While home equity can be a useful resource in a financial emergency, you risk losing the home if you can’t repay. Here's how to borrow against your home safely.
Your home equity shouldn’t be the first line of defense when the roof falls in. But it can be a useful resource to seal a temporary financial gap, and most homeowners have a lot more wealth tied up in their property than they did a couple of years ago.
“It’s not free money,” says AnnaMarie Mock, a certified financial planner with Highland Financial Advisors in Wayne, New Jersey. A worst-case scenario: You borrow against all the home equity you can. The housing market craters — think of the 2007-09 — and home prices plummet. A life change necessitates a move, and you have to sell the house when you owe more than it’s worth. Or you get laid off and have already leveraged everything to the hilt.
A HELOC can be a strategic way to supplement an emergency fund when interest rates are low, Mock says. For instance, instead of keeping six months of expenses in a savings account, you could keep two or three months of income on hand and put the rest in an investment account, where it will have the opportunity to earn more than it would in a savings account. The HELOC would serve as a backup if something big happened and you depleted your cash emergency savings.
This allowed him to avoid pulling money out of investment accounts and losing out on potential gains in the stock market. He says the strategy kept the family of five comfortably afloat, and the business soon provided more income than he made at his previous job.Set and stick to a repayment plan Set a time frame for repayment. Make sure you can afford the monthly payment and understand how this will affect savings for other goals, Mock says.
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