunity), and we have no intention of ever having a Heloc.

To OP specifically: if an adjacent property became available and you wanted to buy it with a mortgage, a Heloc might limit your options. Unless, of course, you used it to buy the property outright.

As an older than most here, but still plenty under typical retirement age person, I value a strong cash position, aka a big, fat emergency fund. YMMV, but I like the flexibility that cash money provides.

[undercover]

IMO, unless you're completely risk-adverse and fear that you'll just suddenly lose a large proportion of your cash flow, it makes absolutely no sense to keep a fat wad of cash laying around. So yeah, call me a  proponent of a HELOC (I'm surprised at all the animosity here). You'll in all likelihood never have to use it, and by sticking that fat wad of cash into investments, you'll likely pay for the small amount of interest that you'll ever incur.

$46k is way too much to have sitting around doing nothing. The most I'd ever keep in cash is probably $5-10k.

[Farmgirl]

You have given us much to discuss.  Lots of good thoughts here.  Thank you!

[salmp01]

I have two HELOCs.  One on my personal residence and one on a rental property.  I just got the one on my personal residence from US bank.  There is no yearly cost to hold this.  If I terminate the HELOC in three years I would pay a fee (I think it's $300).   The HELOC I have on a rental property is from Wells Fargo and that also has no yearly cost.   I only plan to use these if I need the cash quickly to buy a rental property (or in the case of an emergency).   

[Franklin]

How do you feel about a second mortgage? Would you have taken this out before they re-branded and changed the name?  It seems people tend to feel a lot more comfortable about a HELOC vs. a second mortgage. It's the same thing...

(So me- nope, wouldn't do it unless the situation was dire.)

This is incorrect in so many ways.  Maybe you could clarify what you mean.

[retiringearly]

We are in the process of opening one. It's going to replace our "house" reserve fund (about 10% of our overall cash position), allowing us to push that cash into equities. The bank will be waiving the yearly fee as a relationship perk. We don't plan to dip into it frequently, if ever.

My view is that it's an additional layer of flexibility for dealing with things like appliance, HVAC, or roof replacement. Our house is about 10 years old and is going to be due for some of that soon on an unpredictable schedule. Having at least 60 days of float (CC + HELOC) will give us lots of optionality for paying.

This is a GREAT way to look at a HELOC.