Oh man, I'm having trouble figuring out what to do with this.
So I recently refinanced, and in the aftermath find myself in a complex situation. Turns out that I was under water and as part of my refinance I ended up having to pay off the difference between what I still owed and the appraised value. Factoring in closing costs, this amounted to about $17k in closing costs.
Previous situation: I was debt free barring my mortgage before the refinance, but with all my investments in a 401k. This was my model prior to my introduction to mustachianism, and the idea of early retirement. The Mortgage was a 30 year fixed at 5.45% with 28 years left.
Current situation: My mortgage has been changed to a 10 year interest only ARM with an initial rate of 3.5%, no PMI. I have a $17k 10-year loan at 3% (my father provided, the only way the refinance became possible). I have a vanguard Index fund that I am using as my primary early retirement vehicle, while still maxing out my 401k (the debate about 401k versus IRA is another thing entirely).
I'm currently paying in the following fashion:
1) paying towards my mortgage on a schedule to be completed in 12 years (starting at $680 in principal a month)
2) paying off the loan at a rate to pay it off in 3 years. (~ $500 in principal a month over lifetime)
3) paying towards investment at least 300 a month, with any unspent earnings adding to that amount.
Right now, I feel this is a good middle ground: I am guaranteeing myself best use of the ARM, and since I'm intent on not having a mortgage sooner than the 30 years alloted the ARM made sense to me. I'm getting rid of an unwanted debt, given the mustachian stance that any debt beyond your mortgage constitues an emergency and takes precedence. At the same time, I'm building some passive income to support my early retirement goals (I'm hoping to retire somewhere within 7-10 years).
But I'm not convinced this middle road is the best way to go, so I'm asking advice specific to the loan. Yes, it's a loan, and therefore bad bad BAD, but to pay it off any quicker I'd have to delay putting money in to investments (and slowing my build of non-age related passive income) and pay only the minimum on my mortgage (adding to the risk associated with the ARM, given that my minimum is just interest). Alternatively, I could only pay the minimum on this loan for it's lifetime, and push the extra towards my investments to build passive income, given that the interest rate is way lower than expected rate of return from an index fund. But what makes the most amount of sense?