Refinance car as layer of emergency funding?

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Bwlonge
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Refinance car as layer of emergency funding?

Post by Bwlonge » Tue Aug 13, 2019 8:00 pm

Anyone do this? My dedicated emergency fund is a bit low by conventional advice, but it will be building up over the next year according to projections. I'm vigilant about projecting out backup plans, and I'm wondering if cash out refinancing my car might be an option, especially if rates go lower.

It wouldn't be ideal. I'm already under water on the new car I bought a year ago, but MSRP is much higher than what I paid, so bank would be happy to do it. However, if rates go low enough, I can take the cash, place it in a 4% savings account and sit on it essentially without paying interest on it, and available in case of emergency.

Reasonable thing to do?

chevca
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Re: Refinance car as layer of emergency funding?

Post by chevca » Tue Aug 13, 2019 8:36 pm

How are you under water on a car that has a much higher MSRP than you paid for it??

And, where are the 4% savings accounts??

Do you not have any credit cards? I would use those, or think of those as your emergency for the emergency fund back up plan. Build your EF back up as planned and if something comes up use the credit cards.

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whodidntante
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Re: Refinance car as layer of emergency funding?

Post by whodidntante » Tue Aug 13, 2019 8:42 pm

Yes, you can borrow money now to keep as an emergency fund if someone will loan it to you. You would not want to wait because a major reason for needing an emergency fund is getting fired. But you'd probably find it easier to have money if you didn't have a new car.

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Bwlonge
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Re: Refinance car as layer of emergency funding?

Post by Bwlonge » Tue Aug 13, 2019 8:48 pm

whodidntante wrote:
Tue Aug 13, 2019 8:42 pm
Yes, you can borrow money now to keep as an emergency fund if someone will loan it to you. You would not want to wait because a major reason for needing an emergency fund is getting fired. But you'd probably find it easier to have money if you didn't have a new car.
Right, that would be the other option, selling the car in an emergency, or trading in for a beater. That wouldn't be fun.

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Bwlonge
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Re: Refinance car as layer of emergency funding?

Post by Bwlonge » Tue Aug 13, 2019 8:51 pm

chevca wrote:
Tue Aug 13, 2019 8:36 pm
How are you under water on a car that has a much higher MSRP than you paid for it??

And, where are the 4% savings accounts??

Do you not have any credit cards? I would use those, or think of those as your emergency for the emergency fund back up plan. Build your EF back up as planned and if something comes up use the credit cards.
I have great credit and churn. Low down payment on the car, low resale because of common issues with the model. Orion CFU.

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9-5 Suited
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Re: Refinance car as layer of emergency funding?

Post by 9-5 Suited » Tue Aug 13, 2019 9:42 pm

I’m a bit confused. Cash out refinancing is done on the equity one has in real property. How can you get a cash out refinance on an underwater vehicle? It’s just an unsecured loan at that point and no way will be at a super low prime rate. The MSRP doesn’t matter to the lender, only the market value of the collateral. What am I missing?

I would just roll with a smaller emergency fund and save like a madman with a rice and beans budget rather than funding one with debt.
Last edited by 9-5 Suited on Tue Aug 13, 2019 9:43 pm, edited 1 time in total.

adamthesmythe
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Re: Refinance car as layer of emergency funding?

Post by adamthesmythe » Tue Aug 13, 2019 9:43 pm

I've never heard of cash-out refinancing a car. Is that a thing?

random_walker_77
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Re: Refinance car as layer of emergency funding?

Post by random_walker_77 » Tue Aug 13, 2019 9:55 pm

Bwlonge wrote:
Tue Aug 13, 2019 8:00 pm
Anyone do this? My dedicated emergency fund is a bit low by conventional advice, but it will be building up over the next year according to projections. I'm vigilant about projecting out backup plans, and I'm wondering if cash out refinancing my car might be an option, especially if rates go lower.

It wouldn't be ideal. I'm already under water on the new car I bought a year ago, but MSRP is much higher than what I paid, so bank would be happy to do it. However, if rates go low enough, I can take the cash, place it in a 4% savings account and sit on it essentially without paying interest on it, and available in case of emergency.

Reasonable thing to do?
Is this something you're thinking of doing now to free up funds "just in case" (which seems expensive and non-ideal, unless you have suspicions you'll be needing those funds sooner rather than later)?

Or are you thinking of trying this in the case that things go bad and your emergency fund is running out? If the latter, keep in mind that, generally speaking, it's really hard to get a loan/refi when you're between jobs. It's easy to borrow money when you don't need it, and hard when you do...

HEDGEFUNDIE
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Re: Refinance car as layer of emergency funding?

