According to this article over at Yahoo Finance –
Morgan Stanley told thousands of clients this week that they will not be allowed to withdraw money on their home-equity credit lines…
When things get tight, many people tap into their home-equity credit lines for a bit of extra cash. But, what happens when the bank refuses to let them borrow any more money? It looks like some Morgan Stanley customers are going to find out.
Personally, I don’t rely on credit. Instead, I have cash set aside, in my emergency fund. When life throws me a curve-ball, I’m ready for it.
Those of us who choose to keep a portion of our net worth tied up in cash are often criticised. The critics ask, “Why don’t you put that money to work, instead of just letting it sit there?”. I let it sit there because it provides security for my family. I can get to it whenever I need it. And, I don’t have to rely on a lender to bail me out of trouble.
That is a very interesting piece of information. I for one have never believed in using credit such as a HELOC as the sole source of emergency funds. It is important to be completely liquid in an EF, and keeping that money in a high-yielding account (especially if it offers ATM access) enables one to access those funds–or a portion–immediately. I completely agree with your security assessment, and ease of access as long as the money is still working for you by earning interest.
A while back I wrote a post about this same topic with the intention of making others aware of the necessity of having a well-funded emergency fund:
http://letsblogmoney.com/2008/06/13/emergency-funds-a-vital-part-of-any-financial-plan/
I find that even if you don’t ever have to access it, there is no harm, since the interests just compounds over time and creates even more of a cushion should the time come when it is necessary to withdraw against the account.
Wow, that is scary. That really makes you wonder exactly what it looks like on their books if they lack the solvency to allow people to pull on their helocs.
No doubt having cash on hand is absolutely a good idea for emergencies but in regards to holding cash itself versus having it in the bank; the truth be told if FDIC insured banks start failing cash wont be worth squat either…
That’s exactly it…don’t let ANYONE ELSE be responsible for any part of your financial success. Think about Social security. Think about defined-benefit retirement plans. Those are always subject to financial and/or political pressures. Now…think about a 401k or an IRA. It is YOURS and no-one can take them away from you (outside of raising taxes).
This makes sense to me and I think it reflects good on the company not bad. I think the company would be crazy to let people borrow against their houses when the value of the house (sthe ecured asset) may be going down. Until they can feel that the money they lend out is properly secured they arwe making a good choice. OF coures this will stunt thier ability to gain interest off new HELOCs but it will save their tails is thing home prices drop further.
I agree. Plus the last thing I’d want to worry about in an emergency would be how to pay a loan.
I do not have a Home Equity LOC. I thought about getting one but now I am glad I didn’t. I know that whatever money I’ve saved for an emergency will be there when I need it.
You know I was just talking to someone about money merge accounts and I brought this up as a possibility… If you were doing a money merge type thing, you would be in a heap of trouble if your HELOC got froze…
That’s really scary. Our economy is in real trouble, it seems. Home equity isn’t real wealth, so it shouldn’t be depended upon. Cash isn’t real wealth either as it does not contain any intrinsic value and cannot be swapped for anything except another dollar bill. If we ever had a real emergency, cash probably wouldn’t be as much value as it is today. I think people need to start thinking about making more serious preparations for emergency.
I’ve been there alright, and it IS scaryt! Our 2nd mortgage is a maxed out HELOC for $72k, When i got into personal finance last year, I started researching ways to save more money, in particularly w/ our Heloc at 9%.
We re-fi’d for only $50, and since it’s variable, we’ve gotten it down to about 5%! BUT, because i wanted to save even more, we started applying ALL our money towards it…all paychecks, savings, emergency funds, etc. We figured we’d save a good 5% on $10k each month since we were putting so much money against it.
Well, it worked for a good 4 months saving us hundreds of dollars, but then we got that dreaded letter telling us they FROZE OUR HELOC! within 24 hours all $10k we had applied to it was “lost” and we couldn’t get it back to pay bills, etc. I say “Lost” only because we can’t touch it anymore, but it basically decreased our mortgage so we didn’t really lose anything.
Wow, this is a lot longer than i intended to write – sorry about that. Just beware if you’re working on something wonky w/ HELOCS….every now and then something crazy can happen 🙁
Is it even legal to freeze a HELOC? I mean if you have the equity (and can prove it with an independent appraiser), shouldn’t you have access to it?
This must be reason #572 on the list of why one should not pay off their mortgage before investing. At least if you invest your money (with a conservative asset allocation), you’ll be able to get it if you need it.
I just read the article in more detail. It sounds like they told people that they couldn’t access their HELOC because their home dropped in value. Perhaps these thousands of people no longer have any equity to withdraw. If that’s the case, I don’t blame the bank.
When you say you keep your emergency fund in cash, do you mean in actual cash (like in a coffee can in the backyard?), or do you mean in a savings account like ING?