What to do with extra cash each month?

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smalliebigs
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What to do with extra cash each month?

Post by smalliebigs » Tue Jun 04, 2019 10:17 pm

Due to some smart investing in real estate, my family will be getting around $1,500 more each month. I'd like your opinion on what to do with this, please.

MFJ, both 31 years old.
$100,000pa salary
Wife is SAHM
2 year old toddler
15-year mortgage @ 3.25% with 13 years remaining

401k: I am maximizing the match by putting in 10 % of my salary
Roth IRA: we have been putting in the max each year (myself and spouse), and we already have next year's $12,000 ready in a taxable VTSAX.
HSA contributing to the limit
$10,000 in 529
$10,000 in emergency funds
Total investments are just under $140,000.

For the time being while I research options, I've changed the contribution limit of my 401k to 25% so that I can reach the $19,000 limit for the year.

I could alternatively pay extra principal into my mortgage so it ends in 7 years. But the effective rate is only 2.8%, which is kind of not worth it.

I could alternatively keep my 401k contribution level at 10%, and just throw the extra money in taxable total stock market. This will probably allow for some flexibility and help with early retirement planning, or help to save up for some travel, spending, etc.

Putting it in 529 doesn't seem like a very attractive option compared to the other idea above.

Or what else...?

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Tyler Aspect
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Re: What to do with extra cash each month?

Post by Tyler Aspect » Tue Jun 04, 2019 10:29 pm

International stock ETFs can be situated in a taxable account. Ticker symbol IEFA or VEA are some of the typical choices from IShares and Vanguard.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

MotoTrojan
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Re: What to do with extra cash each month?

Post by MotoTrojan » Tue Jun 04, 2019 10:51 pm

Tyler Aspect wrote:
Tue Jun 04, 2019 10:29 pm
International stock ETFs can be situated in a taxable account. Ticker symbol IEFA or VEA are some of the typical choices from IShares and Vanguard.
I prefer IXUS or VXUS for broader coverage.

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BL
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Re: What to do with extra cash each month?

Post by BL » Tue Jun 04, 2019 11:13 pm

Good idea to get 19k into 401k and max Roths for both of you, and save for an emergency fund of 6 months of expenses.

Not that it probably affects your decision very much, but I question whether much or any of your mortgage is deductible. How much in deductions do you have beyond the current 24,000 Standard Deduction?

TexMexIndex
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Re: What to do with extra cash each month?

Post by TexMexIndex » Wed Jun 05, 2019 4:08 am

My priority:
1. Max out 401K
2. Max out IRA


After that I would throw money at the mortgage or throw it in taxable index to grow wealth long term.

Make sure you are traveling some, helping some, and enjoying life too.

Topic Author
smalliebigs
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Re: What to do with extra cash each month?

Post by smalliebigs » Wed Jun 05, 2019 7:31 am

Tyler Aspect wrote:
Tue Jun 04, 2019 10:29 pm
International stock ETFs can be situated in a taxable account. Ticker symbol IEFA or VEA are some of the typical choices from IShares and Vanguard.
Why international, though? Just for diversification?

BL wrote:
Tue Jun 04, 2019 11:13 pm
Good idea to get 19k into 401k and max Roths for both of you, and save for an emergency fund of 6 months of expenses.

Not that it probably affects your decision very much, but I question whether much or any of your mortgage is deductible. How much in deductions do you have beyond the current 24,000 Standard Deduction?
Sorry, I'm confused. Is there now a limit to the amount of mortgage interest that can be deductible?

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BL
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Re: What to do with extra cash each month?

Post by BL » Wed Jun 05, 2019 8:09 am

smalliebigs wrote:
Wed Jun 05, 2019 7:31 am
Tyler Aspect wrote:
Tue Jun 04, 2019 10:29 pm
International stock ETFs can be situated in a taxable account. Ticker symbol IEFA or VEA are some of the typical choices from IShares and Vanguard.
Why international, though? Just for diversification?

BL wrote:
Tue Jun 04, 2019 11:13 pm
Good idea to get 19k into 401k and max Roths for both of you, and save for an emergency fund of 6 months of expenses.

