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Should You Pay Off Your Mortgage or Build Your Emergency Fund?

Let’s say you have a sum of money. You could have saved it, received it from an inheritance or won the lottery.  How you got the money does not matter, in this post we will look into what you should do with it.  Obviously you should save/invest the money for your future, but how?  Many people ask whether they should pay off their mortgage early or opt to build an emergency fund.  This question is asked time and time again.  If you ask 50 different people you will get 50 different answers, here is my take:

Pros of paying off your mortgage early

Paying off your mortgage early relieves you of your biggest debt, and that alone should count for something. Also, you will be opening up over a thousand dollars each month in your budget that used to go to your mortgage that can now go to saving money each month or investing money each month.

Most people who qualify for a mortgage and “buy” a home consider themselves home owners, but that is not entirely accurate. The bank will always own your home while you are paying a mortgage. If you miss a few loan payments, you will get a few nasty letters or phone calls from the bank that owns the mortgage. If you miss a few more payments your home will be foreclosed on and you will be left out to dry.  Does this sound like “owning” a home to you?  Truly owning a home means you have 100% equity in it and have no mortgage to pay. This achievement no doubt comes with a very rewarding feeling.

Pros of building an emergency fund

Everyone should have an emergency fund of at least 6 months of living expenses, especially if they have a family. Unemployment is high and underemployment (having a job with fewer hours or less responsibilities) is common these days. Our economy seems to have stabilized over the past year or so, but that does not mean it is strong by any means. If you are laid off you will need an emergency fund to lean on because unemployment only lasts for a short period of time.

It is so tough to build an emergency fund. Conservatively, a family of four would need $25,000 to survive for six months.  When you are on a tight budget and you would like to build up college savings for your kids or sock money away for your retirement, an emergency fund is often the “odd man out”. Even if you are able to sock away 500 dollars each month to build your emergency fund it would still take 50 months, or over 4 years to build the fund.

Why building your emergency fund is the right choice

It is a tough call between these two options, and depending on your personal situation choosing to pay off your mortgage may be the right choice.  But for most, building your emergency fund is the way to go.  I look at it like this: Once you pay your mortgage it is very difficult/impossible to get the money back if disaster strikes. Sure you can look into reverse mortgages but those are a hassle and nothing is guaranteed.

If you choose to build up an emergency fund you can always change your mind, and if your situation changes then  use the money you had in your emergency fund to pay off your mortgage.  Building an emergency fund just gives you so much more financial flexibility.

This guest post was written by Evan. Read up on Forex Strategies at



My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.


  1. You hit the nail on the head. A paid off mortgage is not a rent free home. Taxes an utilities are still due each month. Pay off the mortgage after a healthy e fund is built.

    • Thanks for the comment Brenda! Those bills will still roll in, whether that house is completely paid off or not!

  2. Building up your emergency fund is definitely the way to go, and this economy has proven that more than any other time in recent history.

    • Sure is! Imagine if you paid off your house and then found out that your roof needs to be repaired. Where are you going to find that $10,000?

  3. You mention the one problem with paying off a mortgage. It is not very liquid and the thing you need most in an emergency is liquidity.

    • That’s right. It’s not liquid at all and if you find yourself in a situation where you need cash, you’ll be stuck. Paying off the house is a great thing to do, but you want to make sure that you have some reserves if you do so.

  4. My plan is to pay off the mortgage and then build an emergency fund. We don’t have kids, we both have fairly ‘secure’ jobs and we have a few low interest lines of credit if we need cash fast. Interesting to read others perspectives though.

    nursieC on twitter

    • I would still have an emergency fund of some sort, even if it was only $10,000.

  5. This assumes that you can only do one thing. I would say build an emergency fund and then pay off the mortgage. (Which is what we’re in the process of doing.)

    • You could do both at the same time. I think that’s what my wife and I will do (after we save up a few thousand in our emergency fund); we’ll put some cash toward our mortgage (so we don’t miss out on canceling the interest in the first couple years), and we’ll also put some toward the emergency fund.

  6. I guarantee if you use your savings (or inheritance or winnings) to pay down your mortgage, Murphy will be knocking on your door before your check clears the bank. The right thing to do is build the emergency fund. I’ve been in both situations – paying a hefty amount on the mortgage then needing emergency money; and LEARNING my lesson, building an emergency fund and being thankful we had it when an emergency arose.

    • Yep! Murphy has a way of creeping up on you when you spend that emergency fund! I’d love to hear about your life lesson! 😉

  7. Derek-

    I can’t believe the debt-free king is choosing NOT to pay down the debt. Here is my take on it:

    -pay down the mortgage
    -open a HELOC
    -begin building emergency fund

    By paying down your mortgage, you are no longer responsible for these payments (return ~4%). By opening up a line of credit, you are prepared for any emergency and you remove the need for liquidity. If an emergency never occurs, the HELOC doesn’t cost a thing (w/ most lenders). If an emergency does occur, you’re paying the same (if not less) interest than you were before. With this option you achieve all of your goals.

