Creating a Cash Emergency Reserve from Your Home’s Equity

No one knows what the national economy will be like after the Covid-19 virus pandemic is contained. However, based on the history of past recessions, it could be a very scary economy, with high unemployment, slow growth and mass foreclosures.

To offset this, many homeowners are now creating bank accounts in amounts deemed sufficient to get through the hardest periods of the recession. To do this, they are cashing out stocks, funds and other assets. And, they are applying for cash-out refinance mortgages to tap built up equity in their homes.

The accounts are specifically intended to be used only in the most severe emergencies and normally are in amounts equal to 6 to 12 months of known home expenses.

The idea is to maintain the accounts as a last-gasp liquidity source, and eventually to return net amounts to the home’s equity when the economy is back in order. This done by making a prepayment on the mortgage.

To get a cash-out refi, the home owner must have at least 20% free equity in his or her home. The best cash-out programs fund up to 80% of the home’s value. The more equity you have over 20% of value, the more cash you get. The loans offer the same rates as those for other purposes, such as purchases and straight refis. In most cases, a new appraisal is required and closing costs are incurred. Most lenders offer loans with no financing costs (“points”), but all the costs are able to be paid from loan proceeds.

An important reminder: to obtain a cash-out mortgage, you must be employed. Creating an emergency account requires forward planning. Also, it is smart to shop for the best possible rate for the cash-out refi. The closer you can get to a monthly payment equal to your current one, the better off you will be.

All Credits Mortgage is a Virginia mortgage company

( We have many cash-out refi mortgages that we can tailor to your needs.)