HELOC as Emergency Fund

cute fuzzy bunny said:
Yeah, and you oughta see the letter I wrote them about their hopelessly myopic perspective on the matter, and the areas where they royally screwed up or didnt give enough information.

They wrote me back, and one of their editors is going to be talking to me next week about a revision to the article with more information and some different conclusions...

Besides not talking at all about risk adjustment to the various approaches, the article is pitched towards a wage earner, not a retiree. It was the classic error of reducing the situation to the most simplistic "I can make xx% over here over 30 years and it only costs me yy% to fund that arbitrage". Thats fine if thats as complex a situation as you feel comfortable with looking at and if you make all your financial decisions in close set binary and if you can watch your investments bounce around like a rubber ball while your house is on the line without making any changes to your AA.

Wage earners with a 10+ year horizon before retiring oughta have a mortgage and invest as much as they can. Retirees...a lot harder to make the case.
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Thanks CFB! DH showed me that article. I read it sad said that CR needs to stick with evaluating toasters. I didn't have the time, inclination, energy or whatever to respond. But it certainly wasn't useful.
 
Countrywide just canceled any draws on our HELOC based on declining home values.
 
Mick, where is the property? What was the CLTV?
 
I think the key word here is "emergency" money.

I dont plan on tapping the heloc or reverse mortgaging my house, but under certain circumstances its an option.

Given a situation where someone might have 3-4 months worth of expenses...or 2-3 years worth if they have a lot of leverage by investing their mortgage and need to protect themselves from protracted downturns in the market. Unless cleverly invested (with a degree of luck) at good rates in longer term cd's, most peoples cash is losing ground to inflation.

For something they might probably never use.

I'd rather let the bank be my lender of last resort at a reasonable rate for something I have a <5% chance of using, than lose value on my money every month with 100% certainty.

If and when I hit a situation where I'm faced with "okay, checking account is empty, markets are down so I dont want to sell any investments right now, I have some bills to pay", I can either sell something, get a temporary PT job, use the heloc, use my overdraft/line-of-credit, use a credit card, or any one of another dozen options.
 
cute fuzzy bunny said:
If and when I hit a situation where I'm faced with "okay, checking account is empty, markets are down so I dont want to sell any investments right now, I have some bills to pay", I can either sell something, get a temporary PT job, use the heloc, use my overdraft/line-of-credit, use a credit card, or any one of another dozen options.
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Exactly!

However, in that particular circumstance, a HELOC is a little hard to use unless it is already set up. Therefore, a little advance planning is necessary -- like having it already in place -- since any mortgage requires tons of paperwork, inspections, and other such time consuming activities.
 
RonBoyd said:
Exactly!

However, in that particular circumstance, a HELOC is a little hard to use unless it is already set up. Therefore, a little advance planning is necessary -- like having it already in place -- since any mortgage requires tons of paperwork, inspections, and other such time consuming activities.
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I set up a HELOC with PENFED in 8 days, no cost, no inspections, no appraisal, nothing sent in on my part, completion of the on-line application and then only had to take the overnight package they sent to my local notary and put the signed paper work into the SASE and send it back to PENFED. 4 days later had on-line access to $100K when and if needed.
 
RonBoyd said:
Exactly!

However, in that particular circumstance, a HELOC is a little hard to use unless it is already set up. Therefore, a little advance planning is necessary -- like having it already in place -- since any mortgage requires tons of paperwork, inspections, and other such time consuming activities.
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I usually get one set up as soon as I'm in a new property. FWIW, there was very little paperwork or other stuff to do with the three I've executed. One had an appraiser do a "drive by" appraisal, which I think means they just see if theres a house there and it appears to be in good condition. The other two didnt even do that. All three sent a notary over to my house with the paperwork, which took about 45 minutes to read and sign.

That was it. I received a checkbook in the mail to use a few weeks later, and I could transfer amounts from my HELOC to any other account online.
 
This was a really germane post for us -- we're about to refinance our mortgage and then take out a HELOC to pay off a private debt. In the process of refinancing, we are using our emergency fund to pay down the mortgage even more (this frees up a lot of cash and will allow us to keep this place as a rental when we move). But it means we'll be operating without an EF for a few months, and we're planning on using the HELOC as an emergency fund during that time. So it's nice to see some thoughts on the HELOC.

As far as the credit issue, we're not having any trouble with getting loans or a HElOC. I'm sure having great credit scores and a good loan to value ratio is helping.

But, we'll make sure to not take the HELOC for granted and will keep an EF in cash ready.
 
