When a Home Equity Loan is Good

Published December 3, 2007
[ From Lansing State Journal ]
Fearing a layoff? Prepare finances for jolt

John Waggoner
Gannett News Service

You can't help but notice the little signs at work that layoffs are coming. The closed-door meetings. The buzzards in your parking space.

The economy is slowing, and that means you need to be prepared. You need to make sure that your household can withstand the loss of income.

• Your first step: Make a rainy-day fund. Financial planners often recommend that you keep three to six months' worth of salary as an emergency fund. They're talking about the amount of money you need to pay your bills each month.
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Keep the cash in a money-market mutual fund or a bank money-market account. The average money fund yields just 4.2 percent, but you're not investing for the yield. You want access to your money whenever you need it.

• You also will need to reduce your expenses. Pay down your debts aggressively. Think of your debts as good debts and bad debts. Good debt is your mortgage, or any other loan that charges less than 6 percent in interest.

Bad debt is pretty much anything that charges more than 6 percent. A credit card balance that charges 18 percent interest? Bad debt.

• Consider taking out a home equity loan to get rid of your high-interest loans, if you don't have enough in savings to pay off the debt.

The catch: It's a lot easier to get a loan when you have a job. If you suspect you're going to be laid off, run to the loan office.

If you don't have a home equity loan available, cut up the card and stop making new charges on the account. Pay 5 percent of your balance this month. Pay the same amount each succeeding month.

• It could make sense to stop pouring money into your 401(k) plan and using it to pay down high-interest rate debt, said Kurt Brouwer, a Tiburon, Calif., financial planner. If your company matches your contribution, however, you should contribute at least enough to get the match.
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