home equity loan vs. home equity line of credit – which is for you?

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.