No Emergency Fund? Try a Home Equity Line of Credit

It's a good idea to have an emergency fund to fall back on in case you encounter unanticipated financial difficulties. Three to six months' worth of living expenses is the commonly accepted rule of thumb. Do you have these funds set aside in case an unforeseen disaster makes an unexpected appearance?

Flexible Power

An emergency fund doesn't necessarily need to be all in cash. A home equity line of credit is a savvy alternative. With a HELOC, you get direct access to your home equity in case you ever need it; but until you actually use it, there are no payments, interest, or debt. That flexibility is the strongest argument for this type of financial instrument.

When you do run into one of life's not-so-little surprises and start drawing from your credit line, you may appreciate the low interest rate that a HELOC carries. It's generally much lower than credit cards, and often better than traditional home equity loans. And, in most cases, you're only required to make interest payments during the first few years of your borrowing (the "draw period"). While it's still a smart long-term choice to pay down the actual balance, the pressure on your finances during times of need is more bearable when you have lower payments.

In the Interest of Interest

A HELOC will have an adjustable interest rate. As the federal lending rate rises, so does your interest rate. In a rising interest rate environment, this can become expensive. On top of that, your repayments will be larger the more you draw from the credit line; so this option may not be for you if you require absolutely predictable monthly payments.

Since your home equity line of credit is secured against your home, some or all of your interest payments may be tax deductible. It depends on the home's value and the existence of other equity debt. Ask a financial professional whether your interest payments will qualify.

If you have a lot of equity in your house, the credit limit on a HELOC can be very high, which makes it perfect for emergency use. You'll be able to handle most of what life throws at you.

Finally, you don't want to pay a lot of fees for an emergency fund. Look around for a HELOC with low or no closing costs, no fees for actually using the credit, and no early repayment fees. Getting a leg up on financial flexibility doesn't need to cost you an arm and a leg.

By MortgageLoan.com