WILMINGTON, Del.--(BUSINESS WIRE)--Financial planning experts recommend tucking away three to six months' worth of living expenses in a savings or money market account that's safe and easy to access if/when you need the cash. The hard reality: It can be difficult to save ahead of time for emergencies, and even if you do, your savings may fall short. A smart strategy may be a combination of cash on hand and the ability to borrow additional funds.
Still, the key is having resources ready before a difficult situation arises. The more you know about how a home equity line of credit works, the better you'll be able to use it to your financial advantage.
Open a Home Equity Credit Line Before Disaster Strikes
Here's where a home equity line of credit, or HELOC, may help bridge the gap. A HELOC can be opened in advance, and once you're approved, the available funds will be ready when you need them. Interest only accrues on the amount you borrow, so the credit line can supplement your emergency plan or rainy day fund at a relatively low cost to borrow. As an added bonus, the interest you pay may be tax deductible.*
Here's why you may want to apply for a HELOC loan before the unexpected strikes:
• Credit approval may be easier. You're more likely to get approved for a loan when circumstances are good vs. when you've taken a hit financially.
• Shop and compare rates and fees. Take the time to choose carefully to get the best rates while also avoiding upfront fees and closing costs for home equity lines.
• Quick access to cash. You can write checks against your credit line with the same convenience as a checking account, so there's no worry about accessing cash in an emergency.
• Avoid costly alternatives. You'll be less likely to charge up high-interest-rate credit cards or deplete retirement accounts to make ends meet.
• Payment flexibility. You can keep payments low by making interest-only payments during the draw period (rather than principal plus interest payments), which may provide relief in a financial pinch.
• Be prepared for next time. A home equity line can be paid down and then borrowed from again during the draw period, so there's no need to apply for a new loan as additional expenses come up.
Use Caution with Your Safety Net
Be aware that using home equity for emergency expenses is not for everyone. It only works for short-term situations when you know you'll be able to repay the loan. It's also important to borrow wisely with home equity and maintain available credit so the funds will be available in case of emergency.
* Consult your tax advisor regarding the deductibility in your situation.
Equal Housing Lender