Not that it probably affects your decision very much, but I question whether much or any of your mortgage is deductible. How much in deductions do you have beyond the current 24,000 Standard Deduction?
Sorry, I'm confused. Is there now a limit to the amount of mortgage interest that can be deductible?
No, not a limit, but the standard deduction was increased to 24,000 for MFJ last year with the new law. In order for you to benefit from separate deductions, your total for mortgage interest, some State And Local Taxes (SALT) up to $10,000, charitable giving, and medical costs (that exceed 10% of your Adjusted Gross Income), and possibly a few other things (although a few extras were eliminated with the new law), would have to exceed $24,000 for the year for it to be better than the standard deduction. Only the amount higher than 24,000 makes a difference in your income taxes.

3funder
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Re: What to do with extra cash each month?

Post by 3funder » Wed Jun 05, 2019 9:23 am

Invest in VTIAX in your taxable account. That, or contribute more to your child's 529 account. The 529 is probably a better deal. Or, if you wish to cover all bases, you could split the leftover money three ways:

$500 -- Emergency Fund
$500 -- VTIAX
$500 -- 529
Last edited by 3funder on Wed Jun 05, 2019 9:25 am, edited 1 time in total.

Topic Author
smalliebigs
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Re: What to do with extra cash each month?

Post by smalliebigs » Wed Jun 05, 2019 9:24 am

I see. So if I accept the $24,000 standard deduction, then I won't get the mortgage interest deduction, then?

profet
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Re: What to do with extra cash each month?

Post by profet » Wed Jun 05, 2019 9:27 am

smalliebigs wrote:
Wed Jun 05, 2019 9:24 am
I see. So if I accept the $24,000 standard deduction, then I won't get the mortgage interest deduction, then?
Its an 'OR' situation. You either itemize or take the standard deduction.

If, when you itemize, your deductions are over $24k, then you submit an itemized list for deductions.
If not, then you just take the standard deduction.

Topic Author
smalliebigs
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Re: What to do with extra cash each month?

Post by smalliebigs » Wed Jun 05, 2019 9:29 am

profet wrote:
Wed Jun 05, 2019 9:27 am
Its an 'OR' situation. You either itemize or take the standard deduction.

If, when you itemize, your deductions are over $24k, then you submit an itemized list for deductions.
If not, then you just take the standard deduction.
I see. Thank you. So my mortgage interest is effectively 3.25%, then.
3funder wrote:
Wed Jun 05, 2019 9:23 am
Invest in VTIAX in your taxable account. That, or contribute more to your child's 529 account. The 529 is probably a better deal. Or, if you wish to cover all bases, you could split the leftover money three ways:

$500 -- Emergency Fund
$500 -- VTIAX
$500 -- 529
A lot of people have suggested international. Is this purely for the foreign tax credit?

3funder
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Re: What to do with extra cash each month?

Post by 3funder » Wed Jun 05, 2019 9:34 am

smalliebigs wrote:
Wed Jun 05, 2019 9:29 am
profet wrote:
Wed Jun 05, 2019 9:27 am
Its an 'OR' situation. You either itemize or take the standard deduction.

If, when you itemize, your deductions are over $24k, then you submit an itemized list for deductions.
If not, then you just take the standard deduction.
I see. Thank you. So my mortgage interest is effectively 3.25%, then.
3funder wrote:
Wed Jun 05, 2019 9:23 am
Invest in VTIAX in your taxable account. That, or contribute more to your child's 529 account. The 529 is probably a better deal. Or, if you wish to cover all bases, you could split the leftover money three ways:

$500 -- Emergency Fund
$500 -- VTIAX
$500 -- 529
A lot of people have suggested international. Is this purely for the foreign tax credit?
Re: International

No; it is not purely for the foreign tax credit. In fact, I don't factor that into my decision making at all. For me, it is about diversification and valuations.

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willthrill81
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Re: What to do with extra cash each month?

Post by willthrill81 » Wed Jun 05, 2019 9:34 am

smalliebigs wrote:
Wed Jun 05, 2019 9:29 am
profet wrote:
Wed Jun 05, 2019 9:27 am
Its an 'OR' situation. You either itemize or take the standard deduction.