    • I know! But, if you choose to pay off the house and have no reserves, you’ll no doubt go back into debt when that emergency happens. I don’t like the idea of using HELOC as a back-up. It’s seems similar to keeping that credit card in your wallet in case of an emergency. Then there’s that to pay off….

      • If you choose to build the emergency fund and keep the mortgage, you’ll earn .5% on the savings and pay 4% on the mortgage. If you payoff the mortgage and begin building the emergency fund, you’ve earned essentially 4% +.5% on additional funds moving forward. If an emergency does occur, you simply tap into the HELOC at worst-case scenario 4%. To summarize, if an emergency occurs, our options look identical.

        Either option provides you liquid funds for an emergency, but my plan will lead to a greater return if no emergency occurs.

        • Or, you can be like me and find a 4% return on your checking account (hehehe). I’m not sure that’s too common though…

          I understand your point funancials, but cash is just so much simpler and more liquid.

          • After I read about your high-interest checking (and couldn’t believe it) I did some research. Found a start-up “boutique bank” which was offering around 3%. Having that sort of return w/ liquidity changes things.

          • Yeah. It is pretty sweet! I’m glad you found something similar!

      • I think what he meant or his plan was to build the EF, immediately after the home is paid off. Which would be quick since the old mortgage payment would be used to build the fund.

        • Got it. Love to hear your comments, Vin!

  8. I have to agree with you Derek. With an ER fund your money is still accessible and readily available. Like you say, once you pay of your mortgage, you have your house but that is it. We are currently working on building up our ER fund to where we would like it to be. It is a slow and steady process.

    • Yep yep! The emergency fund is pretty important.

    • I would not say “that is it.” After you pay off your house, the money you would pay for the mortgage every month is cash flow!!!! put it in savings, emergency fund, investments or buy what you want… live life and be a big giver to bless others….

      • Exactly! Love it, Vin!

  9. Why not do both? We currently have a 2 year emergency fund and are directing a set amount of money to it every month. We are also paying off the mortgage early.

    • Wow. Sounds like you have a pretty solid emergency fund there! I’d say you could probably stop putting money toward that and start paying down your mortgage at warp speed!

  10. Good points here derek – you can always use the cash in the future if you want, but not if you pay your mortgage. I’d probably use a portion of the sum of $ to pay part of the money, but keep a good amount in cash, probably 60-70%

    • That sounds like a good plan Jeff. Keeping cash around typically keeps Murphy away. 😉

  11. I agree with putting the money towards an e-fund first and THEN working on the mortgage. Although, if I had enough money to pay the mortgage off I’d be pretty tempted!

    • That would be tempting wouldn’t it! I once had a friend ask me what he should do, because he had some money set aside for emergencies and with that he could pay off his house loan. He really wanted to, but realized that he would be eating breadcrumbs for a few months because he would be so nervous that Murphy was coming to visit! 😉

  12. I think the emergency fund would be the way to go over the mortgage. I think you would see a better tax deduction that way.

    • Oh goodness, not tax deductions again! While yes, you will get a slight tax break on your mortgage, that is not the reason for stocking money into your emergency fund.

  13. Definitely sock it away for at least 6 months of emergency funds. Any that is left over can be put toward the mortgage — and hopefully pay it down considerably!

    • I’m with you Christa! Saving up the emergency fund can be tough, but it’s definitely important!

  14. I have to say that I would pay off my mortgage. It might be a slight gamble, but with no mortgage payment, your emergency fund would go a lot further, as you would not have to include the biggest item in most people’s budget. Plus, you save on interest, and could contribute what you would normally pay on your mortgage to your emergency fund.

    • I do see your point, but what if that emergency came up the day after you paid your entire mortgage? You would be screwed.

      • After you pay off your house, the money you would pay for the mortgage every month is cash flow!!!! put it in savings, emergency fund, investments or buy what you want… or take a few months to use it for your emergency…. plus you would have immediately started putting money into the EF.

        • Yup – it’s amazing how fast your money can grow when you have no mortgage! And, after a while, it’s super easy to just live without thinking about expenses, because you’ve always got enough money! Crazy to think that some people are strapped for cash EVERY SINGLE MONTH. Must be exhausting…

      • or use HELOC.. and pay it off asap

        • A HELOC is okay, but I don’t love using it as an emergency fund. There’s definitely an element of risk there.

  15. Definately agree with having an emergency fund firmly in place before worrying about paying extra towards your mortgage. Liquidity is the name of the game and a paid off house while nice is not the most liquid and won’t necessarily help you out in case of an emergency. Paying off debt vs. saving vs. investing is always a hot topic in personal finance! My wife and I first got our emergency fund in place and now enjoy paying off mortgage and investing at same time.

    • You said it PFS! Liquidity is key in the event of an emergency.

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