20 May Should I use a HELOC for an emergency fund?

Q. I have $50,000 that has been my emergency fund but I will need to use some of that money for college for my second child. It would wipe out the account, and I’m nervous about not having money available. Should I do a home equity line just to have it, and will it cost money to open, or should I just take my chances?
— Homeowner

A. Having a home equity line of credit can give you peace of mind.

It can also give you options if the need for additional funds should arise.

You are correct in that you should really try to keep your emergency fund intact, Michael Cocco, a certified financial planner with Beacon Wealth Partners in Nutley.

He said you should have a minimum of enough money to cover three months of your expenses — while striving to have six months — in a risk-free and liquid bank account, he said.

However, he said, an emergency fund can be more than just what is in your savings account.

“If you apply for a home equity line of credit, you do not pay any interest until you actually use that line of credit and borrow against it,” Cocco said. “Most banks do have an application and/or appraisal fee to obtain this line of credit, but it is well worth the minimal cost to give you and your family the peace of mind and additional options.”

However, once you get approved for that home equity line of credit, you’ll want to carefully consider whether to use it right away, he said.

“Home equity lines can have an interest rate in the 7 to 8% range, so it would not make sense to take on debt and pay that interest if you still have $50,000 in emergency funds in the bank, earning way less than that percentage of interest,” he said.

He added you should consult a qualified home equity loan professional to ensure that you understand all of your options and any risks associated with borrowing against the value of your home before proceeding with any course of action.

Cocco said you might consider getting the home equity line approved, and then start to use most of your emergency funds for college tuition, leaving at least some sort of balance as you should not bring your cash savings to low levels.

“Even if your emergency fund in the bank goes down to $20,000, you have the home equity line to back you up, for emergencies, if needed,” he said.

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This story was originally published in May 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.