If, when you itemize, your deductions are over $24k, then you submit an itemized list for deductions.
If not, then you just take the standard deduction.
I see. Thank you. So my mortgage interest is effectively 3.25%, then.
Considering that you've already taken full advantage of tax-advantaged accounts, paying down the mortgage is a very viable option. A guaranteed after-tax return of 3.25% is hard to come by these days.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
smalliebigs
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Re: What to do with extra cash each month?

Post by smalliebigs » Wed Jun 05, 2019 9:36 am

Well, my 401k is only saved up to my company match up to now. There's effectively $9,000 still up for grabs, potentially.

CommitmentDevice
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Re: What to do with extra cash each month?

Post by CommitmentDevice » Wed Jun 05, 2019 10:39 am

Well done with your family's financial position! :beer
Maxing out retirement or paying down mortgage both seem like good options to me.
If I were in your shoes, I think I'd put the extra money into the mortgage.
  • You'd be effectively earning a 3.25% return
  • You'd be (indirectly) building your emergency fund by increasing your home equity and you could use a home equity line of credit as an extra source of emergency cash.
(Dear Bogleheads - My read is that a $10K EF is a bit low. Do you think that paying down a mortgage a valid way of growing it?)

Topic Author
smalliebigs
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Re: What to do with extra cash each month?

Post by smalliebigs » Wed Jun 05, 2019 11:14 am

If I were to put an extra $1,000 into my mortgage, it would end in 2026, from amortization calculations. That seems quite an interesting prospect

anon_investor
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Re: What to do with extra cash each month?

Post by anon_investor » Wed Jun 05, 2019 12:21 pm

smalliebigs wrote:
Wed Jun 05, 2019 9:36 am
Well, my 401k is only saved up to my company match up to now. There's effectively $9,000 still up for grabs, potentially.
If you are not maxing out your 401k yet, you definitely should. Personally would max out all my tax advantaged buckets before even thinking about extra mortgage payments/taxable investments, especially since it sounds like you do not have a current cash flow problem.

Your emergency fund seems a little low, does that cover 6 months of expenses, you might want to contribute a little towards that monthly to build it up.

You mentioned that you were keeping your future IRA contributions in VTSAX, it is probably better to just contribute a little every pay check next year, since there is a chance that your VTSAX in your taxable account may have capital gains, which would be a taxable event if you were to sell to have money to make your IRA contributions.

After you max out your 401k, and since you max out your IRAs already, if you get a state tax deduction on the 529 plan, you should max out to at least that amount. Once you have done all that, you could split the remaining amount (if any) 50/50 between paying extra to your mortgage/taxable investments. I personally feel that while paying extra to a mortgage is great, that money becomes locked down in the home equity and less liquid than a taxable investment account, in the event you needed money for something (another reason to beef up your emergency fund).

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smalliebigs
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Re: What to do with extra cash each month?

Post by smalliebigs » Wed Jun 05, 2019 1:24 pm

Actually, I feel like my 3 month's worth of income is a decent level of emergency funds. In a true, true emergency, we can still draw from the rIRA, credit cards, my wife's savings, etc. And my job is pretty stable, so I don't have any worries there.

I feel like the 529 is a low end of scale for priority, but that definitely is an option.

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Wiggums
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Re: What to do with extra cash each month?

Post by Wiggums » Wed Jun 05, 2019 1:40 pm

Maxing out retirement or paying down mortgage both seem like good options to me.

Regarding an emergency, Once you take money from your Roth, you can’t put it back in. I don’t personally like that option.

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Duckie
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Re: What to do with extra cash each month?

Post by Duckie » Wed Jun 05, 2019 6:20 pm

CommitmentDevice wrote:Dear Bogleheads - My read is that a $10K EF is a bit low. Do you think that paying down a mortgage a valid way of growing it?
No. Reducing the mortgage is not going to help if there is an emergency. What's he going to do, sell the house? With a toddler and non-earning wife I think he does need to double his emergency fund (although in an extreme pinch he could use the Roth IRAs).

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willthrill81
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Re: What to do with extra cash each month?

Post by willthrill81 » Wed Jun 05, 2019 6:44 pm

smalliebigs wrote:
Wed Jun 05, 2019 1:24 pm
Actually, I feel like my 3 month's worth of income is a decent level of emergency funds. In a true, true emergency, we can still draw from the rIRA, credit cards, my wife's savings, etc. And my job is pretty stable, so I don't have any worries there.

