Warning about HELOC as Emergency Fund

My favorite emergency fund is a brokerage margin account. Ready money at low interest rates when you need it, otherwise it is hard at work for you.

You do need to be careful not to borrow so much you might trigger a margin call. So make sure the portfolio is well diversified and you don't borrow more than

-- Doug

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I too am skeptical of debt used as a primary emergency fund (it might be Ok as a secondary emergency fund for ultra-large emergencies.)

1. I frequently encounter people with a tight budget (they spend the monthly income that gets into their checking account.) That means no cash flow next month to support a new debt. Pushing problems into the future is no solution.
2. More often than not, my experience is that proponents of debt for emergency funds (and other reasons) are struggling to live within their means. What they really want is to spend or invest that money instead of hold it back for an emergency - and they can't afford to do both. At least they can't afford to do both without making some tough choices which they don't want to face. Again, this doesn't apply to everyone (note the beginning phrase "more often than not".)

-HW "Skip" Weldon Columbia, SC

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An amortizing adjustable rate mortage plus a HELOC is similar to an option ARM, and in the thread "Study defends option ARM mortgages" that I started a while ago no one approved of option ARMs. With a typical option ARM, doesn't the borrower have more control? I think required payments may depend on changes in home value, but not on changes in circumstances of the borrower.

I know the argument against option ARMs -- many people have used them to buy more house than they can afford. But many people benefit from the convenience of credit cards and pay off the balance monthly, while others have bankrupted themselves with credit card debt. I think the option ARMs can be useful for people who are disciplined about money.

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I think you are right, my friend. I think nothing (well, very little) in personal finance is black and white. I agree with Skip's "More often than not, my experience is that proponents of debt for emergency funds (and other reasons) are struggling to live within their means." But of course that doesn't address those who use it in a much better way, and it may need to better define 'emergency'. When rates were low (1% T-bill) I used my so called emergency money to drop my principal and refinance my mortgage dropping the rate and term. My savings rate is high enough that I would be able to pay back the HELOC if tapped for things like new heating system, central air blows up, etc. If my wife or I lost our job, it would be tight, but my decision has to come from the choice of sleeping better for having a large cash balance vs knocking years off the mortgage back end. Much of our portfolio is pre-tax, so even though I have cash there, my post tax funds are pretty illiquid. In the end, I'd say every situation is unique, but here BWS's warning was more about the Lender risk regarding HELOCs than the consumer. An appreciated warning. JOE

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