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Posted 06/28/2006

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Two Simple Ways To Create Instant Liquid Reserves And Protect Against Foreclosure

According to Bankrate.com, while most people had money in a liquid account somewhere, only 39% had enough liquid money to last through three months of living expenses.

If we know that 39% of Americans do have three months of savings, then we can reason that 61% of Americans don't.

Now, as a mortgage guy, I find "3 months" to be a coincidental time period.

3 months is the same amount time in which a homeowner can go from being on-time to on the auction block.  3 months of non-payment gives a lender the legal right to foreclose.

The Bankrate.com article talks about the need for liquidity in times of crisis so let's look at two common crises because of accidents:

  1. Minor medical problem (short-term disability)
  2. Major medical problem (long-term disability)

I am purposefully omitting other losses of income including job loss, or quitting because the former often carries a severance, and the latter is often a planned change for which money is saved as a cushion in advance.  And we've covered divorce once already.

Accidents are called accidents because they are unplanned.  Nobody plans to roll-over their SUV, develop cancer, contract a staph infection, or lose a limb while sporting.  These things just happen to people -- ready or not.  When they do, life gets very expensive.

See, medical insurance covers most medical bills, but not everything.  And disability insurance may not fully re-instate income levels to pre-accident levels.  Liquid funds are what is used for handling full-time nursing care, or retrofitting a home for the disabled, etc.

It's a fact that 1 in 4 people will face a medical problem in their lives that renders them unable to work for at least three months.  That means that 15 percent (61% * 25%) of people completely deplete their reserves and face foreclosures just because they got sick or injured.

Whether you currently have emergency reserves or not, there are a two cautionary steps you can take as a homeowner to protect yourself.

The first step is to create a cushion by opening a Home Equity Line of Credit.  A HELOC gives you the ability to write a check against your existing home equity at any time.  The rates can be higher than on other mortgages, but when a crisis hits, the interest rate sn't so important.

Often, opening a HELOC is free and they tend to carry annual fees of less than $100.  $100 is a small price to pay for an insurance policy against disaster.

The second is to consider disability insurance beyond what is offered at work.  Talk with your personal insurance agent to see if you are a good candidate.  If you don't need it, your agent will tell you, so it's a call worth making.  Again, the goal here is to protect your income and your home.

And the best time to take action is now.

When a person doesn't appear to be a risk, banks and insurance companies will bend over backwards for their business.  When they're sick or injured, however, not so much.

61% of Americans are in a danger zone, but all Americans should be concerned about "accidents".  With careful planning, the collateral damage on yourself and your family can be minimized.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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