Houses Are Not Edible

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mirror
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Houses Are Not Edible

Post by mirror »

With interest rates where they are today, barring an irrational debt to value ratio (defined as >70% for purposes of this post), why wouldn't/shouldn't one prioritize liquidity in times of economic uncertainty?

For example, if one could do a cash out refinance in which they receive $60k, and the total mortgage debt to home value ratio was under 60% (as a maximum percent in case of a major crash and home values plummeted) wouldn't it be better to have $60k liquid funds and not need it?

Credit avenues are drying up whether it is HELOC applications no longer being accepted, credit card limits being unilaterally lowered, or even reduced income due to dividends being reduced/halted I am having a hard time seeing why pulling equity from a home is a bad idea. Yes, there are costs to the cash out refinance (and of course interest), but in our hypothetical situation $60k represents 2 years of household spending. So if it was kept in cash one would have a two year cushion in case of job loss and long(er) term unemployment or significant market crash. If over the next two years neither of those things happened one could make a lump sum payment towards the mortgage, or pay a small fee and recast to end up with a lower payment as well. I am not advocating investing the money, but rather keeping it in cash as an extended (1.5+yr) emergency fund. Yes, there are interest costs, but it seems like paying a few thousand dollars in interest to ensure 1.5 years of economic stability is no different than the cost of paying an insurance company to cover physical damage to a house (i.e. both are insurance with costs associated).

Also for the sake of conversation assume this is in addition to a 'regular' 6 month emergency fund, but things change, perspectives change and I've been cooped up with too much to think about recently.

What say the boglehead community?

p.s. this is for discussion purposes only, I just thought it would be a fun conversation.
HomeStretch
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Re: Houses Are Not Edible

Post by HomeStretch »

I value liquidity in good, bad and uncertain times. My portfolio’s liquidity is such that I don’t need to increase it when uncertainty strikes. Usually there is little to no warning of uncertainty. It’s harder to create liquidity when the uncertain times hit. As I have sufficient liquidity, I personally would not tap home equity to increase cash.

You will get varying opinions on this. I understand not everyone holds multiple years cash or wants a paid off mortgage like I do. To each his/her own.
KlangFool
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Re: Houses Are Not Edible

Post by KlangFool »

OP,

A) Is it a recourse loan or a non-recourse loan?

B) What if pulling out the money increase the liquidity requirement? Aka, the monthly mortgage payment.

KlangFool
yohac
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Re: Houses Are Not Edible

Post by yohac »

There are quite a few hypotheticals in that scenario. For someone who has exactly six months EF, no other after tax investments, no IRAs or 401K (which can now be borrowed against for three years without penalty), maybe for that person it could make sense.
MarkRoulo
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Re: Houses Are Not Edible

Post by MarkRoulo »

mirror wrote: Sun May 03, 2020 4:43 pm With interest rates where they are today, barring an irrational debt to value ratio (defined as >70% for purposes of this post), why wouldn't/shouldn't one prioritize liquidity in times of economic uncertainty?

For example, if one could do a cash out refinance in which they receive $60k, and the total mortgage debt to home value ratio was under 60% (as a maximum percent in case of a major crash and home values plummeted) wouldn't it be better to have $60k liquid funds and not need it?

Credit avenues are drying up whether it is HELOC applications no longer being accepted, credit card limits being unilaterally lowered, or even reduced income due to dividends being reduced/halted I am having a hard time seeing why pulling equity from a home is a bad idea. Yes, there are costs to the cash out refinance (and of course interest), but in our hypothetical situation $60k represents 2 years of household spending. So if it was kept in cash one would have a two year cushion in case of job loss and long(er) term unemployment or significant market crash.
I think you are just arguing for not being 100% invested in high-risk assets.

$80K in, say, US Treasury Bonds, would probably be as good a cushion as $60K in cash.

Lots of folks on this forum advocate being less than 100% invested in high-risk assets (stocks, junk bonds, commodities) and recommend at least SOME bonds as well as an emergency fund in cash.

But the folks who advocate this usually advocate it as a normal position, not one to be assumed only when things get exciting.
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Nate79
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Re: Houses Are Not Edible

Post by Nate79 »

We made a gingerbread house at Christmas. It was certainly edible.....


