Let me say that again: Your home equity line of credit (HELOC) is NOT your emergency fund.
Even in the good times, but particularly when the times are tough, you want an emergency fund that is cold hard cash. Even if the bank where you’re keeping the cash gets taken over, FDIC insurance will cover $100k per depositor (as long as the bank was FDIC insured).
An emergency fund that’s credit of any kind isn’t really an emergency fund at all. It’s an emergency possibility, but not something you can count on. A credit card’s limit can be lowered at any time for any reason. A HELOC can be lowered or frozen.
For example, you could lose your HELOC if:
Your house’s price goes down and your equity decreases.
You lose your job (and therefore need the emergency fund) and are no longer a good credit risk.
You do something which lowers your credit score and your
Even if your house is in an area where prices aren’t going down, you’ve got great credit, etc, your bank may still freeze your HELOC (fortunately, Nina’s wasn’t her emergency fund). That’s in the best of circumstances. Their reasons may not even have anything to do with you, they may be cutting back on their HELOCs everywhere because the bank is in trouble.
You may counter, “But the HELOC is essentially my money, since I put that money into equity!”
Sorry, it’s not. In your original mortgage, your bank bought the house and decided to sell it to you in installments. When it gives you a HELOC, the bank essentially buys back part of your house that it’s already sold you and sells it to you again.
In good times, banks like this because they get to sell you the same thing twice and make interest on it both times. But it’s completely up to the bank whether or not they want to buy and resell your house. You can’t make them buy part back the same way you can’t make anyone else buy your house.
Don’t count on being able to use your home equity, ever. If you have a HELOC available and choose to use it in an emergency, that’s your decision. You just can’t plan on it being there when you need it most. In fact, the circumstances in which you’ll need it most may be the exact circumstances in which you lose it.
If you don’t have a cash emergency fund already, start one today. It doesn’t have to begin with some dramatic step. If you don’t have $1000 or the money to cover 3 months living expenses, start snowflaking it today. Because credit is just potential money.