What is your opinion of a HELOC?

[Lindahfx]

As some of you may recall (http://www.savingadvice.com/forums/g...orry-long.html), I posted that I will be out of a job in June (unless I find something else in the meantime). We are doing whatever we can to save $$ and prepare for cash flow issues when I become unemployed. My financial advisor suggested we look at a HELOC. We have been approved for one and although it makes sense for us, I do have some reservations. I'm wondering what your experience or comments are regarding these.

[bjl584]

It's basically just a big line of credit with your house as collateral. I would stay away from this as a means of having extra money. It would be far better to tap an emergency fund for cash needs. If you don't have one, then using credit cards would be better than a HELOC. Credit cards are unsecured debt. In other words, if things get really bad for you, your credit may end up ruined, but at least you won't get thrown out of your house. Just my opinion.

[glock35ipsc]

Don't us a HELOC as an emergency fund. It puts your home at risk if you use it as an emergency fund with no means to make the monthly payments towards it.

What happens if you exhaust the limit of the HELOC? Some banks require you to re-qualify for the HELOC annually. If you are still with out a job, or do not meet their requirements to continue the line of credit, you may be forced to refinance the home to pay off the HELOC. But, if you couldn't re-qualify for the HELOC, there is a chance you might not qualify to refi the house.

They can lead to a nasty chain of events in this situation.

Oh, I'd look for a new financial adviser too!

[disneysteve]

I'm going to disagree with my esteemed colleagues. I think it is a good idea to open a HELOC while you are still employed and can qualify for one. That does not mean that you need to actually draw on it unless an emergency arises. Hopefully, you have an EF and other savings that you could tap first. Yes, I realize that a HELOC is secured debt and a CC is not, but a HELOC also has a much more favorable interest rate and that interest is tax deductible, unlike a CC which could have a rate in the high double digits and is not deductible.

Opening a HELOC when you still can means it will be there for you if things get so bad that you need that extra money. Hopefully, you'll never have to touch it, but what if you burn through your EF and max out your CC and still haven't found work? You'd be out of options. The HELOC would give you one more source of cash.

[Seeker]

Seconding Steve exactly.

It's fine to open a HELOC and have it available -- but I wouldn't take any money out until I absolutely needed it for an emergency... a true one. Not for my day-to-day expenses while unemployed -- I'd curtail those drastically until I had an income.

Also, HELOC rates need to be fixed and manageable even under unemployment if the need arose for me to even consider taking equity out of my home again.

[wincrasher]

There are banks that still issue HELOC's??

What are the requirements for these things - you still must retain 20% equity?

[noppenbd]

We opened a HELOC about 18 months ago as a backup emergency fund while we were building up our EF. About a year ago we heard that banks were starting to shut them down, so we drew about $25K out of it and put it in a high-yield savings. As we've built up the EF we've paid down the HELOC, always keeping at least $25K in the EF. So it has been a valuable tool. However, it can definitely be a dangerous weapon as well if you are not a disciplined person. We recently paid off the remaining $15K on our HELOC with a CC balance transfer, which changes it from secured to unsecured debt. Also, we are in the midst of a refi, and will be keeping the HELOC open. The new lender required that we maintain 20% equity, using the full credit line of the HELOC (assuming you drew it down all the way).

[Broken Arrow]

Linda, I would agree with the HELOC if you know with reasonable confidence that it will not be misused in any way. Otherwise, you're putting your home at risk.

[MonkeyMama]

I consider HELOC a debt like any other - a last resort. Thing is if it is there it is easy to misuse. Just be careful. IT has its pluses and minuses, like any debt.