Back to reality. We have a 1 year emergency fund (combo of cash and bond funds in taxable) and additional taxable accounts of stocks as well as Roth IRAs. We have no need to raid the equity in our home like typical poor broke in debt up to their eyeballs consumers.
BrownEyedGirl_27
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Re: Houses Are Not Edible

Post by BrownEyedGirl_27 »

Nate79 wrote: Sun May 03, 2020 5:57 pm We made a gingerbread house at Christmas. It was certainly edible.....


Back to reality. We have a 1 year emergency fund (combo of cash and bond funds in taxable) and additional taxable accounts of stocks as well as Roth IRAs. We have no need to raid the equity in our home like typical poor broke in debt up to their eyeballs consumers.
Same for us except the one year emergency fund is in high yield savings, taxable and Roth accounts (only investments drawn on if dire circumstances). No interest in HELOCs when we become homeowners
"Your mind has a mind of its own. At the very moment when you are most convinced of your own rationality, you may be feeling rather than thinking your way toward a decision.” | Jason Zweig
badapu
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Re: Houses Are Not Edible

Post by badapu »

Most banks are allowing deferral of payments x 3 months (forbearance) no questions asked
No impact to credit history, no balloon
Gets added to back end

https://www.wellsfargo.com/mortgage/man ... ance-plan/

We are continuing to pay and want to get mortgage completed by this year end for mental peace

To each their own. However for ppl who share your philosophy - minimal downside to forbearance
megabad
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Re: Houses Are Not Edible

Post by megabad »

Seems like a silly question. Your examples are pretty poor examples of “liquidity”. A better question would be, should you rely on these suggested forms of debt in planning for a time of economic uncertainty? And you have an abundance of evidence that tells you absolutely not. Essentially no one with bad credit is able to get loans right now. This was the same a decade ago. If you always assume you have unlimited credit than this whole premise is pointless. At that point you should take out debt in every case as long as you believe you will have higher return than cost.
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Re: Houses Are Not Edible

Post by DesertDiva »

Nate79 wrote: Sun May 03, 2020 5:57 pm We made a gingerbread house at Christmas. It was certainly edible.....


Back to reality. We have a 1 year emergency fund (combo of cash and bond funds in taxable) and additional taxable accounts of stocks as well as Roth IRAs. We have no need to raid the equity in our home like typical poor broke in debt up to their eyeballs consumers.
So you live within your means?! :idea:
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Christine_NM
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Re: Houses Are Not Edible

Post by Christine_NM »

I've known smart people who believed they should carry as big a mortgage as they qualified for. So just because I disagree with you doesn't mean you are wrong or that i'm wrong. Housing finance tends to be a gut feeling based on when and how you grew up.

Houses are not edible, but you can't eat money or sleep in your safe deposit box either. Now we find out money doesn't always buy food. You need a place to live, you have a home with some equity, why screw that up.
18% cash 44% stock 38% bond. Retired, w/d rate 2.5%
jharkin
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Re: Houses Are Not Edible

Post by jharkin »

I don’t see anything wrong with your theory... but I don’t think many families that can survive on 30k a year of spending have 60k of equity available under 60DTI.
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LilyFleur
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Re: Houses Are Not Edible

Post by LilyFleur »

I have a HELOC at 4.25%. After using it to get kids through college, I paid it off. It's only for very brief loans for cash flow now. I find it easy to pay off my credit cards every month, but once you start spending out of a HELOC, it's easy to let the total get too high.
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AerialWombat
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Re: Houses Are Not Edible

Post by AerialWombat »

1). I'm a real estate investor. Liquidity is of paramount importance to me no matter what the economy is doing. I need reserves in case of costly repairs, or when tenants don't pay rent (has never happened to me yet, knock on wood). I'm going to great lengths right now to increase my cash position, including recently coming out of semi-retirement to work full time+ again so I can sock away cash.