Post by HEDGEFUNDIE » Tue Aug 13, 2019 10:06 pm

I would do it for 3% or below.

strafe
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Re: Refinance car as layer of emergency funding?

Post by strafe » Wed Aug 14, 2019 4:41 am

Bwlonge wrote:
Tue Aug 13, 2019 8:00 pm
Anyone do this? My dedicated emergency fund is a bit low by conventional advice, but it will be building up over the next year according to projections. I'm vigilant about projecting out backup plans, and I'm wondering if cash out refinancing my car might be an option, especially if rates go lower.

It wouldn't be ideal. I'm already under water on the new car I bought a year ago, but MSRP is much higher than what I paid, so bank would be happy to do it. However, if rates go low enough, I can take the cash, place it in a 4% savings account and sit on it essentially without paying interest on it, and available in case of emergency.

Reasonable thing to do?
This scenario doesn’t work.

In a refi, The bank bases the LTV limit on the current market (book) value. They will not loan you an amount equal to original new MSRP for a used car.

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Brianmcg321
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Re: Refinance car as layer of emergency funding?

Post by Brianmcg321 » Wed Aug 14, 2019 6:25 am

Maybe you should sell the car and buy a beater.

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Bwlonge
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Re: Refinance car as layer of emergency funding?

Post by Bwlonge » Wed Aug 14, 2019 6:28 am

9-5 Suited wrote:
Tue Aug 13, 2019 9:42 pm
I’m a bit confused. Cash out refinancing is done on the equity one has in real property. How can you get a cash out refinance on an underwater vehicle? It’s just an unsecured loan at that point and no way will be at a super low prime rate. The MSRP doesn’t matter to the lender, only the market value of the collateral. What am I missing?

I would just roll with a smaller emergency fund and save like a madman with a rice and beans budget rather than funding one with debt.

I would have to see what my CU says, but they lend up to 120% of value. I checked the value of it on a calculator they link to, and i'd be likely looking at 10-15k out. It's because this car doesn't sell well in private markets, yet was released with a high MSRP, but those calculators tend to reflect only a couple factors, not what I could actually get for the car. I bought it 7k under MSRP because they were trying to get rid of them. VW Alltracks, if you're familiar. They have a history of leaking, mine did, and they've discontinued the model after 3 years.

classicindexer
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Re: Refinance car as layer of emergency funding?

Post by classicindexer » Wed Aug 14, 2019 6:50 am

My goal is to have less debt, not more. DW and I only have a mortgage now. I personally would not borrow money to establish or increase our emergency fund. If I was in your shoes, I would just keep saving to build the emergency fund over the next year and cut back on other expenses/savings goals. Worst case you sell the car and get a cheaper car.

chevca
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Re: Refinance car as layer of emergency funding?

Post by chevca » Wed Aug 14, 2019 10:09 am

Bwlonge wrote:
Wed Aug 14, 2019 6:28 am
9-5 Suited wrote:
Tue Aug 13, 2019 9:42 pm
I’m a bit confused. Cash out refinancing is done on the equity one has in real property. How can you get a cash out refinance on an underwater vehicle? It’s just an unsecured loan at that point and no way will be at a super low prime rate. The MSRP doesn’t matter to the lender, only the market value of the collateral. What am I missing?

I would just roll with a smaller emergency fund and save like a madman with a rice and beans budget rather than funding one with debt.

I would have to see what my CU says, but they lend up to 120% of value. I checked the value of it on a calculator they link to, and i'd be likely looking at 10-15k out. It's because this car doesn't sell well in private markets, yet was released with a high MSRP, but those calculators tend to reflect only a couple factors, not what I could actually get for the car. I bought it 7k under MSRP because they were trying to get rid of them. VW Alltracks, if you're familiar. They have a history of leaking, mine did, and they've discontinued the model after 3 years.
Especially if it's a discontinued model, you can stop using MSRP in any form about this deal. Why are you stuck on that?

I think what many of us are confused about was your use of being under water on the car. That would mean you owe more than the car is worth. How are you figuring to walk away with $10-15k on something you owe more than it's worth?

You realize you would be making monthly payments on your EF, right? What if your car gets totalled when you have borrowed 120% of the value? This just isn't a good idea.

Still would love to know where 4% savings accounts are at.

j0nnyg1984
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Re: Refinance car as layer of emergency funding?

Post by j0nnyg1984 » Wed Aug 14, 2019 10:55 pm

Cash out refi on a freaking car? :oops:

You need to sell the car, get a job (or a second job) and read Dave Ramsey's book.

This is ridiculous.

mindgap
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Re: Refinance car as layer of emergency funding?

