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Author Topic: Using a HELOC as a contingency fund?  (Read 1758 times)

paul_daoust

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Using a HELOC as a contingency fund?
« on: July 20, 2017, 01:53:09 PM »
Right now we're debating paying off our rental property's mortgage quickly. The issue here is that it doesn't leave as much money to put into our contingency reserve fund. So my question is, is it stupid to use your house's equity itself as your contingency fund by taking out a HELOC? And if so, what sort of stupid, and in what circumstances?

The first thing I can think of is that we intend to use the rental properties' income as retirement income. We're pretty frugal, but still, if we had to pay back our HELOC balance with interest, that'd maybe make for some tight grocery bills for a few months.
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Cwadda

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Re: Using a HELOC as a contingency fund?
« Reply #1 on: July 20, 2017, 02:06:59 PM »
Why are you paying off your rental properties so quickly? Do they have high interest rates? Do they lose money if they're not being paid off in full? If yes, you should consider selling them.
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snacky

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Re: Using a HELOC as a contingency fund?
« Reply #2 on: July 20, 2017, 02:27:35 PM »
I have an untapped HELOC for my contingency fund, instead of keeping cash in an account. It has worked well for me so far, but I haven't been landlording for long.
The risk is that the bank can recall and cancel the HELOC at any time.
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paul_daoust

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Re: Using a HELOC as a contingency fund?
« Reply #3 on: July 20, 2017, 02:30:54 PM »
Sorry, I should've elaborated a bit to give context. See this thread for why I want to pay down mortgage so quickly: https://forum.mrmoneymustache.com/real-estate-and-landlording/aggressively-paying-down-rental-property's-principal-for-earlier-cash-flow/
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Dicey

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Re: Using a HELOC as a contingency fund?
« Reply #4 on: July 23, 2017, 01:49:22 PM »
Last time I floated this, people tried to laugh it off, but they were dead wrong.

In the last downturn, banks lowered or closed helocs just because property values in general were falling, not because of any changes in the heloc holder's creditworthiness.

A closed/reduced heloc is nothing I would want to rely on exclusively in an emergency.
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Another Reader

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Re: Using a HELOC as a contingency fund?
« Reply #5 on: July 23, 2017, 01:55:14 PM »
Quote from: Dicey on July 23, 2017, 01:49:22 PM
Last time I floated this, people tried to laugh it off, but they were dead wrong.

In the last downturn, banks lowered or closed helocs just because property values in general were falling, not because of any changes in the heloc holder's creditworthiness.

A closed/reduced heloc is nothing I would want to rely on exclusively in an emergency.

Yep.  Lots of people lost what they thought was their backup liquidity, which caused some of them to lose a lot more.
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paul_daoust

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Re: Using a HELOC as a contingency fund?
« Reply #6 on: July 30, 2017, 07:59:45 AM »


Quote from: Dicey on July 23, 2017, 01:49:22 PM
In the last downturn, banks lowered or closed helocs just because property values in general were falling, not because of any changes in the heloc holder's creditworthiness.

Perfect; that's just the kind of preemptive facepunch I was hoping for. Thanks, all!

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