Screw the Emergency Fund, Buy a Home

by JT McGee

Buy a home with rates at record lows!The biggest failure in personal finance, in my opinion, is failing to offset personal finance with finance. At some point your personal finances and the world of finance have to meet. Where they intersect is opportunity, and whether or not you choose to play this opportunity is up to you.

This is one thing I don’t particularly enjoy about personal finance. Personal finance is all about avoiding risk by creating a symbiotic system where you can control and minimize as many possibilities for failure. Screw that! As far as I see it, you can go bankrupt a billion times, but you only need to get filthy rich once. I like that flexibility.

I don’t want to speculate on the future of the housing market, but I don’t think we’re going significantly lower. (See post on home price trends.) With that said, I don’t think home prices are going higher, either. However, there is something that I suspect will be going higher: interest rates.

The current interest rate environment is providing once in a lifetime opportunities. Never has the Fed targeted near-zero or zero percent rates (0-.25% overnight rate). Here’s a historical target rate chart for monetary policy:

Federal funds rate is the lowest ever, buy a home, or refinance right now!

Here’s a chart of 30-year mortgage rates over the past five years; you’re not getting in at the absolute bottom, but you’re getting in pretty flippin’ cheap:

Rates for 30-year mortgage rates are at a lifetime low.  Buy, borrow, and spend that cash now!  It's cheap--nearly free--money.

The way I see it is that with each passing day you risk the possibility of missing out on the lowest rates in history. When you’re at the bottom, there’s no way to go but up, and there’s no such thing as refinancing to save money when rates are on the rise.

What’s the difference between a $100,000 loan at 4.9% and one at 6.0% over 30 years? Oh, just under $25,000, or one-fourth of the total loan amount. I could also mention that a lower rate is probably also a lower tax-adjusted rate. That’s a bit too abstract, and I don’t want to have to graph it, nor quantify it, nor sit here and create another example for it. But it’s a real cost that I’m just going to insert right…about…here.

Please, whatever you do, don’t let Dave Ramsey’s advice from periods of higher interest rates get in the way of making a rational, reasonable decision to lock in the lowest rates you’ll probably see in your lifetime. Instead, you should let some punk kid with a $10 domain name and half-assed blog design tell you how to orchestrate the largest purchase you’ll make in your life. That makes sense! 😛

Fed rates and homeownership were mentioned in another post of mine: why the Fed won’t raise rates until 2012. The Fed is underwriting the housing market, but only temporarily. You can play waiting games if you want, but I certainly wouldn’t.

P.S. I don’t know if Dave Ramsey advocates building an emergency fund before buying a home, but because it sounds like a bad idea I’m sure he does. I wonder if he’ll tackle emergency funds for businesses in his Entreleadership book.

Photo by: James.Thompson

{ 18 comments… read them below or add one }

Bogey April 28, 2011 at 07:54

I just had a post go up this morning about being a contrarian. It’s funny now that savings interest rates are at historical lows, all of a sudden everyone is concerned about have a ton of cash in the bank. On the other hand, rates to borrow money are also at hostirical lows, but yet nobody wants to borrow any money. wtf?

No wonder the average person remains poor. They do exactly the opposite of what the current economic environment would reward them for doing.

That’s why I love being a banker! Most people make it so easy for us to be filthy stinking rich (kidding, sorta).

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Simon Zhen April 28, 2011 at 10:04

“As far as I see it, you can go bankrupt a billion times, but you only need to get filthy rich once.”

That type of mentality surely provides an enticing incentive for younger generations to strive harder in their twenties. But, one’s level of risk tolerance is the greatest deterrent against taking such leaps of faith.

As a twenty-something myself, I’d definitely be interested in taking advantage of the relatively low cost of borrowing. The thing holding me (and many others) is the lack of funds for a down payment.

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JT McGee April 28, 2011 at 11:40

@ Bogey – I don’t get it. Personal finance is saying stock up on cash, but why? Cash is worthless right now in terms of raw cash flow and yield. Leverage is king right now, even if not deployed immediately, I would be borrowing every last dollar I can at fixed interest rates. It only makes sense.

