The Right Home Equity Strategy for Excess Cash

Some experts tout the wisdom of paying off your mortgage early. Others say it's better to stash excess cash in an emergency fund. How do you know which strategy is right for you?

Managing your personal finances can be like an extreme juggling act. There you are, trying to keep your current expenses paid, while simultaneously setting aside money for the future, absorbing unexpected challenges like car accidents and plumbing leaks, and spending occasionally on yourself. All this without dropping any of the balls in the air! As you deftly keep them airborne, expert advice is being tossed at you through email, your morning paper, the evening news, and Internet headlines. No wonder you're confused about how to manage your excess cash.

If you have money left over every month after you pay your bills, feed yourself, and put gas in the car, the first thing you should do is count your blessings. Next, decide which excess cash strategy works best for you: paying off your mortgage early, or building up your emergency savings fund. Each has its pros and cons.

Paying down your mortgage

If you make extra principal payments on your mortgage, you'll pay off your debt early, build your home equity more quickly, and save thousands in interest costs. But you'll also be tying up your money in your home, which is not a liquid asset. In the current lending environment, lenders aren't offering 100 percent home equity loans anymore. That means that if an emergency arises, you can only convert some of it into cash. And if you lose your job, you may not be able to convert any home equity into cash, because you won't qualify for the loan.

Saving for a rainy day

If you put that extra cash into a high-rate savings account instead of making extra principal payments, you'll have the money available if you need it. You'll also save enough to pay off the mortgage early, if that's your goal. But if spending is your weakness, that big savings account balance might never materialize.

Split the difference

There's one more option that's ideal for homeowners who don't like putting all their eggs in one basket. Let's say you have $400 to spare each month. Put $200 in a high-rate savings account, and pay an extra $200 on your mortgage. As an added measure, you might also consider opening a home equity line of credit now, so that it's in place in case financial disaster hits. Then you'll have access to liquid cash, as well as home equity funds. And, by making the extra principal payments on your mortgage, you'll be saving on your interest costs, too.

Regular investments in your mortgage, your deposit balance, or both, will vastly improve your financial situation in the long run. Of course, your circus act will continue, but eventually, it will be easier to manage.

Home Equity Loan Tips By: Catherine Brock