HELOC as Emergency Fund

[liveitup]

Seems to me the most likely emergency requiring use of the HELOC also involves loss of my job. My understanding was that the agreements generally give the bank wide ranging powers to limit my usage of the credit line and we're seeing some of this in the market with banks freezing HELOCs in down real estate markets. My own line is well coverered by the equity in my house, even if prices fall a lot, so I think that is not going to be a problem, unless they start unilaterally freezing and exiting the HELOC business. Probably that's unlikely. Even so, I wouldn't plan to draw their attention to my loss of a job, if that's why I need to access the line.

But the job connection is still a concern. I have the equity to open a new line if the bank does the unexpected with the old one. But presumably that would only be needed at the same time I'm looking for emergency cash due to job loss. Will banks open new HELOC for someone with no employment, but with plenty of equity? If that's possible, then I think leaving the HELOC as emergency fund is still a viable solution. If loss of job means exposure to cutting off current line and impossible to get a new one, then I don't think this plan will work for me. Anyone know if sufficient equity can get one a HELOC even if temporarily unemployed?

Lien holders in 2nd position are in a VERY risky environment right now,which is why they are tightening their standards and freezing lines of credit.If the lien holder in 1st position forecloses,the 2nd is wiped out and up the creek,unless there are additional proceeds from the sale.Their only recourse is to go after the previous owner and that's like trying to squeeze blood out of a turnip.

I don't have a crystal ball,but I do believe it's going to worse before it gets better.I'm a very optimistic person by nature,but I also look at the real picture and I don't like what I see.Defaults are expected to rise in 2008-2009 and I've noticed a 30% ytd increase over 2007 in my area alone.

Not too long ago,NO DOC HELOC's were available from some lenders,for unemployed individuals and anyone else for that matter.They are a thing of the past for the most part.

 

[Nords]

Will banks open new HELOC for someone with no employment, but with plenty of equity?
Anyone know if sufficient equity can get one a HELOC even if temporarily unemployed?

I've gotten them when I was permanently and fully unemployed.
No reason to deny me a secure loan on an unmortgaged asset.

Heck, our house has two chronically unemployed adults and a mortgage yet we're still beating the HELOC offers off with a stick.

 

[JustCurious]

Lien holders in 2nd position are in a VERY risky environment right now,which is why they are tightening their standards and freezing lines of credit.

Only if the loan to value percentage is high, i.e, you have relatively little equity. If you have a high percentage of equity, the 2nd position lien holder is in a safe position, and you will have no problem getting a HELOC.

 

[lazygood4nothinbum]

no, not heloc. the charity fund is the emergency fund. hasn't anyone been paying attention?

 

[JustCurious]

Seems to me the most likely emergency requiring use of the HELOC also involves loss of my job. My understanding was that the agreements generally give the bank wide ranging powers to limit my usage of the credit line and we're seeing some of this in the market with banks freezing HELOCs in down real estate markets. My own line is well coverered by the equity in my house, even if prices fall a lot, so I think that is not going to be a problem, unless they start unilaterally freezing and exiting the HELOC business. Probably that's unlikely. Even so, I wouldn't plan to draw their attention to my loss of a job, if that's why I need to access the line.

I had the same thoughts and concerns about using a HELOC as an emergency fund in the event of a job loss. But I've decided it's a good option, as one source of funds among others, because in the event of a job loss, it would be unlikely that the bank would know about it, but in any event, I would transfer funds from the credit line immediately upon losing my job.

 

[growing_older]

One of the benefits of using the HELOC as an emergency fund was that there was no easily identifiable big cash balance sitting around. This meant available funds were invested productively. This meant that temptation to buy big ticket itmes was reduced since it would require selling something or drawing on the HELOC. A useful extra measure of will power to keep LBYM.

So if I change my thinking about HELOC so it's only one source of energency funds among several, then I'll also need to add a money market or some other cash savings. If I cannot count on the HELOC for cash under some common emergency situations, such as job loss, then I guess I better start building a more conventional cash emergency fund. Ooohhh, those fast new computers sure look attractive.

 

[mathjak107]

last thing id want to do is owe money secured with my home in a cash crunch. if i was forced to sell equities in a down market to cover some of the loan then the hole thing would be self defeating

 

[OAG]

Isn't really about timing? If you use the HELOC and have to actually withdraw money from it can't you time the repayments? I do not know about most HELOC's but the one I have does not contain any prepayment penalties so assuming I needed the cash for a real emergency I could time the selling of the repayment asset. That would require some thinking and management but I think it mitigates or, over time, negates any "creating any financial problem for the home".

 

[RonBoyd]

Another voice in the argument for setting up a HELOC before it is needed:

Fed official: 2008 economy like 1991 recession - Feb. 19, 2008

2008 similar to 1991 recession

"Gary Stern, the regional Fed president, said the current excesses in residential construction, housing market decline, and credit crunch all resemble the "headwinds" environment that prevailed 17 years ago."

"If credit is in fact restricted by some institutions and in some markets, it will likely take time for potential borrowers to find alternatives and substitutes."

 

[OAG]

Another voice in the argument for setting up a HELOC before it is needed:

Fed official: 2008 economy like 1991 recession - Feb. 19, 2008

2008 similar to 1991 recession

"Gary Stern, the regional Fed president, said the current excesses in residential construction, housing market decline, and credit crunch all resemble the "headwinds" environment that prevailed 17 years ago."

"If credit is in fact restricted by some institutions and in some markets, it will likely take time for potential borrowers to find alternatives and substitutes."

I do not see what that article has to do with most on this board. Some markets, some locations, will be restricted. Restricted to who? Probably not many here. Additionally, if you have a HELOC in place with an institution that has a World-wide and pretty selected clientèle - people that have a solid employment and are pretty well know for paying their bills, what is the worry?