I feel like the 529 is a low end of scale for priority, but that definitely is an option.
In most situations I've seen, it doesn't make sense to contribute to a 529 plan unless you've already maxed out all other tax-advantaged accounts available to you.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

CommitmentDevice
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Re: What to do with extra cash each month?

Post by CommitmentDevice » Wed Jun 05, 2019 6:46 pm

Duckie wrote:
Wed Jun 05, 2019 6:20 pm
CommitmentDevice wrote:Dear Bogleheads - My read is that a $10K EF is a bit low. Do you think that paying down a mortgage a valid way of growing it?
No. Reducing the mortgage is not going to help if there is an emergency. What's he going to do, sell the house? With a toddler and non-earning wife I think he does need to double his emergency fund (although in an extreme pinch he could use the Roth IRAs).
You're probably right but help me understand where my logic is flawed. My thinking is that if the OP pays down his mortgage more aggressively, he increases his home equity. A HELOC is a loan against that equity, and more equity means a larger line of credit which could be drawn upon in an emergency. Ergo, paying down the mortgage has the same net effect on financial resilience as a contribution to an emergency fund, just with the bonus of reducing accumulating interest on the loan.

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willthrill81
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Re: What to do with extra cash each month?

Post by willthrill81 » Wed Jun 05, 2019 6:49 pm

CommitmentDevice wrote:
Wed Jun 05, 2019 6:46 pm
Duckie wrote:
Wed Jun 05, 2019 6:20 pm
CommitmentDevice wrote:Dear Bogleheads - My read is that a $10K EF is a bit low. Do you think that paying down a mortgage a valid way of growing it?
No. Reducing the mortgage is not going to help if there is an emergency. What's he going to do, sell the house? With a toddler and non-earning wife I think he does need to double his emergency fund (although in an extreme pinch he could use the Roth IRAs).
You're probably right but help me understand where my logic is flawed. My thinking is that if the OP pays down his mortgage more aggressively, he increases his home equity. A HELOC is a loan against that equity, and more equity means a larger line of credit which could be drawn upon in an emergency. Ergo, paying down the mortgage has the same net effect on financial resilience as a contribution to an emergency fund, just with the bonus of reducing accumulating interest on the loan.
There are some 'experts' who agree with your line of thinking (i.e. use a HELOC as a portion of one's 'EF'), Karsten from Early Retirement Now being one of them. The issue you can run into with a HELOC is that if your home's value declines significantly, it may wipe out any equity you've accumulated, and the issuing bank may close the HELOC with little or no notice. This happened to many people in the last recession.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

LeftCoastIV
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Re: What to do with extra cash each month?

Post by LeftCoastIV » Wed Jun 05, 2019 6:55 pm

Considering that you've already taken full advantage of tax-advantaged accounts, paying down the mortgage is a very viable option. A guaranteed after-tax return of 3.25% is hard to come by these days.
Paying down a mortgage is great for sleeping well at night, but just recognize that it is an illiquid investment you are making. Sometimes people will compare the effective rate of paying down a mortgage (in your case, 3.25%) with something like a one-year CD that pays 2.5%. It's apples-to-oranges, because the only way to get the money out of the house is to use a HELOC, cash out refi, or sell the house. If you think you'll need the money in the next 5-7 years, I'd keep it in a liquid investment. But, I'd max out tax-deferred options like 401K, IRA, etc. before turning to the mortgage pay down.

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willthrill81
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Re: What to do with extra cash each month?

Post by willthrill81 » Wed Jun 05, 2019 7:06 pm

LeftCoastIV wrote:
Wed Jun 05, 2019 6:55 pm
Considering that you've already taken full advantage of tax-advantaged accounts, paying down the mortgage is a very viable option. A guaranteed after-tax return of 3.25% is hard to come by these days.
Paying down a mortgage is great for sleeping well at night, but just recognize that it is an illiquid investment you are making. Sometimes people will compare the effective rate of paying down a mortgage (in your case, 3.25%) with something like a one-year CD that pays 2.5%. It's apples-to-oranges, because the only way to get the money out of the house is to use a HELOC, cash out refi, or sell the house. If you think you'll need the money in the next 5-7 years, I'd keep it in a liquid investment. But, I'd max out tax-deferred options like 401K, IRA, etc. before turning to the mortgage pay down.
Good points.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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smalliebigs
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Re: What to do with extra cash each month?

