In this article, Dave Ramsey advises that a person should only dip into their emergency fund to pay off a mortgage if the fund is too big and there is only a very small amount left to pay on the house. His reasoning being that you shouldn’t drain your emergency fund just to get rid of mortgage payments, even if it means being completely debt-free sooner. We think he’s probably right, but it is a solution for a problem that is seldom encountered. Folks with big emergency funds and small mortgages are few and far between.
Unfortunately, the average American owes more than a very small amount on their house. In fact, many Americans are struggling to make mortgage payments on houses with little equity. If this is your situation, then it may be wise to consider dipping into your emergency fund and using it to jump-start a debt settlement plan. A qualified debt settlement attorney will negotiate for a large reduction in your second or third mortgage, settling the mortgage for a fraction of what is owed. Alternatively, we can often negotiate a favorable loan modification in the first mortgage as well. In the end, this may deplete some emergency funds, but it also could prevent foreclosure, which is an emergency, and that is what the funds are for!