I’ve posted before about the option of withdrawing HELOC money as a safety net. Many HELOC lenders have been reducing or freezing lines, so in some cases it makes sense to preempt this possibility by withdrawing money early.

An Early Show article disagrees with this strategy, claiming that HELOC “hording” is reactionary and a poor financial decision. Here’s a blurb:

“While rising prices and tighter lending standards partially explain the increased use of home equity lines of credit, there’s another issue at play here: People are panicking. They see that other types of credit are increasingly hard to come by. They also know that some banks are freezing lines of credit, meaning that, even if the bank promised you a $30,000 credit line and you’ve only used $10,000, the bank can suddenly say, “Sorry, we’re changing the agreement. You can now only borrow $10,000.” Banks are allowed to do that and, for the first time in a long time, they’re exercising their rights in some cases. So people are grabbing the money now, just in case it disappears later…

It may seem like a good idea to take this credit when you can, knowing it may not be available down the road. But it’s not.

If you’re just taking out a home equity line of credit to build a cash cushion, to hold onto “just in case,” you’re simply making a bad financial choice. Think about it: Once you take out the line of credit, you’ll be paying an interest rate of about 6 percent on the loan. You’ll put the cash in a “safe” location, meaning it will earn about 1 percent. So you’re losing 5 percent of your money just to be “safe.” A better alternative is to tighten your belt, even if it’s painful, and build your own cash cushion.”

Obviously there’s no need to withdraw tens of thousands if you have no plan to use it. However, should you need the money in the future, a withdrawal now still seems like the smartest option. You can find “safe” investments that make well over the 1% mentioned in the article.

The best option is to rely only on earned income. But, if that is not a possibility during this time of financial uncertainty, owing 6% on a HELOC is a heck of a lot better than owing 16% on a credit card.

See Also:

Strategic Withdrawals to Avoid the HELOC Freeze

HELOC Freeze Horror Stories

Tags | Heloc, heloc freeze, savings accounts