Urchina said:
This was a really germane post for us -- we're about to refinance our mortgage and then take out a HELOC to pay off a private debt. In the process of refinancing, we are using our emergency fund to pay down the mortgage even more (this frees up a lot of cash and will allow us to keep this place as a rental when we move). But it means we'll be operating without an EF for a few months, and we're planning on using the HELOC as an emergency fund during that time. So it's nice to see some thoughts on the HELOC.

As far as the credit issue, we're not having any trouble with getting loans or a HElOC. I'm sure having great credit scores and a good loan to value ratio is helping.

But, we'll make sure to not take the HELOC for granted and will keep an EF in cash ready.
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Operating without an emergency fund is like playing Russian Roulette.

Don't assume the HELOC will always be there to draw from.In this enviornment,it's here today and it may be gone tomorrow.

Here's a story about a man who paid off his HELOC with all of his savings,only to have it frozen days later by Bank Of America.

Lenders block home-equity line withdrawals North County Times - North San Diego and Southwest Riverside County News - NCTimes.com - Californian.com
 
Eh, I'd be annoyed for the full five minutes it'd take me to close the 'frozen' account and open a new one at a bank that'd like to have my business.

Everything and anything can go poof at any time. A rock could fall out of the sky and hit me in the head right...ooof! Ow! Hey! Who the hell is throwing rocks over there?

BTW, I never get anywhere near a high LTV on these. I think my heloc on my old mcmansion was about 15-18% of its value, and the one on my last house was about 20% of what I paid for it.

More than enough for an emergency or to help with a temporary cash flow problem, but not enough to worry about valuation drops, making a troubled bank nervous, or to get myself in trouble.
 
cute fuzzy bunny said:
BTW, I never get anywhere near a high LTV on these.
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Yeah, our HELOC is in the 10% range. If we have an "emergency" greater than that I would prefer not to risk our house in the rescue attempt. Or, at least, make that the "last resort."

On the other hand, I am relying on that source of funds being available if needed. In fact, I consider that a "solid" contract between us and the bank. But then on that other hand (is that 3?), our relationship with this bank is not what it used to be. We now write about three checks a month and, truly, treat them simply as a Clearing House for fund Transfers. It has been several years since I have actually been inside the building to speak with a person. Now that I think about it, in the 35 years we have had accounts with this bank it has changed hands five times -- all in the last 6-7 years. Wow! Is this depressing... and scary.
 
Yeah, our two banks dont like me either. I only used one of them to wash a half million bucks because vanguard wanted to take 10 days to send funds to my escrow account since they were a "new account", while they'd overnight transfer to our existing bank account, who was more than willing to do a same day transfer to the escrow account. Didnt put a penny in or out other than our minimum balance ($25).

The other bank I just use to deposit lots of small checks when I'm in the store shopping and walk by their ATM. Then once a month I EFT the few hundred bucks to vanguard. Saves me the trouble of filling out a deposit slip with vanguard and making up a mailing envelope. I do leave a few hundred bucks in that account as an emergency source of pocket money.

No wonder the banks are pissed, in financial trouble, and trying to sock people with huge fees.
 
RonBoyd said:
Yeah, our HELOC is in the 10% range. If we have an "emergency" greater than that I would prefer not to risk our house in the rescue attempt. Or, at least, make that the "last resort."

On the other hand, I am relying on that source of funds being available if needed. In fact, I consider that a "solid" contract between us and the bank. But then on that other hand (is that 3?), our relationship with this bank is not what it used to be. We now write about three checks a month and, truly, treat them simply as a Clearing House for fund Transfers. It has been several years since I have actually been inside the building to speak with a person. Now that I think about it, in the 35 years we have had accounts with this bank it has changed hands five times -- all in the last 6-7 years. Wow! Is this depressing... and scary.
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Solid contract is fine, just make sure you read the fine print. Last I looked, it usually gives the bank lots of leeway to do whatever they feel like.

I don't do much with my local bank either, and I am probably a marginally profitable customer at best. So I have my HELOC with Schwab, where I know I am a valued customer that is worth a lot to them. So I presume they will be more hesitant to jerk me around on the HELOC.
 
brewer12345 said:
Solid contract is fine, just make sure you read the fine print. Last I looked, it usually gives the bank lots of leeway to do whatever they feel like.
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Yeah, I looked when this thread took this turn; I am in a very weak position.
brewer12345 said:
I don't do much with my local bank either, and I am probably a marginally profitable customer at best. So I have my HELOC with Schwab, where I know I am a valued customer that is worth a lot to them. So I presume they will be more hesitant to jerk me around on the HELOC.
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Hmmmm. Now there's a thought.
 
brewer12345 said:
Solid contract is fine, just make sure you read the fine print. Last I looked, it usually gives the bank lots of leeway to do whatever they feel like.

