Saturday, August 18, 2007

House Payoff versus Large Savings???

OMG. My best friend from childhood lost her job yesterday. Of course she was in the mortgage industry and did sub-prime loans. So these past 5-6 years she has been rolling in the money. Fortunately my nagging did some good. We're like sisters, she's an only and well I'm closer to her than my own siblings. We've known each other pretty much since birth.

What you say? In college my best bud use to be deeply in CC debt and ran up a ton of bills. However since she meet her boyfriend 3rd year in college, he cut up her CC and made her pay them all off. Since then she never abused CC again. I also nagged her about savings, starting her retirement, and putting money aside. So I told her how to invest her retirement money and stuff and got her turned onto coupons for makeup.

Anyway I was a bit worried but my nagging worked. She can live for 3 years at least at her current spending habits without changing a thing because of her money in the bank. A nice $100k. Yes! So while she'd rather not touch her savings, she can not work if she chooses.

I'm hoping she instead chooses to go back to school and retool her career. Right now what would have happened if she had followed Dave Ramsey's advice and put that $100k on her mortgage and only had 6 months of living expenses? Well she'd be desperate to find a job and her mortgage payment would still be there because her mortgage would not be paid off, only the amount of time shortened. Right now she's in the position of choosing a job. And pretty much any job she works at will supplement her savings, and she's getting unemployment. Plus her BF is picking up some slack on the household bills.

But what would most people do? Do they really pay off their homes? I realize we're in unique situation of buying $500k townhouses, but still money in the bank buys time to choose a job without stressing as much. I'd personally rather have 3 years of potential job hunting and retooling than going back to work within 6 months. Plus it's longer if you trim the budget.

How long could we live 6-12 months depending on how frugal we are. I'd really like to have more cash, but we keep spending our "savings" right now on school. It's eating up $30k/year which we would be saving otherwise.

Moral of the story? Stockpile cash until you can pay your mortgage in full, otherwise you tie up too my liquidity in the house. I guess overall it's personal choice. Will you choose to tap an EF for something like home repair or would you have saved cash and touch that and leave an EF basically for sacred things like death and job loss?


Boomie said...

If your best friend, who lost her job had paid off her mortgage, she would have 6 years spending money instead of 3. How many people who lose their jobs can not pay mortgage payment and eventually go into foreclosure and lose their homes? It is worse if u pay rent because landlord can evict you.
Sorry dear, but I am of the thought, that paying off a mortgage is #1. Just thunk if you didn't have a mortgage how much money you can put into savings?
I retired at 50 because I had no mortgage. Never mind another job...I don't have to work anymore!
Also, when you buy a house you should have a licensed engineer do a home inspection and find out what repairs need to be done BEFORE you buy. Yet, any repair, is an investment on the future sale of home. You get back your investment.

Living Almost Large said...

Boomie, mistake here, $100k will not pay off a $500k mortgage. NOT even close. So she's had 6 months of expenses say $20k and a $400k left on her mortgage at this point in time. would she be able to manage to live for 6 years?

Your formula only makes sense for people who can save enough proportionately to pay off their mortgage. In proportion she saved 20% of her mortgage.

So if a couple had $200k home they would have to have $40k. And their normal 6 month EF, say $10k, then how will they live for 6 years if they still have $160k to pay off?

That is the correct way to look at the problem. You like many others assume that the house is paid off, hence if you read correctly my post, I said the circumstances change if you have enough saved to pay your mortgage off in full.

Otherwise like my friend with the 35% DP, well if they lose their income they had better hurry and get another job. Because they still owe 60% of their house and only have 6 months of living expenses.

Gotta compare apples to apples boomie. You cannot compare someone with a paid for home versus a not. So those two friends are direct comparison. NOT a 50 year old woman with a paid for mortgage.

They are 28 and 30 and each have homes. One has $100k saved and the other $10k saved. But one owes say 78% of her house and the other 60%. Neither owns their house. BUT one has 3 years of living and the other has 6 months of living expenses.

So which is a better situation? Such a big DP? Or a bigger EF to live on?

Anonymous said...

It doesn't take 3 years to find a job if you chose your career wisely. 6 months emergency fund is more than adequate in nearly all situations. Any more than that and you lose money by having too much liquidity. Honestly, is keeping $100k in cash a good idea? Not really. Having $10k - $20k in cash is generally a safe bet, depending on COL/expenses.

Most people who have invested for retirement with a ROTH would also have that as an option to withdraw from in a dire emergency.

Living Almost Large said...

Anonymous, many people will argue that finding a job can take more than 6 months. I think a 6 month cash ef too much, but having $100k in taxable accounts is fine. As long as it's accessible for an emergency great.

My friend already maxed out retirement accounts, and she has $100k in taxable accounts. Entirely cash? No, but it's there for her.

C- said...

Being your second example, I must say, I don't very much appreciate the assessment that my choices are in some way or fashion unwise.

Not that it is your business, or anyone elses' for that matter...

I did extremely well by putting down a larger DP than typical (hey, it isn't to pay DOWN the mortgage so much as to have a smaller monthly down payment that fits the budget). I have a wise loan - not an ARM, not a 0% down interest only - NO! I have a low fixed rate.

I HAVE an emergency fund, cash, that I can get to at a moments notice. Not very many people even have a months' worth set aside, so I don't appreciate the snideness about what is a very fine achievement. In the "example" the EF numbers are guessed at - not accurate - but I suppose it is fine to make things up for a blog post.

In my own particular situation, I am not in the least worried about job loss. Both my partner and I have chosen our career paths wisely , and mine isn't being utilized at the moment, which is actually a double EF. I could be back at work TOMORROW making enough money to cover our bills. My partner has an outstanding offer, if he ever wants it for another job (he doesn't at the moment), and what he does is very much in demand. I think we're covered as far as job loss is concerned.

None of the urgent maintenance issues will go un-addressed.

I HAVE learned a very valuable lesson here though - NOT to share so much information because it is likely that you'll end up as someone's example on a blog.