HELOCs for Emergency Funds: Is it a Good Idea?

Always have an emergency fund ready! Aren't you hearing this again and again in all the discussions with your financial advisor? Nobody wants to be caught off guard by an unplanned trip to the hospital or a mechanic's shop. But it happens many times that you fail to save money and get huge stress in situations like these. And we are here to lower your stress. Did you know a Home Equity Line of Credit, or HELOC can be used for anything, which also includes emergency expenses?

You might now think whether it will be a good idea. So, before you consider HELOC as an emergency fund, here are a few things you will want to know.

What is HELOC?

A HELOC is a type of revolving credit which allows homeowners to borrow money using the equity in their home as collateral, like a second mortgage in Canada but they both are structured and served in different ways. Home Equity Line of Credit functions similarly to a credit card in which you have a credit limit and can borrow any amount up to that limit. If the interest rate is variable and linked to the prime rate, it will likely change over time.

Pros of using a HELOC for emergency funds include:

Lower interest rates: HELOCs are a more affordable borrowing choice because they often have lower interest rates than those on credit cards and personal loans. This will help you consolidate your debt.

Flexible option: You have the option to borrow as much or as little money as you need. You don't use the entire credit limit; this way, you only have to pay interest on the amount you borrow.

Quick access to money: You can easily and quickly get access to money, usually within a few days. In an emergency where time is of importance, this can be very useful.

Cons of using a HELOC for emergency funds include:

Changing interest rates: A HELOC's interest rate is often variable, which means it may change over time. As a result, planning a budget for monthly payments may be challenging.

A long-term debt: When choosing desirable HELOC rates, it can have long payback terms, which could result in you repaying the loan over the course of many years. This may have an impact on your finances and make it harder for you to save money for other objectives.

A risk on home: Your home is going to serve as collateral when you take out this loan. You run the risk of losing your home if you can't pay back on time.

HELOCs are a smart choice for emergency cash, but you must also examine the benefits and drawbacks before choosing. A HELOC can give you immediate access to money at a cheaper interest rate than other borrowing options if you have a reliable source of income and are confident that you can make the required monthly payments. But, in case you are not able to pay back the loan, you run the risk of losing your house. So, make sure that you carefully evaluate your financial situation and consult with a financial adviser before borrowing money using a HELOC for unexpected costs.