Post by mindgap » Wed Aug 14, 2019 11:01 pm

j0nnyg1984 wrote:
Wed Aug 14, 2019 10:55 pm
Cash out refi on a freaking car? :oops:

You need to sell the car, get a job (or a second job) and read Dave Ramsey's book.

This is ridiculous.
+1

flyphotoguy
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Re: Refinance car as layer of emergency funding?

Post by flyphotoguy » Thu Aug 15, 2019 2:46 pm

chevca wrote:
Wed Aug 14, 2019 10:09 am
Still would love to know where 4% savings accounts are at.
Yeah where's this 4% at?

Also maybe do a Dave Ramsey. Get rid of that car, get a beater car (corolla, civic, matrix, accord, camry...) and start saving... It's redonkidonk to do a refi on an underwater, problematic car....

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dm200
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Re: Refinance car as layer of emergency funding?

Post by dm200 » Thu Aug 15, 2019 2:54 pm

Bwlonge wrote:
Tue Aug 13, 2019 8:00 pm
Anyone do this? My dedicated emergency fund is a bit low by conventional advice, but it will be building up over the next year according to projections. I'm vigilant about projecting out backup plans, and I'm wondering if cash out refinancing my car might be an option, especially if rates go lower.
It wouldn't be ideal. I'm already under water on the new car I bought a year ago, but MSRP is much higher than what I paid, so bank would be happy to do it. However, if rates go low enough, I can take the cash, place it in a 4% savings account and sit on it essentially without paying interest on it, and available in case of emergency.
Reasonable thing to do?
Very reasonable - in my opinion.

I believe that credit unions are much more likely than banks to make such loans - at low rates.

Some credit unions charge the same interest rate on such loans as they do on the same model year loan to purchase the car. Other credit unions charge a slightly higher interest rate on such "cash out" car loans than on loans to purchase the identical vehicle.

I think, though, that if I owned such a car, free and clear, I would wait to to this loan until I needed the money. I doubt a 4% rate on savings will continue.

While we are seeing recent lower interest rates on savings, do not assume that all loan interest rates will show similar declines. There may be some different financial forces at work.

MichCPA
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Re: Refinance car as layer of emergency funding?

Post by MichCPA » Thu Aug 15, 2019 3:05 pm

I am in the camp that doesn't understand how one could cash out refinance anything underwater. My understanding is that underwater means principle is greater than fair market value.

If this is one of those 4% accounts upto 15k, its not likely to move the needle because against a 2% car loan rate you make a net $300 a year (25 a month) which gets taxed, so maybe $20 a month after that. That's a whole lot of effort to distract yourself from the real problem. I can't stand Dave Ramsey, but he applies to this situation pretty well.

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dm200
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Re: Refinance car as layer of emergency funding?

Post by dm200 » Thu Aug 15, 2019 3:11 pm

MichCPA wrote:
Thu Aug 15, 2019 3:05 pm
I am in the camp that doesn't understand how one could cash out refinance anything underwater. My understanding is that underwater means principle is greater than fair market value.
If this is one of those 4% accounts upto 15k, its not likely to move the needle because at a 2% loan rate you make $300 a year (25 a month) which gets taxed, so maybe $20 a month after that. That's a whole lot of effort to distract yourself from the real problem. I can't stand Dave Ramsey, but he applies to this situation pretty well.
I interpret the OP description of "under water" differently - since the car is owned free and clear.

Often. as well, some credit unions are very "generous" in making loans on used cars at a somewhat higher valuation than what is the actual current "resale" value - especially for someone with very good credit.

classicindexer
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Re: Refinance car as layer of emergency funding?

Post by classicindexer » Thu Aug 15, 2019 3:26 pm

If I owned that car free and clear I would not borrow money against it. That’s nuts. :annoyed I own my car outright and would not do this to beef up our EF.

Dave Ramsey’s baby steps may help here. Sell the car and get a beater/cheaper car or get on a budget or tighten up the current budget to save more money to an emergency fund. Could also temporarily postpone retirement savings and investing for a short period of time (one year or less).

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Re: Refinance car as layer of emergency funding?

Post by randomguy » Thu Aug 15, 2019 3:28 pm

Bwlonge wrote:
Tue Aug 13, 2019 8:48 pm
whodidntante wrote:
Tue Aug 13, 2019 8:42 pm
Yes, you can borrow money now to keep as an emergency fund if someone will loan it to you. You would not want to wait because a major reason for needing an emergency fund is getting fired. But you'd probably find it easier to have money if you didn't have a new car.
Right, that would be the other option, selling the car in an emergency, or trading in for a beater. That wouldn't be fun.
And is very expensive interms of transactions costs.

