A Home Equity Line of Credit is Great to Have for Emergencies

Line of credit makes a great rainy day fund

The economic downturn of the last five years, combined with Americans’ lack of success in saving money has more families living from paycheck to paycheck than ever before. When these factors are combined with the nearly ten thousand dollars in credit card debt that each household owes, we find that few families have any cash put away in case of emergencies. What can the average family do to make sure that cash will be available in case of a disaster or medical emergency? What can you do in case that “rainy day” comes?

There are a number of things that can be done, but one great idea is a home equity line of credit. The equity in a home is the difference between the market value of the home and the amount still owed on the mortgage. The real estate boom of the last few years has left many Americans with record amounts of equity in their homes; some may have equity of several hundred thousand dollars and not even realize it! Many do, and home equity loans have been issued in record amounts during the last few years. There are two types of home equity loans; the line of credit, which features a “revolving” system that lets you repeatedly borrow and repay and the term loan, which has a fixed repayment schedule. Each has their good points and bad points, but the line of credit offers greater flexibility. 

The line of credit is a terrific item to have in reserve in case of emergencies. The credit line represents a maximum amount that may be borrowed; the borrower may write checks against the loan as necessary. The interest rate is variable, and the payments are due as with a credit card. The amount due on each bill is based upon the total amount borrowed, plus interest. Lines of credit are ideal for funding indefinite projects such as do-it-yourself home improvements, but it also makes a great source of emergency cash. By taking out a loan, no charges are incurred; you only pay money back when you actually use some. The costs of obtaining the loan are minimal, and the process is much simpler than the process of obtaining a first mortgage. In the meantime, you can simply sleep well, knowing that you have a sizable amount of cash available just for the asking should an emergency occur. In the meantime, the homeowner is under no obligation whatsoever to use any of the money. In some cases, the lender will require that money be withdrawn right away, but that is not particularly common.

Americans tend not to save money, and as such, tend to be unprepared when emergencies strike. One way to be prepared for this is to take out a home equity line of credit before you need one. That way, no matter what happens, you will be ready with cash in hand to take care of it. You never know when an emergency will happen, but you can always be prepared to face one.