Revisiting the underwater/emergency fund dynamic

1 Answers

• 
  

  
  

  +2 Votes 2  0

  Pinyo on Aug 25, 2010

  I am sorry your house lost over 50% of its value in 4 years. That’s just unbelievable. I think some homeowners in your situation would have simply walk away from the loan.

  Here’s how I prioritize my own finances

  1. Always try to build up a small emergency fund first at least a month worth of expenses for any true emergency
  2. Pay off any high interest debt, e.g., credit card debt
  3. Build up your emergency fund some more, e.g., 3 months worth
  4. Pay extra principal on your mortgage, but without sacrificing saving for retirement

  I don’t understand why some people are so focused on putting everything into paying off the mortgage. Yes, if you can completely pay off the mortgage, then go ahead. But as long as you still have a mortgage balance, you still have the risk of foreclosure. It doesn’t matter if you already paid off 99% of the loan, your risk is still the same as when you just started. So, it’s better to have money for emergencies when you can’t completely pay off your mortgage.

  Secondly, paying extra principal for your mortgage may not be the best financial move depending on your situation. For example, it’s better for me to put extra money in my tax-deductible retirement accounts to pay less income taxes, than to save a few bucks off the mortgage interest. So, I don’t pay extra principal unless I know I can max out my retirement accounts.