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

The downside of withdrawing funds from your HELOC is that you will be charged interest until you pay back the money. Many people take out HELOCs instead of home equity loans because they want to have money at their disposal and not pay interest until they choose to withdraw. Removing funds from your HELOC now negates that benefit.

If you were hoping to withdraw from your HELOC sometime later this year, you may be able to counterbalance the interest charges by putting the money into a high-yield savings account or CD. San Francisco mortgage consultant Julian D. Hebron recently published a helpful blog post that shows how HELOC borrowers can withdraw money from the HELOCs now and still come out ahead of the game:

If borrowers have open lines of credit they were planning to access during 2008, they should strongly consider taking a draw now, before an unforeseen limitation on their ability to access their equity. The Prime Rate is the benchmark rate for HELOCs and is currently 6%. HELOCs are priced at Prime plus/minus a base rate. The current average HELOC rate for a good credit borrower with some equity is about 6.5%. In most cases, interest on HELOC amounts up to $100,000 is tax deductible. If a borrower is in a 33% tax bracket, the after tax rate on this money is about 4.355%. So if they took a HELOC draw and placed it into a CD or another similar liquid vehicle earning approximately 4.5% (or 3.015% after tax), they can ease the cost of those funds on an after tax basis.

If you’re looking for a place to keep your HELOC funds until you’re ready to use them, there are several competitive options right now:

Countrywide is offering a 6-month CD with a 4.10% APY. The minimum balance is $10,000.

Primer America is offering a 6-month CD with a whopping 7% APY. There is a $1000 minimum and a $5000 maximum. Because Primer America is a credit union, you may have to meet certain requirements (live in a particular area, have a particular employer, or pay an application fee) to join.

If you’d rather keep your HELOC funds liquid, Washington Mutual is offering an attractive savings account with 4% APY, when the account is linked to a free checking account.

See Also: What to Do if You’re Hit by the HELOC Freeze