Post by smalliebigs » Wed Jun 05, 2019 8:54 pm

Duckie wrote:
Wed Jun 05, 2019 6:20 pm
No. Reducing the mortgage is not going to help if there is an emergency. What's he going to do, sell the house? With a toddler and non-earning wife I think he does need to double his emergency fund (although in an extreme pinch he could use the Roth IRAs).
Seeing you putting it that way makes me realize that I really should increase my emergency funds a bit more.

rascott
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Re: What to do with extra cash each month?

Post by rascott » Wed Jun 05, 2019 9:15 pm

willthrill81 wrote:
Wed Jun 05, 2019 6:49 pm
CommitmentDevice wrote:
Wed Jun 05, 2019 6:46 pm
Duckie wrote:
Wed Jun 05, 2019 6:20 pm
CommitmentDevice wrote:Dear Bogleheads - My read is that a $10K EF is a bit low. Do you think that paying down a mortgage a valid way of growing it?
No. Reducing the mortgage is not going to help if there is an emergency. What's he going to do, sell the house? With a toddler and non-earning wife I think he does need to double his emergency fund (although in an extreme pinch he could use the Roth IRAs).
You're probably right but help me understand where my logic is flawed. My thinking is that if the OP pays down his mortgage more aggressively, he increases his home equity. A HELOC is a loan against that equity, and more equity means a larger line of credit which could be drawn upon in an emergency. Ergo, paying down the mortgage has the same net effect on financial resilience as a contribution to an emergency fund, just with the bonus of reducing accumulating interest on the loan.
There are some 'experts' who agree with your line of thinking (i.e. use a HELOC as a portion of one's 'EF'), Karsten from Early Retirement Now being one of them. The issue you can run into with a HELOC is that if your home's value declines significantly, it may wipe out any equity you've accumulated, and the issuing bank may close the HELOC with little or no notice. This happened to many people in the last recession.


I had an open HELOC through GMAC in 2008. They froze it.... could no longer access it.. so not a great choice for an EF.

rascott
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Re: What to do with extra cash each month?

Post by rascott » Wed Jun 05, 2019 9:21 pm

No way I'm paying down a 3.25% mortgage over putting more money in tax-advantaged accounts. The difference over 30+ years could well be huge. OP has stable job.... makes no sense. The mortgage payment isn't much of a risk at all.

CommitmentDevice
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Re: What to do with extra cash each month?

Post by CommitmentDevice » Wed Jun 05, 2019 9:29 pm

rascott wrote:
Wed Jun 05, 2019 9:15 pm
willthrill81 wrote:
Wed Jun 05, 2019 6:49 pm
CommitmentDevice wrote:
Wed Jun 05, 2019 6:46 pm
Duckie wrote:
Wed Jun 05, 2019 6:20 pm
CommitmentDevice wrote:Dear Bogleheads - My read is that a $10K EF is a bit low. Do you think that paying down a mortgage a valid way of growing it?
No. Reducing the mortgage is not going to help if there is an emergency. What's he going to do, sell the house? With a toddler and non-earning wife I think he does need to double his emergency fund (although in an extreme pinch he could use the Roth IRAs).
You're probably right but help me understand where my logic is flawed. My thinking is that if the OP pays down his mortgage more aggressively, he increases his home equity. A HELOC is a loan against that equity, and more equity means a larger line of credit which could be drawn upon in an emergency. Ergo, paying down the mortgage has the same net effect on financial resilience as a contribution to an emergency fund, just with the bonus of reducing accumulating interest on the loan.
There are some 'experts' who agree with your line of thinking (i.e. use a HELOC as a portion of one's 'EF'), Karsten from Early Retirement Now being one of them. The issue you can run into with a HELOC is that if your home's value declines significantly, it may wipe out any equity you've accumulated, and the issuing bank may close the HELOC with little or no notice. This happened to many people in the last recession.


I had an open HELOC through GMAC in 2008. They froze it.... could no longer access it.. so not a great choice for an EF.
I appreciate (and am persuaded by) the points made - thanks for helping me learn.

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