Home Equity Loans Are Not Ideal for Emergency Savings Needs

It is recommended by many financial experts that you have some form of emergency savings in place in case the unexpected happens. These can be things like emergency medical expenses, accidents, and any other unexpected expenses that may arise during the course of everyday life. When you have emergency savings you will be better prepared to meet any financial emergency with ease and less stress and panic. But, what is the best course of saving for an emergency? There are certainly some dos and don’ts that you should be aware of that can save you money in the long run.

When it comes to saving for emergencies, homeowners may be particularly vulnerable to some of the things you shouldn’t do, such as using a home equity loan or line of credit for emergency savings. Using this method can be costly and have a negative effect on your credit report. By taking out more debt you are increasing your debt to income ratio and creditors see that as a red flag. You are also acquiring more debt which can be detrimental to your budget if you do not have the finances to repay the loan. You are basically using your home as collateral and the lender has the right to take your home if you cannot pay the debt owed to them.

It is better to open up an interest bearing savings account and steadily build funds this way for emergencies. With a savings account, you have better control over your finances and do not have to worry about repaying loans because this is money that you have at your disposal, plus whatever you have gained in interest on it. Some financial experts even recommend that you have at least six months worth of your regular income saved up in case of emergencies. By having at least six months of your regular income in savings, you have this source of income to draw from in case of job loss or other financial disaster beyond your control.

Taking out a home equity loan or line of credit is not recommended by financial experts because of the disadvantages this can have on you, your finances and ultimately your credit score. The best financial advice is preparation. Do plan for financial emergencies in advance by putting away a certain percentage of your income biweekly, or each month. Make sure that you put your money in a savings account where you can accrue interest and do not touch this money except in case of emergencies. When the emergency is over, make sure that you replace the income used as soon as possible so that it will always be there for you when you need it.

As a homeowner you probably have many financial obligations to yourself and your family. Making sure that you provide for their needs in advance is not only a wise decision, but it can save you from financial turmoil and disaster in the wake of an emergency or financial crunch.

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