The real problem is that credit will often disappear when you need it. Getting a loan when you have a job is easy. Getting one when your unemployed is harder.

MichCPA
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Re: Refinance car as layer of emergency funding?

Post by MichCPA » Thu Aug 15, 2019 3:29 pm

dm200 wrote:
Thu Aug 15, 2019 3:11 pm
MichCPA wrote:
Thu Aug 15, 2019 3:05 pm
I am in the camp that doesn't understand how one could cash out refinance anything underwater. My understanding is that underwater means principle is greater than fair market value.
If this is one of those 4% accounts upto 15k, its not likely to move the needle because at a 2% loan rate you make $300 a year (25 a month) which gets taxed, so maybe $20 a month after that. That's a whole lot of effort to distract yourself from the real problem. I can't stand Dave Ramsey, but he applies to this situation pretty well.
I interpret the OP description of "under water" differently - since the car is owned free and clear.

Often. as well, some credit unions are very "generous" in making loans on used cars at a somewhat higher valuation than what is the actual current "resale" value - especially for someone with very good credit.
Rather unconventional.

I would still shy away for the reasons mentioned. The interest rate is about 4% pre-tax and I can't find an auto loan below 3.25%. You need something at 3% or below at a 25% fed+state tax rate to break even. Given the OP max of 15k out, its $600 gross with taxes and loan interest reducing the benefit. The current interest rate environment doesn't present a ton of great opportunities. Also the car loan is (probably) fixed and the savings account isn't so that could go sideways even if the numbers work now.

OP is better off looking for new account opening bonuses that don't require direct deposits or more credit card SUBs to provide some quick cash.

MichCPA
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Re: Refinance car as layer of emergency funding?

Post by MichCPA » Thu Aug 15, 2019 3:38 pm

randomguy wrote:
Thu Aug 15, 2019 3:28 pm
Bwlonge wrote:
Tue Aug 13, 2019 8:48 pm
whodidntante wrote:
Tue Aug 13, 2019 8:42 pm
Yes, you can borrow money now to keep as an emergency fund if someone will loan it to you. You would not want to wait because a major reason for needing an emergency fund is getting fired. But you'd probably find it easier to have money if you didn't have a new car.
Right, that would be the other option, selling the car in an emergency, or trading in for a beater. That wouldn't be fun.
And is very expensive interms of transactions costs.

The real problem is that credit will often disappear when you need it. Getting a loan when you have a job is easy. Getting one when your unemployed is harder.
But if the interest arbitrage is close to 0 sum (or slightly negative) based on the probable interest rates of the savings account (after taxes) and the loan, and you always have the option to sell the car if something actually happens, I don't see what this move buys the OP.

Heck, even the gap insurance on the loan if the OP takes out a 120% LTV loan is going to chip away at the numbers.

chevca
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Re: Refinance car as layer of emergency funding?

Post by chevca » Thu Aug 15, 2019 11:03 pm

dm200 wrote:
Thu Aug 15, 2019 3:11 pm
MichCPA wrote:
Thu Aug 15, 2019 3:05 pm
I am in the camp that doesn't understand how one could cash out refinance anything underwater. My understanding is that underwater means principle is greater than fair market value.
If this is one of those 4% accounts upto 15k, its not likely to move the needle because at a 2% loan rate you make $300 a year (25 a month) which gets taxed, so maybe $20 a month after that. That's a whole lot of effort to distract yourself from the real problem. I can't stand Dave Ramsey, but he applies to this situation pretty well.
I interpret the OP description of "under water" differently - since the car is owned free and clear.
OP said they bought the car a year ago and later said they made a low down payment. How do you figure it's owned free and clear? And, what could under water possibly mean on a car that's owned free and clear, if that were the case here?

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CyclingDuo
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Re: Refinance car as layer of emergency funding?

Post by CyclingDuo » Fri Aug 16, 2019 6:51 am

Bwlonge wrote:
Tue Aug 13, 2019 8:00 pm
Anyone do this? My dedicated emergency fund is a bit low by conventional advice, but it will be building up over the next year according to projections. I'm vigilant about projecting out backup plans, and I'm wondering if cash out refinancing my car might be an option, especially if rates go lower.

It wouldn't be ideal. I'm already under water on the new car I bought a year ago, but MSRP is much higher than what I paid, so bank would be happy to do it. However, if rates go low enough, I can take the cash, place it in a 4% savings account and sit on it essentially without paying interest on it, and available in case of emergency.

Reasonable thing to do?
Reasonable thing to do?

