conventional loan
Question: Did I not say “relying on an occasional home equity loan for emergencies”?
You surely did. And it’s still very bad advice. Of all times not to jeopardize your house with a home equity loan (and it’s always a risk), an *emergency*, which assumes you don’t have the money to pay it otherwise, seems the most risky.
So where do you suggest saving for/getting emergency funds? Saving in
savings accounts and CDs where returns are typically less than 1% after taxes, almost guaranteeing that you lose (particularly vs. inflation). If that money is used to pay down mortgage,
you can have the same (actually much greater due to greater returns) rainy day fund available by effectively making (saving) 4+% if you itemize and 6+% if you use a standard deduction. As I
pointed out, the home equity should only be used for rare emergencies, but I’ll add one more
use – to finance a car – provided you itemize. A deductible home equity loan is usually much
cheaper than a typical car
Answer: So where do *you* suggest saving? I may have my savings in low-interest CDs, money market funds, and savings bonds, but at least their value is still higher than when I bought them, unlike the money I invested in stock mutual funds, which continue to hemorrhage money (and this includes my IRAs–I’ll never have to worry about taxes on the gain because there’ll never be a gain). Still beats leaving it under the mattress. You save for, and get, emergency funds by putting money away regularly into assets which can be easily liquefied. I don’t know how a 3-5% APR (which is what I’m getting on my various instruments) gets knocked down to less than 1% by taxes. That’s a pretty hefty tax rate–60-80%. You’re going to borrow money from your house to pay your mortgage? So instead of cashing in a low-interest CD and losing that 3-5% APR to pay your 8% mortgage, you’re going to add on a 9% loan to pay that mortgage, and because you get to deduct 15 or 28% of the interest, you think you’re making money.
If you finance your car using a conventional loan, the worst that can happen when you default is that they take the car. If you finance your car using your house as collateral, you might keep the car, but lose the house. And since you don’t believe in saving for emergencies, you won’t have any money to protect the house when repo-man comes to the door. Gee, sounds like a plan to me.
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