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A home equity line of credit is an excellent source of emergency funds for homeowners that have no money in savings. However, there are a few problems with utilizing a loan for this purpose. Outlined below are the more common drawbacks.

Minimum withdrawals required
A home equity line will usually require a minimum withdrawal when the loan closes. In addition to the closing costs associated with the loan, the borrower is going to have to deal with the interest fee of the minimum draw. As a result of prepayment penalty fees associated with lines of credit, the homeowner is going to have to invest the money to alleviate the cost of the interest.

Suppose the minimum draw is $20,000, the interest rate is at 6%, and you can only earn 4% on savings. That is a 2% difference between what you are paying in interest and what you are earning from the investment. Although its only a few hundred dollars per year, it will add up to thousands of dollars after several years.

Don't forget about closing costs. Suppose these costs totaled $1,000. Without factoring the tax impact from equity loan interest deduction, you have spent $1,000 plus the difference in interest cost from the minimum withdrawal and your investment. An emergency fund should cover about three to nine months worth of living. You need to determine what percentage of the emergency funds these costs represent.

Home equity loans expire
Another potential issues is not being able to withdraw from the line after a certain amount of time. If this is the case, you are going to have to pay off your first line when it expires, and then take out a new one in order to continue to have emergency funds available.

Star Loan Services offers a wide variety home equity loans. We will help you find a loan with minimal closing costs, interest fees, prepayments penalties and draw requirements, so that you can obtain the emergency funds that you need. 

In conclusion, utilizing a home equity line for this purpose is going to take financial discipline. It is not going to be easy for anyone to not be tempted to use the money for impulse purchases. If you currently have problems keeping tabs on your finances, then you probably should not consider utilizing a home equity loan for emergency reserve funds.

We invite you to contact us. We will analyze your current situation and help you determine what your best course of action is. Or, you can fill out a free, no obligation request for an equity loan without having your credit checked.




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