A few weeks ago I read an article at Life and My Finances titled, “Should You Pay off Your Mortgage or Build Your Emergency Fund?” Derek has one of the best-run PF blogs in the western hemisphere, but this particular article was written by guest writer Evan – so I have no problem challenging it.
Here is the question at hand:
Let’s say you have a sum of money. You could have saved it, received it from an inheritance or won the lottery. How you got the money does not matter, in this post we will look into what you should do with it. Obviously you should save/invest the money for your future, but how? Many people ask whether they should pay off their mortgage early or opt to build an emergency fund. This question is asked time and time again. If you ask 50 different people you will get 50 different answers.
Evan is correct. If you ask 50 different people you will get 50 different answers. Not because it’s a tricky situation, but because 49 of the people will be donks and the 50th person will be me.
There are some great points in the article on the pros and cons of paying down the debt and building the emergency fund. If you’re a Dave Ramsey fan, which I’m not, you obviously beat your meat to the idea of being debt free. At the same time, given our uncertain economy, isn’t it best to keep your funds liquid for possible emergencies?
Evan thinks so. Most people in the comments think so.
But I don’t.
Your Emergency Fund Can “Suck It”
Here is what you should do if you receive, have saved, or win a large chuck of change and are stuck in the given scenario:
- Pay off the mortgage
- Open a Home Equity Line of Credit
- Save and invest
Everyone wants to pay down the mortgage but is paralyzed by the same thought.
What if something happens? What if I lose my job? What if there’s an emergency?
Let’s assume the amount you have is $100k. What the f*@# kind of emergency is going to cost $100k?
You could make the argument of long-term care being THAT expensive, but if you’re THAT old you’re not going to be in this debt-provoking predicament.
Let’s assume the amount you have is $40k. What the f*@% kind of emergency is going to cost $40k?
Should I keep going? Maybe it’s just me but the largest check I’ve ever written was for $4000. It was for Lasik surgery – hardly an emergency. It’s who I have to thank for seeing these personal finance issues so clearly.
Remember that losing your job doesn’t mean losing all your income. Our generous government will provide some cash until you get back on your feet. If that runs out, you can simply spew out Dave Ramsey-style advice on your newly created PF blog and earn side income, right?
Liquidity Is For Losers
Since I’m always looking to maximize the return on my money, paying down the mortgage (right now) seems like the best scenario. You’re no longer making payments to the bank, which gives you ~4% return. Only rate higher belongs to Greek Bonds paying 70%. Good luck with those…
By opening up the HELOC, you are now covered for any uncertainties. If the roof caves in or little Timmy breaks his arm, dip into the HELOC. Now you’re paying the same interest (if not less) on this portion as you would have been via the mortgage. If nothing happens, the HELOC won’t cost you a thing (w/ most lenders).
I won’t always suggest HELOCs as a viable option, but in this low interest environment, they are golden. They provide a combination of flexibility and peace of mind.
What would you do?