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There is still so much uncertainty right now. I have a home and some money in savings, but what more can I do to give myself a cushion in case of unexpected expenses or lost income?
Uncertainty feels like it’s everywhere these days, and taking control where possible is really empowering.
First, congratulations on having savings set aside. An emergency fund is one of the first things to build to help reduce financial stress and decrease the chances of overextending when an inevitable unexpected expense arises. As a homeowner, you know water heaters go out, dishwashers break down without notice, and siding gets damaged in a storm. In reality, it’s probably more accurate to say we have expected expenses at unexpected times.
Homeowners can use the equity in their homes as a backup for untimely expenses. I think of it as a safety net. It can also be used for other types of expenses as well.
This back up loan is called a home equity line of credit, also called a “HELOC.” A HELOC is a type of loan that lets you borrow against the equity in your home (the difference between your home’s value and your mortgage balance) and only take out the amount you need when you need it.
This is as opposed to a lump-sum home equity loan where you are given the loan funds at once and you begin paying back each month over a set repayment period. As you make payments on a lump sum home equity loan, the balance goes down and the money you paid back is not available to you anymore.
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On the other hand, a HELOC works more like a credit card. You are approved to borrow up to a certain amount based on your home’s equity, and you can borrow as much of it as you’d like right away or in the future. As you pay the balance down, the money you paid back becomes available to you again, just like the way payments you make on your credit card free up funds for you again. This is how a HELOC can provide you that stress-relieving cushion. You can go about your days knowing you can very quickly and easily get funds when you need them and only pay when you use them. It is really quick.
Some lenders charge annual fees for a HELOC. Find one, like Summit Credit Union, that does not. That is an expense you don’t need to pay and money you can save. You’ll also want to check with your lender on the draw period – how many years you can draw funds from your HELOC, and the repayment period – how long you’ll have to pay the balance down. HELOCs can also be refinanced if it makes sense for you based on rates in the marketplace.
Another benefit is the HELOC interest rate is often much lower than credit card rates, so as long as you do not overuse your credit card(s), a HELOC can be a smart way to consolidate credit card and other higher-rate debt. You might use the monthly savings in payments to pay down the debt faster, making more of your HELOC available to you if needed.
A HELOC, ready when you need it, can be a stress reliever and another tool for managing your money. If you are a homeowner, I encourage you to reach out to Summit Credit Union, where our lenders are ready to help you build your own cushion of certainty. Now that’s owning it.