Stop funding your retirement accounts for the moment and get rid of all your non mortgage debts (auto loan, student loan, CC's) ASAP!

:beer
"Everywhere is within walking distance if you have the time." ~ Steven Wright

JoeRetire
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Re: Refinance car as layer of emergency funding?

Post by JoeRetire » Fri Aug 16, 2019 7:02 am

Bwlonge wrote:
Tue Aug 13, 2019 8:00 pm
I'm already under water on the new car I bought a year ago, but MSRP is much higher than what I paid, so bank would be happy to do it.
Your bank would be happy to refinance a car when you are underwater and let you take cash out?

Are you sure? Have you asked?

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Kenkat
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Re: Refinance car as layer of emergency funding?

Post by Kenkat » Fri Aug 16, 2019 7:31 am

Just build back up your emergency fund over the next year and be done with it. Chances are, you won’t need to use your emergency fund. If you do, then you can figure something out then, but don’t go into debt for something that won’t likely happen.

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dm200
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Re: Refinance car as layer of emergency funding?

Post by dm200 » Fri Aug 16, 2019 8:53 am

chevca wrote:
Thu Aug 15, 2019 11:03 pm
dm200 wrote:
Thu Aug 15, 2019 3:11 pm
MichCPA wrote:
Thu Aug 15, 2019 3:05 pm
I am in the camp that doesn't understand how one could cash out refinance anything underwater. My understanding is that underwater means principle is greater than fair market value.
If this is one of those 4% accounts upto 15k, its not likely to move the needle because at a 2% loan rate you make $300 a year (25 a month) which gets taxed, so maybe $20 a month after that. That's a whole lot of effort to distract yourself from the real problem. I can't stand Dave Ramsey, but he applies to this situation pretty well.
I interpret the OP description of "under water" differently - since the car is owned free and clear.
OP said they bought the car a year ago and later said they made a low down payment. How do you figure it's owned free and clear? And, what could under water possibly mean on a car that's owned free and clear, if that were the case here?
OK - you are correct. Yes, the OP did state the purchase of the car involved a loan.

Thanks.

indexfund56
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Re: Refinance car as layer of emergency funding?

Post by indexfund56 » Fri Aug 16, 2019 10:41 am

Sell the car and get a cheaper car. Clearly, you cannot afford it.

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dm200
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Re: Refinance car as layer of emergency funding?

Post by dm200 » Fri Aug 16, 2019 10:46 am

indexfund56 wrote:
Fri Aug 16, 2019 10:41 am
Sell the car and get a cheaper car. Clearly, you cannot afford it.
I don't think so. While not buying that car may have been the better course of action, now that it is purchased, there are large costs of being hit with both large depreciation and transaction costs.

surfstar
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Re: Refinance car as layer of emergency funding?

Post by surfstar » Fri Aug 16, 2019 11:00 am

You have a Roth? In a true emergency that and credit cards, can be used for funds. If the rate on your car is already low, don't refi it.

flyphotoguy
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Re: Refinance car as layer of emergency funding?

Post by flyphotoguy » Fri Aug 16, 2019 11:16 am

dm200 wrote:
Fri Aug 16, 2019 10:46 am
indexfund56 wrote:
Fri Aug 16, 2019 10:41 am
Sell the car and get a cheaper car. Clearly, you cannot afford it.
I don't think so. While not buying that car may have been the better course of action, now that it is purchased, there are large costs of being hit with both large depreciation and transaction costs.
The car is already leaking according to the OP, so maintenance cost would just increase at this point and it would be harder to sell the longer he keeps it so might be best to get rid of it asap.

MathWizard
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Re: Refinance car as layer of emergency funding?

Post by MathWizard » Fri Aug 16, 2019 1:28 pm

From a previous post:

Code: Select all

 https://www.bogleheads.org/forum/viewtopic.php?f=2&t=285036

you have two duplexes, and the recent purchase is why your EF is low, and you have
a liquidity issue, having tied up your capital. The rental properties may help you a lot
in the long run, but you could lose them in the short term due to liquidity issues.

If you cannot get a HEL or HELOC on at least one of these, you have overextended yourself.

I would stop trying to max your retirement accounts, just put in enough to get any match,
and put any extra retirement funds in a ROTH, maybe just ROTH CDs, or something else safe for now.
You can get more aggressive once you have shored up your EF. The ROTH contributions can
be withdrawn at any time (but not put back) so they can form a 2nd tier of your EF.

It seems like you are skirting the edge trying to reach for more return, and that may cause
you lots of trouble because you lack liquidity. Think of the capital in the rental properties as
a long term part of your retirement fund if that helps you feel good about not maxing retirement
funds while your replenish your EF.

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