Note: Access to debt can be a really good thing BUT it’s only beneficial to those who have good self-control and positive money habits. If you’re an Advanced Journeyer, you may be able to utilize some of the information in this article right now. Even if you’re just starting out on your journey, it’s good to be aware of the available financial options to you. Think of it as another tool for you to put in your Financial Freedom toolbox. Not sure where you land on the Journeyer Skill scale? Click here to find out.
As a round table guest on the Stacking Benjamins podcast, we discussed the various steps we’d take to prepare ourselves for a job layoff. I had the idea of securing all lines of credit available to me, including a home equity line. My theory was that in an event of an emergency, I’d want to have access to as much money as possible, even debt.
Following my own advice, we decided to apply for a home equity line. My previous home equity line on my first property was closing and if we applied now, we’d be able to save on origination and maintenance fees on the new home equity line.
Here are the 3 reasons we decided to apply for more debt and the benefits of having access to a home equity line:
1 Access to liquidity in your house
We’re in the process of paying off our mortgage early. If we stay consistent with our current additional mortgage principal payments, we’ll pay off our home by the time we reach 50-years-old, 11 years before the original maturity date. However, our goal is to pay it off before that.
Some “gurus” in the personal finance space would advise us against paying down our mortgage debt early. They’d say that we should invest our money in more liquid investments (ex. index funds, mutual funds, stocks, etc.). They are somewhat right. It’s far easier to unload and sell a stock position than it is to sell a house.
This issue is somewhat mitigated by having a home equity line. The home equity line will allow us to tap into the equity in our house immediately should we ever have an emergency. We won’t need to sell our home and wait to get any money. We’d be able to access the money in a home equity line instantly.
2 Great safety net if you intend to leave the mainstream workforce
If you have goals of retiring early or quitting your job, having a home equity line is a great financial safety net for additional access to money beyond your emergency fund. Also, it’s best to secure the home equity line before you leave your job as it will be harder to qualify for a home equity line without steady employer income.
This does not give you the green light to use your home equity line- remember, you’ll need to pay it back! It just provides you an additional layer of protection should you need access to cash once you’re out of the mainstream workforce.
3 Slim down your cash emergency fund to pay off debt or invest
If you have a reasonably “safe” job or if you’re a dual income household, you may find that you don’t need to have the recommended 6-9 months worth of expenses in a cash emergency fund. You may be able to slim down your emergency fund to just 3-5 months worth of expenses and use some of the money to either pay down consumer debt or invest. Your home equity line can act as your second line of “emergency fund protection”.
I’m not advocating that you deplete your emergency fund for the purpose of mindless splurging. The idea is that you keep a leaner emergency fund while you aggressively work to pay off debt and invest. Knowing that you have a home equity line to fall back on, allows you to take more calculated risks.
In reality, we have no plans on using our home equity line, nor would I advise you to take out a home equity line with the intention of using it. Having a home equity line is meant to be more of a mental/emotional safety blanket as you work on optimizing your finances.
The ability to access cash should you need it in an emergency is huge and will allow you to make decisions that will accelerate your journey to Financial Freedom. If you’re disciplined and have good money habits, it may be worth it to consider using a Home Equity Line as just one of many tools to use in your Financial Freedom toolbox.