@ Simon – I don’t know where you live, nor am I familiar with your current situation; however, if you don’t live in the boonies you should be able to get an FHA loan with as little as 3% down. That amount of money, at least where I live, isn’t much at all…I could get a single family home here for $70,000 in a decent area, thus requiring a down payment of only $2,100. Manageable, I’d say.

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Simon Zhen April 28, 2011 at 16:55

Kicking it in New York City – where $70,000 can’t by much. At 3% down, real estate appears very attractive.

Where do you live? At $70,000 and ~$2,100 down, it sounds like a possible investment opportunity.

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JT McGee May 12, 2011 at 03:03

Look anywhere in the Midwest US. $70,000 rentable homes are everywhere.

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Kellen August 4, 2011 at 11:26

a) FHA won’t give you 3.5% down if you are not the occupant of the house. They do have a program where you can buy residential rental property for only 10% down though.

b) Expect closing costs to bring your cash outlay up quite a bit. Especially if the seller is short of cash themselves, they won’t be contributing anything to the closing costs.

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JT McGee August 4, 2011 at 20:16

Whoops. You’re right, 10%.

Assuming 10% down and $3,000 in closing costs, that’s $10k, or 14%. Still reasonable.

Ash @ Sterling Effort April 28, 2011 at 13:10

Agreed. Massive emergency funds are for chumps. I’m so anti-emergency cash right now. I’m currently ploughing all my cash into investments. I actually think I have an addiction.

I’m quite happy I own a home right now. My mortgage rate will drop to about 3% later this year with inflation here in the UK knocking around at about 4-5%

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Barb Friedberg April 28, 2011 at 19:14

YOU ARE CORRECT!! THIS IS ONE OF THOSE “ONCE IN A GENERATION OPPORTUNITIES” TO LOCK IN ROCK BOTTOM RATES. Just don’t borrow more than you can afford because forclosure is not good!

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JT McGee April 29, 2011 at 11:55

@Ash – I’d say US inflation is probably in line with Britains, we just don’t admit it. That said, money is even cheaper here, despite a mostly similar inflation profile. Awww yeah! Cheap money.

@ Barb – Absolutely not. But don’t wait to borrow either, if you know you want to buy this is the time to do it. Money will not be this cheap forever!

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Financial Samurai April 30, 2011 at 12:24

I like it. Use funny money USD to actually buy a REAL ASSET. I’m looking to close on another rental property soon. It’s a no brainer looking back 10-20 years from now.

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JT McGee April 30, 2011 at 20:46

It sure makes sense for the saver and investor alike. Money is cheap, too cheap, and borrowing now makes a ton of sense. I wouldn’t pass up any fixed-rate debt at these rates, even if you keep it in cash equivalents for a short-term loss until a suitable use for it is found.

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101 Centavos May 3, 2011 at 05:51

No reason one can’t do both, take advantage of low rates *and* set up an emergency fund. That’s the whole point of budgeting.

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JT McGee May 3, 2011 at 11:11

My view is more of a “don’t wait just because of a emergency fund” rather than don’t do both. I think there’s room for both, sure, but I wouldn’t wait around so long that I got caught paying 5-6% for a loan I could have gotten earlier for 4.5%. Money is so cheap.

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htbam July 19, 2011 at 01:54

Honestly, comparing the opportunity costs of buying a home now vs waiting, it looks to be a better deal to buy now, lock in the interest rate, and make up for the emergency fund later. Money is as cheap as it’s going to get right now.

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Betty Kincaid August 2, 2011 at 23:05

Agreed. It’s not the price of the home you have to worry about it’s the price of the money.

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mas August 28, 2011 at 23:39

In my own “i don’t wait just because of a emergency fund” rather than don’t do both but it looks to be a better deal to buy now, lock in the interest rate, and make up for the emergency fund later.

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Steve February 22, 2012 at 16:30

And what, pray tell, do you think will be happening to housing prices when interest rates finally rise?

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