COVID-19 is not only sending millions of Americans into panic mode but battering the stock market, shuttering small businesses left and right, and causing countless workers to lose their paychecks. And with health experts warning that the current situation could last for months, that's seriously bad news for those who don't have enough money in the bank to tide them over while they're forced to go without an income.
And to be clear, a large number of Americans lack emergency savings in a very big way. In fact, an estimated 39% don't have the cash reserves on hand to cover a mere $400 expense, let alone several months' worth of bills.
If you're without a paycheck or savings, it's natural to panic. But before you do, remember that you may be able to use your home as a source of income when you need to.
Tapping your home equity
If you have equity in your home, you're not automatically out of luck during this financial crunch: You may have the option to take out a home equity line of credit (HELOC) and use it to cover your expenses in the near term until you're able to work again.
With a HELOC, you don't borrow a lump sum upfront (that's a home equity loan). Rather, you get approved for a line of credit that you borrow against as needed.
HELOCs are fairly easy to qualify for. The reason? Your home is used as collateral to secure that loan. In other words, if you don't repay your HELOC as per your lender's requirements, your lender can force the sale of your home to be made whole. Obviously, that's not what you want. But the upside of a HELOC is that you don't need great credit to qualify; you just need the equity in your home to be there.
Why a HELOC over a home equity loan? Both are viable borrowing options, but a HELOC is more flexible because rather than borrowing a lump sum, you get access to a line of credit that you borrow against as you need to. With this setup, you don't get stuck making payments -- and paying interest -- on a sum you don't really need.
In other words, if you're borrowing against your home to pay bills, you may not be sure how long you'll have that need. If you take out a $15,000 home equity loan, you'll be put on a repayment schedule based on that total sum. If you take out a $15,000 HELOC and only draw down $10,000 of it, you'll only need to repay $10,000.
The economic situation in the U.S. is growing increasingly dire by the day. With small businesses closing their doors, retailers pausing operations, and food establishments losing much, if not all, of their customer base, it's safe to say that a large number of Americans will face financial struggles for the foreseeable future.
If you own a home you have equity in, tapping that equity could be your best bet for staying above water. And if you're worried about paying your mortgage because your income has been slashed, reach out to your lender -- many are offering relief at a time when the country is deep in crisis mode.