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Can You Use Your HELOC as an Emergency Fund?

Time and time again, financial advisors discuss the importance of having an emergency fund. No one wants to be surprised by an unexpected trip to the hospital or the car repair shop. If you’re not good at saving money, you may be wondering whether you can use a HELOC as an emergency fund. Turns out, you can. Whether that’s a good idea, however, remains debatable.

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What Is a HELOC?

A HELOC (or a home equity line of credit) is a second mortgage. HELOCs give homeowners the opportunity to tap into their home equity and borrow against the value of their homes. They essentially work like credit cards, but they’re much riskier. If you can’t pay off your HELOC, you could lose your house.

Anyone with a HELOC will have a draw period, or a set number of years to withdraw funds from their line of credit. During this period, borrowers are required to pay interest. Once it ends, you’ll be responsible for paying back whatever you borrowed, plus interest.

How to Use a HELOC as an Emergency Fund

Can You Use Your HELOC as an Emergency Fund?

If you’re eligible for a line of credit, you may be able to borrow money as needed for up to 10 years. That may be helpful when you need to cover the cost of an unexpected expense. If you need access to additional funds, you’ll need to pay off at least a portion of what you borrowed in order to increase the amount of credit that’s available to you.

Once your draw period ends, you’ll need to find another source of extra income. After all, a HELOC can only serve as a temporary safety net. Before you take out a HELOC, let’s look at some of the pros and cons of using one as an emergency fund.

The Pros of Using a HELOC as an Emergency Fund

Using a HELOC as an emergency fund could make sense if you need fast cash. Saving thousands of dollars could take years. But through a HELOC, you could have access to up to 85% of your home’s appraised value within a matter of days.

HELOC interest rates are usually lower than the rates tied to credit cards. That’s another reason why using a HELOC during an emergency could be a good idea. What’s more, even though you’ll have to pay interest every month, your interest may be tax deductible up to $100,000 (if you’re using the funds for various purposes).

The Cons of Using a HELOC as an Emergency Fund

Can You Use Your HELOC as an Emergency Fund?

There are some downsides to using a HELOC as an emergency fund. Most HELOCs come with variable interest rates. If rates fluctuate and rise too high, you may have a hard time paying off your interest. Furthermore, your bank or private lender may decide to cancel or reduce your line of credit without warning (particularly if the value of your home falls drastically in a short amount of time). Losing access to your HELOC could be devastating if you’re already facing a financial crisis.

Using a HELOC as an emergency fund also means you’ll have to eventually pay back what you borrowed. That could be a problem if you have an unstable source of income or you don’t have much job security.

Final Word

Whether you should use a HELOC as an emergency fund depends on your personal situation and your financial habits. Taking out a HELOC could be beneficial if you want another tax break or you need access to a large amount of cash in a short period of time. On the other hand, if you can’t afford to pay the fees and closing costs associated with HELOCs, you may be better off with a cash emergency fund.

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Lauren Perez, CEPF® Lauren Perez writes on a variety of personal finance topics for SmartAsset, with a special expertise in savings, banking and credit cards. She is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Lauren has a degree in English from the University of Rochester where she focused on Language, Media and Communications. She is originally from Los Angeles. While prone to the occasional shopping spree, Lauren has been aware of the importance of money management and savings since she was young. Lauren loves being able to make credit card and retirement account recommendations to friends and family based on the hours of research she completes at SmartAsset.
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