I don't do much with my local bank either, and I am probably a marginally profitable customer at best.
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Last time I looked at my HELOC, they had the right to freeze it whenever in their sole opinion they were concerned about the collateral or my ability to pay. A few years back, I was in the branch the everning that a large local company had announced massive layoffs. The branch manager told me that they had automatically frozen every HELOC for customers who worked at that company until they knew who was going to be laid off and who wasn't.

Dunno it this will ever help me or not, but I pop into my [small] local branch periodically to deposit a check or take out some cash. I always walk right up to the branch manager, so that he knows me and knows that I'm making a deposit. It certainly helped when I wanted them to reverse a "below minimum balance" monthly charge in my MM account. Three times now he's reversed it. He knows me by name now.
 
rayvt said:
Last time I looked at my HELOC, they had the right to freeze it whenever in their sole opinion they were concerned about the collateral or my ability to pay. A few years back, I was in the branch the everning that a large local company had announced massive layoffs. The branch manager told me that they had automatically frozen every HELOC for customers who worked at that company until they knew who was going to be laid off and who wasn't.
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Spooky. I would usually think that most banks are dumber than to use the language that favors them to actualy protect themselves. Must have been a reasonably smart branch manager in charge, or a local bank (rather than a clumsy behemoth).

I view a HELOC as just one of several liquidity alternatives that I generally have lined up at any given time. Usually have a chunk of cash, some CDs I could break, untapped credit cards, margin loan availability, and the HELOC. If the commode hits the windmill, at least some of these options could be tapped.
 
One bank was TCF bank. Bankrate.com Star Rating: ****. Market Cap: 2.45B 453 retail banking branches.

The other was Motorola Credit Union.

Another clause that favored them was the right to offset the HELOC balance against any deposits you have in any other account at the bank.

I believe these are both pretty standard clauses. But then---how many people ever actually read the loan documents they are signing? Darned few.
 
TCF is really an overgrown community institution which does a lot of HELOCs. I am not surprised they were sharp enough to catch what was going on and protect themselves.

The right of offset is really, realy common language in loan docs. Even the car loan I took from Pen Fed a few years ago gives them the right to offset deposits vs the loan if I default.

Dunno what to say on whether people read the docs. Can't help the terminally stupid or lazy keep from shooting themselves in the foot, I guess.
 
rayvt said:
One bank was TCF bank. Bankrate.com Star Rating: ****. Market Cap: 2.45B 453 retail banking branches.

The other was Motorola Credit Union.

Another clause that favored them was the right to offset the HELOC balance against any deposits you have in any other account at the bank.

I believe these are both pretty standard clauses. But then---how many people ever actually read the loan documents they are signing? Darned few.
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You hit the nail on the head!

The fact that people failed to read and understand their signed loan documents is one of the reasons we're in this mess.:rant:Instead of taking personal responsibility,they blame the banks,brokers and whoever else they can think of,when they should be looking in the mirror.
 
liveitup said:
Operating without an emergency fund is like playing Russian Roulette.
Don't assume the HELOC will always be there to draw from.In this enviornment,it's here today and it may be gone tomorrow.
Here's a story about a man who paid off his HELOC with all of his savings,only to have it frozen days later by Bank Of America.
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Everyone who's worrying about this can send me their mailing address, and I'll be happy to forward the half-dozen attractive home-equity financing offers we're receiving in the mail every month. Our latest one came from somewhere in Florida. They weren't sure how to spell Hawaya but they were pretty confident that they could loan us a lot of money on it.

rayvt said:
Last time I looked at my HELOC, they had the right to freeze it whenever in their sole opinion they were concerned about the collateral or my ability to pay. A few years back, I was in the branch the everning that a large local company had announced massive layoffs. The branch manager told me that they had automatically frozen every HELOC for customers who worked at that company until they knew who was going to be laid off and who wasn't.
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With easy credit-union membership requirements and all the discount brokerages in the world offering HELOCs, I don't think I'll ever set foot in a bank again. Don't like the HELOC you have? Go find another one. I don't think it'd take long.
 
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?
 
growing_older said:
. Anyone know if sufficient equity can get one a HELOC even if temporarily unemployed?
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Probably not. At least I would not count on it. As many have suggested, you want these measures in place before they are needed. The real point to me is the sentiment expressed by Brewer is to have multiple sources of emergency funds available depending on the nature of the emergency.
 
I've gotten them when I was permanently and fully unemployed.

House is paid off, plenty of assets, plenty of cash flow, tax forms from the last few years show good income numbers.

No reason to deny me a secure loan on an unmortgaged asset.
 
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