2). While liquidity is rule #1, I'm also nearly $2 million in debt. Sure, it's all low interest rate, 30 year debt, but good grief, I hate seeing that number. I do occasionally make extra principle payments against principal -- the principle being paying off debt. (Yay for word play!). In the near future, I will likely sell some houses and use the equity to pay off other houses. This will reduce my long-term net worth potential, but the peace of mind from getting rid of the mortgages faster is priceless.
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Topic Author
mirror
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Re: Houses Are Not Edible

Post by mirror »

yohac wrote: Sun May 03, 2020 5:04 pm There are quite a few hypotheticals in that scenario. For someone who has exactly six months EF, no other after tax investments, no IRAs or 401K (which can now be borrowed against for three years without penalty), maybe for that person it could make sense.
Essentially this is a HELOC in a non-traditional sense due to HELOCs becoming unavailable. I guess I am curious why it would be better to pull money out of an IRA or 401k, take a loss, lose that tax advantaged space and in the case of traditional versions of either of those accounts pay 20%+taxes (even if the additional 10% penalty is waived).

For the record I am not doing this, nor advocating for it, just looking for a healthy debate on the merit (or lack thereof) on this hypothetical.
Topic Author
mirror
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Re: Houses Are Not Edible

Post by mirror »

badapu wrote: Sun May 03, 2020 6:26 pm Most banks are allowing deferral of payments x 3 months (forbearance) no questions asked
No impact to credit history, no balloon
Gets added to back end

https://www.wellsfargo.com/mortgage/man ... ance-plan/

We are continuing to pay and want to get mortgage completed by this year end for mental peace

To each their own. However for ppl who share your philosophy - minimal downside to forbearance
True, but a mortgage is not one's only expense.
Topic Author
mirror
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Re: Houses Are Not Edible

Post by mirror »

Nate79 wrote: Sun May 03, 2020 5:57 pm We made a gingerbread house at Christmas. It was certainly edible.....


Back to reality. We have a 1 year emergency fund (combo of cash and bond funds in taxable) and additional taxable accounts of stocks as well as Roth IRAs. We have no need to raid the equity in our home like typical poor broke in debt up to their eyeballs consumers.
Neat. Sounds like a fun Christmas. :D
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mirror
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Re: Houses Are Not Edible

Post by mirror »

megabad wrote: Sun May 03, 2020 6:31 pm Seems like a silly question. Your examples are pretty poor examples of “liquidity”. A better question would be, should you rely on these suggested forms of debt in planning for a time of economic uncertainty? And you have an abundance of evidence that tells you absolutely not. Essentially no one with bad credit is able to get loans right now. This was the same a decade ago. If you always assume you have unlimited credit than this whole premise is pointless. At that point you should take out debt in every case as long as you believe you will have higher return than cost.
I may not have been as articulate as I had hoped. The term liquidity was regarding having cash on hand as opposed to being tied up in physical real estate. However many people do use credit cards, helocs, and other forms of debt in various points of their emergency fund plan. I do not, but many do https://earlyretirementnow.com/2016/05/ ... ency-fund/
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mirror
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Re: Houses Are Not Edible

Post by mirror »

Christine_NM wrote: Sun May 03, 2020 6:37 pm I've known smart people who believed they should carry as big a mortgage as they qualified for. So just because I disagree with you doesn't mean you are wrong or that i'm wrong. Housing finance tends to be a gut feeling based on when and how you grew up.

Houses are not edible, but you can't eat money or sleep in your safe deposit box either. Now we find out money doesn't always buy food. You need a place to live, you have a home with some equity, why screw that up.
Thanks for the post! Great points indeed.
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mirror
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Re: Houses Are Not Edible

Post by mirror »

LilyFleur wrote: Sun May 03, 2020 7:03 pm I have a HELOC at 4.25%. After using it to get kids through college, I paid it off. It's only for very brief loans for cash flow now. I find it easy to pay off my credit cards every month, but once you start spending out of a HELOC, it's easy to let the total get too high.
True, one may find other 'necessities' if the cash is readily available.
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mirror
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Re: Houses Are Not Edible

Post by mirror »

KlangFool wrote: Sun May 03, 2020 5:01 pm OP,

A) Is it a recourse loan or a non-recourse loan?

B) What if pulling out the money increase the liquidity requirement? Aka, the monthly mortgage payment.

KlangFool
What are your thoughts in each of those scenarios?
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Re: Houses Are Not Edible

Post by LadyGeek »

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