Take out equity:
If you are in a temporary situation where you can’t afford to pay your monthly bills for a short period of time and you do have some equity in your home, you can use some of your equity to cover you until your income is restored. If you have lived in your home for more then 10 years and only have one mortgage, chances are that you do have several thousand dollars in equity that you can easily borrow against.
If you do decide to take out a second mortgage to cover your temporary loss of income, be sure to have a plan. It is very important to have a clear and written plan, so that you stay on track. Consider the following example: Say you have an average income of $2500 per month and your monthly expenses come to around $2400 per month. One day you have an accident at work. The doctor tells you that you will not be able to work for 6 months. Workman’s comp informs you that they will only pay you $1000 per month and you have only $1000 in savings. What do you do?
Create an action plan:
The first thing to do is the figure out how much money you will need to survive the recovery period. You know that in about 3 weeks you are going to need about $400 to cover the first month’s expenses and about $1400 per month for the remaining 5 months. You also may want to figure in an additional buffer for extraordinary medical expenses that will most likely come up, like doctor and prescription co-pays.
1st Month | $500
2nd Month | $1,100
3rd Month | $1,100
4th Month | $1,100
5th Month | $1,100
6th Month | $1,100
Buffer | $900
Total | $6,900
In the above example I also figured I an additional $100 per month to cover the new loan you will be taking out. Once you have calculated the total amount that you will need to survive on, go to your local bank and apply for a 2nd mortgage, or a home equity loan. It is important to make sure not to borrow more then you need. If you have a lot of equity in your home your banker may encourage you to take out more money then you need. Do not let him persuade you, because you are only taking this loan out to get you over your current situation and the last thing you want to do is get your self deeper into debt if you don’t need to.
Once you have your loan money, STICK TO YOUR PLAN AND BUDGET! If you do, then after 6 months you will return to work and proceed with life as usually, with only a small additional monthly expense of $100 per month.
If the numbers don’t make sense then you will need to look at your other options and go from there.