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A friend of a friend wanted to buy a house.. he has no savings or emergency fund.
He wanted to buy a $400,000 house and his parents offered him $200,000. He spends all $200,000 on the down payments, and now he's back to no emergency fund and a $200,000 mortgage. And he has reasonably good credit.
(Now, some of us aren't fortunate enough to have family help chip in the cost of housing but that's not the main point of this post.)
If I were in his shoes, I probably would only take $100,000 for the downpayment and save the other $100,000 for an emergency fund. Do I sound crazy for proposing this instead? Sure, you'd have higher mortgage payments but interest rates are already pretty close to historical lows. Also, if he loses his job and can't pay mortgage payments, he'll be without a house and his parents $200,000 poorer, while if he had only put 100K down, he can draw on the remaining 100,000 to stay afloat while he looks for his next gig.
It seems nobody (at least in real life) understands my way of approaching this.. what do you think?
A friend of a friend wanted to buy a house.. he has no savings or emergency fund.
He wanted to buy a $400,000 house and his parents offered him $200,000. He spends all $200,000 on the down payments, and now he's back to no emergency fund and a $200,000 mortgage. And he has reasonably good credit.
(Now, some of us aren't fortunate enough to have family help chip in the cost of housing but that's not the main point of this post.)
If I were in his shoes, I probably would only take $100,000 for the downpayment and save the other $100,000 for an emergency fund. Do I sound crazy for proposing this instead? Sure, you'd have higher mortgage payments but interest rates are already pretty close to historical lows. Also, if he loses his job and can't pay mortgage payments, he'll be without a house and his parents $200,000 poorer, while if he had only put 100K down, he can draw on the remaining 100,000 to stay afloat while he looks for his next gig.
It seems nobody (at least in real life) understands my way of approaching this.. what do you think?
In your case, where would you park that $100K?
Going the route of putting the $200K down, less interests is paid and monthly payment is lowered. With good credit and 50% equity, he should have no problem getting a $50K line of credit on the house. That can work as emergency fund if you know what you are doing.
Going the route of putting the $200K down, less interests is paid and monthly payment is lowered. With good credit and 50% equity, he should have no problem getting a $50K line of credit on the house. That can work as emergency fund if you know what you are doing.
If interest rates spike quickly (not likely but not out of the question), maybe put the 100K into 10-20 year treasuries if their yields end up being higher than the current mortgage rate that you locked in.
Getting a fixed rate heloc, you are sure on what the rate will be for a fixed period. Most 5 years ones are similar to what a 30yrs mortgage is. For emergency, he can quickly use as much as is needed and only pay interests. Again, the big advantage of the large down payment will reduce the monthly mortgage by a lot.
Getting a fixed rate heloc, you are sure on what the rate will be for a fixed period. Most 5 years ones are similar to what a 30yrs mortgage is. For emergency, he can quickly use as much as is needed and only pay interests. Again, the big advantage of the large down payment will reduce the monthly mortgage by a lot.
I would agree with you--$100,000 or whatever is at least 18 months of living expenses into an emergency fund in mutual funds, CD's and some cash--about 2 months worth of cash in a money market account. It's too hard to get cash out of a house if you need it these days and his mortgage will be minimal.
A friend of a friend wanted to buy a house.. he has no savings or emergency fund.
He wanted to buy a $400,000 house and his parents offered him $200,000. He spends all $200,000 on the down payments, and now he's back to no emergency fund and a $200,000 mortgage. And he has reasonably good credit.
(Now, some of us aren't fortunate enough to have family help chip in the cost of housing but that's not the main point of this post.)
If I were in his shoes, I probably would only take $100,000 for the downpayment and save the other $100,000 for an emergency fund. Do I sound crazy for proposing this instead? Sure, you'd have higher mortgage payments but interest rates are already pretty close to historical lows. Also, if he loses his job and can't pay mortgage payments, he'll be without a house and his parents $200,000 poorer, while if he had only put 100K down, he can draw on the remaining 100,000 to stay afloat while he looks for his next gig.
It seems nobody (at least in real life) understands my way of approaching this.. what do you think?
You don't need 100K for an emergency fund. 30K should be plenty, which still allows $170,000 to go to the down payment/closing costs.
I'd have taken the 200k and one at a time, but all within 2 years, bought a lot of cheap, large old houses, turned them into small rooms, rented out at $100 per week per room, and retired off of my profits. :-) he's an idiot.
You don't need 100K for an emergency fund. 30K should be plenty, which still allows $170,000 to go to the down payment/closing costs.
How do you know this? 30K would hardly get ANYONE through a year of unemployment....sorry, but there is no such thing as having too much liquid money in an emergency....
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