More as a backstop than anything else, I’m about to get around to finally getting a home equity line of credit (aka HELOC). Many people say to make a “rainy day fund” and put six months worth of cash in it. I’m sorry, but I hate the thought of that much money sitting in an account and doing (relatively) nothing. I’m closer to 30 years from retirement than 3, so I just don’t see how I can afford to leave that much money being lazy.
Since we have enough equity in the house (LTV‘s under 40%), I’d rather just leverage the home equity as a backstop in case of financial emergency. The way I figure it is this: If I sack away the case into a rainy day fund, I’m guaranteed to lose money (consider it an opportunity cost), as that money won’t be in a higher-yield investment (even something as boring as an index fund). If I instead go the route for a home equity line of credit (for instance), I only take a financial hit if I end up needing the money. I have nothing against a home equity loan instead, but I don’t really see needing to take a wad of cash out for some long-term payback.
Clark‘s response is always that you don’t want to put your primary residence at risk, and if I were less disciplined, I’d probably agree. However, I don’t view the home equity line of credit as anything but an emergency source of cash. For what it’s worth, a quick search shows that at least one learned source agrees with me As the end of that article says, you don’t really want to be paycheck-to-paycheck, and I agree – I keep ~6 weeks in checking, which keeps me from having to worry too much about things like Christmas purchases causing us to be overdrawn
By the way, for those of you that may already know that I live in North Carolina, the question of “Hey, North Carolina has a homestead law, right? Wouldn’t that protect your primary residence?” may pop in your head. If it does, good for you, but that law doesn’t protect you in the case of a home equity loan or home equity line of credit. The article in the NC Constitution specifically excludes cases where you specifically used the home as collateral for a loan, and both of these are squarely in that category.