A SayEducate.com article
recently suggested given that the current state of the economy will mostly likely worsen, homeowners should think about opening up a home equity line of credit. The suggestion includes the following arguments:
1. If you are currently employed, a home equity line of credit will be more easily secured versus when you are out of work. And if you do lose your job you can use the credit to pay for emergencies.
2. Rates are currently low, therefore it makes sense to obtain credit now.
3. Whether you use your credit or not you have the option to tap available funds.
My view couldn’t be more opposed to the arguments above. First, if you do not need to use credit then there is no reason to apply for a home equity loan. Most individuals do not realize that while you can borrow against your home to purchase a car, make home improvements, etc., one still builds up debt. In turn, a home equity line of credit is NOT free money.
Instead, I would advise individuals to build a true emergency cash fund that can handle 1., home, car, and any other expenditures outside normally budgeted items and 2. allow you to ride out a large gap of unemployment (say between 6-9 months). In my very basic view, if you do not have the cash at hand to make a large expenditure then you haven’t done your homework and prepared for life’s inevitable emergencies. And, furthermore, a home equity line of credit is simply a means of increasing debt, it’s not a solution to the times in one’s life when a large amount of cash is needed.
In sum, forgo the home equity lone of credit game and bite the bullet and build up your cash reserves!