Emergency Fund or Adjustable HELOC
Question: I have an adjustable HELOC which was used to pay the 20% payment down on my fixed rate mortgage. It has gone from 6.5% to 8% in less than a year and will be credit-card-like shortly. The cap is 18%, i.e. a very bad credit card. I am still recovering from the home purchase and do not have a decent emergency fund (< $1000). If I were to lose my job I would have to sell the house immediately. Given that, I’ve run some numbers and found that I could manage to pay the HELOC off in two years, but it would leave little to build an emergency fund. It would be nice to pay down the HELOC before its rate gets much higher. What do you think? Should I try to pay down the HELOC ASAP or focus on building an emergency fund. A six month fund will probably take a couple years to build.
Answer: If this is a home equity line of credit and not a home equity loan, can’t you take the money back out of the HELOC later if you need it?
If you can, I’d build a six _week_ emergency fund and then pay down the HELOC as fast as you can. No sense paying interest the money when you don’t need it.
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