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What if, instead of a cash emergency fund, you had immediate access to a cheap line of credit without needing to apply or get approved?
Would that be a recession life hack or a risky endeavor?
A strong housing market and high inflation are leading some people to consider home equity as a backup emergency fund.
The idea goes like this: If you currently have good credit, stable income, and equity in your home you can take out a home equity line of credit, or HELOC. Then, you’ll have an open line of credit to borrow against when a financial emergency arises. A HELOC can be an attractive product since interest rates are typically lower than those of credit cards and personal loans, and credit limits can be high because the loan is secured by your home.
A HELOC can give you options in a crisis, even if it’s not a replacement for a cash emergency fund. There are risks and costs of the strategy, experts say, and a cash savings fund remains the gold standard for many planners. However, if handled carefully, a HELOC can provide an extra dose of flexibility for equity-rich homeowners who know how to take on debt responsibly.
What Is a HELOC and How Does It Work?
Home equity is the difference between what your house is worth and what you owe on your mortgage. When you pay down your mortgage, or when your home’s market value rises, you gain home equity.
A home equity line of credit (HELOC) or home equity loan lets homeowners tap into that equity for a cash infusion that they can use for almost any expense. In both cases, you’re taking out a loan secured by your home equity and must pay back what you borrowed, with interest, according to the terms of your loan agreement.
While a home equity loan typically works as a fixed-rate installment loan where you receive the money in a lump sum and pay it back in fixed monthly payments, a home equity line of credit works a bit differently. You get access to a revolving line of credit that you can tap into whenever you want, for however much you want (up to the credit limit) for a certain amount of time, known as the draw period. Once the draw period is over, you’ll enter …….