Should You Tap Your Heloc Before it's Frozen?

The home equity line of credit, or Heloc, is a wonderful thing: the best way of having liquid funds available in case of emergency you could possibly imagine. Your net worth might be tied up in your house, but that doesn't matter: if you have a Heloc, you can tap it at any time you like, just by writing a check. And best of all, so long as you don't tap the credit line, it's completely free: the opportunity cost is zero.

But now, as Barry Ritholtz points out, banks are having second thoughts:

Morgan Stanley, the second-biggest U.S. securities firm, told several thousand clients this week that they won't be allowed to withdraw money on their home-equity credit lines, said a person familiar with the situation.

The lesson, to Ritholtz at least, is clear:

If you have those HELOC checks your lender sent you -- AND YOU CAN AFFORD TO SERVICE THE LOAN -- then you better hurry up and use them before its too late!

Except the minute you write that check, the Heloc ain't free any more.

Are Helocs cheaper now than they have been in years? Yes. Most Helocs charge somewhere between a point below and a point above prime, which puts them in the 4% to 6% range. Even so, if you have a prime-rate Heloc and borrow $20,000, that'll cost you $1,000 a year. Money-market accounts are paying about 2.5% right now, so the net cost is about half that, or $500 a year.

Is it worth $500 a year to have that $20,000 sitting in the bank, just in case? Maybe it is. But remember that if and when rates start to rise, the Heloc rate is likely to go up significantly more quickly than the interest rate on your money-market account. $500 is likely the minimum annual cost of keeping that money in the bank; it could go significantly higher.

Oh, and one other thing: a maxed-out Heloc doesn't look good as far as your credit report is concerned. If you're juggling assets and liabilities, needlessly increasing your liabilities is not necessarily a bright idea.

So should you "tap that thang," as Ritholtz urges? I'd probably say no, so long as you have significant positive equity in your home. (That is, more than the amount of the Heloc.) Chances are, your Heloc won't be frozen. On the other hand, if your Heloc is large and your home equity is negative, borrowing the money now while you still can might be a sensible precaution. You're unlikely to find money that cheap anywhere else.