Your HELOC Is Not Your Emergency Fund

A few months ago, I did a series on how much to have in your emergency fund and where to park the cash. Following one of the posts, I was asked if it’s okay to consider your home equity line of credit (HELOC) as your emergency fund. The logic is fairly simple. If you need an emergency fund of $50,000 and you have a line open and approved for $50,000, couldn’t you just keep the line open and only use it in the case of an emergency?

In some cases, yes. If you had a large home repair or were laid off during an otherwise strong job market, you probably could. In finance, we call this unsystematic risk – or the risk associated with only a few. However, many people don’t need their emergency fund until there is some type of systematic risk – or the risk associated with many, such as what we saw in 2008 when many people lost their jobs. A Wall Street Journal Article from 2008 wrote “Across the U.S., sellers with good credit who have never been late on a mortgage payment are getting their (HELOCs) frozen or downgraded.”1 That’s right – the bank in most cases can cancel or freeze your line of credit if they don’t want to take on that risk, and during recessions, they typically don’t.

Even if you were able to use the line of credit during a job loss, having mandatory payments, where the collateral is the roof over your head, is never ideal.

Just save up cash for your emergency fund. It’s not supposed to build your wealth - it’s simply insurance for your wealth building vehicles, like your home and retirement accounts, so you don’t have to tap them.

Thank you for reading,

Alex

This blog post is not advice. Please read disclaimers.

1. Fletcher, June. “When the Bank Freezes Your Line of Credit.” The Wall Street Journal, Dow Jones & Company, 16 May 2008, www.wsj.com/articles/SB121077622984191953.