Why Do You Not Have a Home Equity Line of Credit??

Obviously this question doesn’t apply if you either don’t own a home or don’t have very much equity in the one that you do own.  However, if you have a home with decent equity (more than 10%), then the question certainly applies.  In my opinion, everyone should have a home equity line of credit (HELOC) in place if they are able.  Also, understand that I’m suggesting that you have a credit line in place, not necessarily that you use it – and I’m certainly not suggesting that you borrow on it without a plan in place to pay if off quickly.  A HELOC is kind of like a gun.  It can be a very dangerous thing if not used properly.  But when used in the proper manner, it can be a great weapon in your overall financial arsenal.

It provides two very important components:  the first is liquidity if needed and the second is a great source of temporary funds if needed for an immediate purchase.  I see scenarios all the time where people have a ton of equity in their homes but don’t have much liquid cash in the bank.  A HELOC is a phenomenal emergency fund in that situation.  Because you only pay interest on funds you have actually borrowed, you can have a HELOC in place with no cost to you.  For someone who has equity in their home, but little cash on hand, having a HELOC in place is a great safety net as it provides funds that can be drawn immediately in times of emergency.  I’m not telling you that you don’t need an emergency fund – the lack of an emergency fund is probably the biggest thing that gets folks into debt (well, maybe other than the lack of discipline to save for purchases versus buying on credit – but that’s another discussion).  Having a HELOC in place is just a safe back-up while you build up your cash savings.  If an emergency occurred and you couldn’t cover it with cash, the HELOC is there if needed.

A second great use of a HELOC is for when you have a financial opportunity to make a purchase (house flip for example) that will make you money.  I would never suggest this as an avenue to finance anything that depreciates or an investment that did not allow the HELOC to be paid back quickly.  But it is great to have available if an opportunity like that comes along.  And having one in place might give you the encouragement needed to be looking for these types of opportunities.  Remember that a HELOC is normally tied to prime, so the rate can fluctuate.  That is why it is not a good long term borrowing strategy.  But the interest payments are typically tax deductible and the payments are interest only.  So when used properly, it can be a good source of funds to buy investments where you can make your money and get out (pay the balance of the HELOC off) quickly.

If you have the equity needed to get a HELOC, it’s my opinion that you should – unless you know that you just can’t trust yourself to use it wisely.