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Home equity as cash reserve in down market
Old 11-15-2013, 10:13 AM   #1
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Home equity as cash reserve in down market

I expect some folks here have thought this through.

A debate exists about the advisability of holding a few years cash to weather down markets ( thereby failing to get returns on those funds in the market)
OR to
Let the money ride and take some lumps when having to sell in a down market - the rationale being that the LT investment benefits outweigh the "cost" of selling in down markets.

Why not use a home equity LOC and tap it in in a down market as necessary for cash.
It seems a more effective approach.
If there is no need to tap the LOC- you incur no costs at all for this right to access funds.

If you tap the LOC it seems you are simply betting that the near term return on the invested funds will exceed the interest rate ( net of taxes) paid for the home equity cash. In a down market this is probably a very good bet.

Note that you don't give up any leverage/ownership on your house.
All gains in its value belong to you- even if a LOC loan is outstanding.

Is there any downside I might be missing?
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Old 11-15-2013, 10:48 AM   #2
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What happens if the economy is so bad that the issuer of the line either goes bankrupt or decides to cancel the line?
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Old 11-15-2013, 10:57 AM   #3
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I thought quite a few people had their LOC's frozen during the last downturn. Not to mention a housing crisis kind of dries up equity for the loan. My HELOC was for a seven year period, which is none too safe at the end of that period if I can't renew it easily.

You may not be able to sell your house if needed (either for funds or to relocate) if your equity is negative. Then you're back to selling stocks or sticking it out where you are.
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Old 11-15-2013, 11:23 AM   #4
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I own outright.
Value is about 5 yrs living expenses.
Id look for an LOC to cover 3 years worth of expenses.

The possibility of and LOC being canceled when the equity is free and clear is something I may need to understand better.
Were LOC's canceled under such circumstances?
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Old 11-15-2013, 01:04 PM   #5
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Quote:
Originally Posted by Ken11 View Post
I own outright.
Value is about 5 yrs living expenses.
Id look for an LOC to cover 3 years worth of expenses.

The possibility of and LOC being canceled when the equity is free and clear is something I may need to understand better.
Were LOC's canceled under such circumstances?
All equity should work pretty well.

from 2008:

When the Bank Freezes Your Line of Credit - WSJ.com

"
Across the U.S., sellers with good credit who have never been late on a mortgage payment are getting their home equity lines of credit (HELOCs) frozen or downgraded. Major lenders like Bank of America, Citibank, Countrywide Financial Corp., Washington Mutual Bank and USAA have announced that they're cutting back HELOCs in areas where home prices have taken a hit.
But judging by a recent post about HELOCs on WSJ.com's Developments blog and one reader's comments to that blog, lines of credit aren't just being frozen in places where prices have declined. Take Manhattan, where median condo prices jumped 13.2% to $945,276 in the first quarter of this year over the same period a year earlier, according to real estate firm Prudential Douglas Elliman. In response to that blog post, one New York couple wrote in and said that despite their "excellent credit" and a $300,000 household income, their credit line was slashed as the result of a bank appraisal that came in at half the market value for their $1 million apartment. They had to pay for a new appraisal to get their line of credit reinstated."
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Old 11-15-2013, 01:24 PM   #6
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A credible idea as long as you recognize that there is some risk that you may not be able to access the HELOC when you want to and in that event it might force you to either cut back on spending or sell or both at a time when you would prefer not to.
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Old 11-15-2013, 04:56 PM   #7
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as a retiree presumably you have a large % of your AA in total/intermediate bonds as a protection from stock losses . But if you are concerned about total /intermediate bonds loosing in the next few years because of interest rate rises, then there is a good article yesterday by Allan Roth showing that total bonds would pick back up after losses fairly quickly.
Bond Investors Worried Over Interest Rate Increases | Financial Planning
But it probably makes make sense to have 2-3 years of expenses in CDs , or Ibonds or short term treasury fund just in case stocks and bonds have both tanked. your idea of using HELOC is not bad ( if you are sure it is not at risk of being called in : I know mine isnt though my Credit union) but personally given mine is 5% interest I would rather have it is a backup to my 2-3 years in safe money. If total/intermediate bonds are still way down after 2-3 years (which is pretty unlikely) then it may make sense to tap the HELOC for a year or two. Having the HELOC as a back up plan would mean you do not put too big a percentage of your AA in cash (or cash equivalent) and miss out on the likely better returns from a total bond fund
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Old 11-16-2013, 03:32 PM   #8
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Quote:
Originally Posted by Ken11 View Post
I expect some folks here have thought this through.

Why not use a home equity LOC and tap it in in a down market as necessary for cash.
It seems a more effective approach.
If there is no need to tap the LOC- you incur no costs at all for this right to access funds.

If you tap the LOC it seems you are simply betting that the near term return on the invested funds will exceed the interest rate ( net of taxes) paid for the home equity cash. In a down market this is probably a very good bet.
We took out a 10 year equity loan in '05 (or so) at 5.99 when savings rates were at about 5.5%. This was a couple years before our oldest started college, and it was intended as a college reserve. It turned out we only tapped about 10k in the savings account the last two years of our youngest's college. Similar, but safer.

If you have other savings and a tappable bond allocation, particularly short bond, it might be OK to do what you're proposing, if you're investing in a balanced fund (Wellington, Wellesely or something like a Permanent Portfolio approach. I invested in the latter in a taxable account at the same time we took out the equity loan, to be used if we lost our jobs or if we ran through the equity money to finish the youngest's education. That was in '07, by the way. Investing it as safely as possible, in retrospect, was exactly the right move. In retrospect. We never had to tap it, except 5k for the youngest's final tuition and that was because it was easier to tap versus the savings. Sorry for the length--if you have other pockets to tap, using this as the final pocket to rob might work. Or the first pocket, leaving the others in reserve.
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