Why cash comes first
Savings in a bank account are there the moment you need them. They don't require approval, don't add a monthly payment, and don't use your home as collateral. If you lose income, cash is often what keeps you current on your mortgage.
Borrowing against your home when money is tight can make a hard stretch harder. You'd be adding a payment at the very time your budget is under pressure.
How much to save
A common guideline is three to six months of essential expenses. Some households aim higher, for example if income is irregular or one income supports the family. Start with what you can, even one month, and build from there.
- Mortgage or rent, utilities and insurance
- Food, transportation and childcare
- Minimum payments on other debts
- Medical costs you'd likely face
A HELOC as a backup line
A home equity line of credit is a revolving line you draw from as needed. If you don't use it, it may cost little or nothing beyond any fees the lender charges. That makes it a possible backup behind your cash savings.
There are catches. HELOC rates are usually variable, so the payment can rise. Payments can also jump when the draw period ends. And a lender can freeze or reduce a line in some situations, such as a drop in home values or a change in your finances, which is often when you'd want it most.
A home equity loan for known costs
A home equity loan pays a lump sum at a fixed rate, with the same payment each month. You start paying interest on the full amount as soon as it closes. That makes it a better fit for a known, larger expense, such as a roof replacement or paying off higher-rate debt, than for money you may never touch.
CapCenter offers fixed-rate home equity loans from $50,000 to $250,000 with ZERO Closing Costs (restrictions apply). CapCenter does not offer HELOCs.
Risks to weigh
- Your home secures the loan. Falling behind can put it at risk.
- More debt raises your debt-to-income ratio, which can affect future borrowing.
- If home values drop, you may owe more relative to your home's value.
- Easy access can make it tempting to borrow for things that aren't emergencies.
A balanced approach
Many households build a cash cushion first, then decide whether a backup line makes sense. If you're facing a large, specific cost now, compare a home equity loan, a cash-out refinance and your savings side by side before you choose.
