Invest or Pay Down Mortgage?

[MWorkman]

I was wondering what the Mustachian community thought about the following situation, dilemma, conundrum, there are a few ways to put it.

I recently liquidated my prudential IRA and transferred it over to Vanguard to take advantage of the MUCH lower fees they charge. I took some of the money and invested it in a target retirement fund but I still have a bout 35k sitting in Vanguard's money market. The reason for this is I'm contemplating using it to pay down our mortgage and refinance. Here's why:

We currently owe around 139k on our mortgage at 7%. Terrible interest rate but my wife bought the home with no money down on a 5 year interest only loan before we were married. It is now in it's regular amortization period but of course not paying all that much to principle just yet. Rates of course are fantastic right now and we would like to take advantage of them. The reason we haven't just yet is the home is probably only worth 135-140k maybe a few thousand more. So we can't refinance at this point without bringing cash to closing or if we got a bit higher appraisal we'd still incur a hefty PMI payment without bringing cash which we currently don't have (just the high rate). Our payment currently sits at $1,224.

- If the home were to appraise at $140,000 and we did a loan of $112,000 (80% of 140k to avoid PMI) I ran the numbers and we could even do a 15 year loan at 3.375% (maybe less we have really good credit) and the payment would run $793.81 P & I + approximately $203 for taxes and insurance which would put our payment at roughly $1000 a month. This would save us around $225 a month and now we'd only have 15 years left. (We eventually like to move and hopefully keep this as a rental as it would be a good home to rent) This however would take most if not all of the cash on hand.

- The other option is invest the rest of the money, start paying down the mortgage aggressively until we can refinance and hope rates are still relatively low when we are in position.

- Or we could just continue to invest and pay the mortgage as is until we move and either sell it or keep it and rent it out hoping to break even.

Mustache community thanks for your insight ahead of time.

Matt

[Davin]

Have you looked into refinancing under HARP? It may help if the house appraises as underwater.

[MWorkman]

We are not HARP 1.0 or 2.0 eligible. The loan has to be backed by Fannie or Freddie and it is not thus not eligible for HARP. Wish we were then we could at least drop the interest rate a few points without bringing anything to the table.

[Emg03063]

I'd definitely try to refi ASAP.  Look at 5/1 ARM rates and see if the lower payment makes sense for you (apply the savings to paying down your principal so you don't get screwed when the rate resets).  It did for me.  If you want to take some of the cash you brought to close back into equity investment, you could always open a HELOC for 10% of your value.