Mortgage pay down plan

[different but real]

Looking for ways to improve our current plan. Just turned down for re-finance so our plan is to pay down mortgage as fast as we can and give them the #1 sign (will use a different finger though! and probably tell them multiple times)

particulars:
$203,000 owed on a $265,000 house (paid $287,000 and put 20% down 7+ years ago) have 22 1/2 years left at 5.875%

Not eligible for refinance due to poor credit (should be repaired in 3 years??)

$120,000 income with $85,000 take home pay

No car loans, credit cards or other payments (Spend about $1,000-$1,500 a year in car maintenance above normal costs due to vehicle ages)

Have $10,000 emergency fund

Child going to college in 2 years and we will cash flow that at $1,500 month (some will come from kids summer/weekend job)

We tithe $11,000 to our church (Not open for debate please)

Standard utilities, no tv-hulu+/netflix (took the $80 a month cable savings and added to our Roth IRA contribution), DSL for internet, no home phone

Mortgage payment $1337 month (currently $335 going to principle-rest is interest) property taxes $3,800 year, Car & Homeowners Insurance are $171 month

I think we can find roughly $3,000 monthly to pay down our mortgage for the next two years, then less with college, then should be able to refinance in three years.

We also own a side business that is profitable but we are using all proceeds to build up inventory/fixtures in cash and will need one more year to build to a comfortable level. At that point I was going to double our emergency fund and then put rest on mortgage.

We make our own laundry detergent and hardly ever eat out but still take a vacation, weekend trips and give decent gifts.

We have a written budget but have not really-really tightened the screws... thoughts?

[Another Reader]

You look pretty solid.  Why would you have credit that is bad enough to kill a refinance?  Is this easily fixable?

[Done by Forty]

Without knowing the particulars of your current investments, I'd say you'd be better off maxing out your 401k, and then paying down the mortgage with whatever is left. 

If you're already doing that, then yes, paying down the mortgage sounds like a good idea.  Maybe even a better idea than putting any money in the Roth, but that'll really depend on how the investments perform.

Just my $0.02 though.  It seems like most of the questions here on MMM's forum compare two good situations...there's rarely a 'bad' plan on the table.

[different but real]

Still a sore & sensitive subject.. owned part of a business that failed big. Did not file BK (Income was too high) but had to pay the IRS a large sum 100+ (just finished last year). Still some scars


yes.. maxing out both spouses and my 401k (up to match)

[Another Reader]

Maxing out the 401k's is not just contributing up to the match, unless your companies match the whole $17k for each of you.  In your shoes, I would consider increasing those contributions as well as maximizing the Roth contributions.  The mortgage interest savings, especially after the tax write-off, are just not large enough to me to outweigh the tax savings from putting more into the 401k's and putting future tax-free money away in the Roths.  If the business takes off, you may be shut out of Roths in the future.  Tax free earnings with accessibility to the contributions before age 59 1/2 are awfully hard benefits to pass up.

[Done by Forty]

Yes, as long as the $17k max is being hit in each account, then at that point I'd pay down the mortgage (or, I suppose, max out both Roths, or some balance of the two).

[rusty]

I would recommend not paying down the mortgage until you have all the money needed to pay it off at once.  Here me out on this.  If you pay an extra $60k down on your house and lose your job(s), you are stuck in a bad place.  The bank won't extend you a line of credit because you have no income.  They will not consider all those extra payments as "pre-payments" and let you slide a few months until you get your feet back under you.  They will continue to ask for next month's payment whether you have it or not.  If you can't pay it for 3 months, you can bet they will foreclose. 

Consider a banker's option in today's market.  He has client 1 one who owes $200k on a $250k house which would appraise today at $180k.  His second client 2 has the same situation, but owes $75k.  Which would he foreclose on first?  Would he foreclose on #1 and have to sell the house at a $20k loss?  Would he foreclose on #2 and re-sell house at $105k profit for the bank.  He will choose #2 all day long.  He would likely bend over backwards to help #1 as compared to #2.

By having the money in a cash account, you have more flexibility.  If times get real rough for you, you will have liquidity.  That's worth more than what you would save by paying it down with extra payments.  It may not apply in good markets so much, but in markets like we are in now; having your own options is what being FI is all about.
R

[Done by Forty]

I like the thought, rusty, but in an unlikely but possible "I'm going to lose my home" scenario, wouldn't the OP just withdraw the needed money from the 401k, pay the taxes, and take the penalty?

[Self-employed-swami]

Can you get a LOC for emergencies, and put most of the emergency fund onto the mortgage?

[strider3700]

I'm taking the approach that rusty suggests.   I horde cash in the hopes of having enough to pay the house off in one big payment one day.

Things are a little different in Canada though. Up here the bank gains nothing the same by foreclosing on the house in either situation.  Here if you owe the bank takes the house and sells it you're responsible for the remaining amount owed.  You could end up with nothing and still be making payments for 25 years.

So having the cash sitting there really just lets me make payments for a long time even if I lose my job or something along those lines.

[rusty]

it would depend if the penalty (withdrawal from 401k) would be more expensive, which I would guess would be more than the savings of paying the mortgage down.  I tend to favor the idea of hording cash in a separate bank from where my mortgage is. 

If economy gets much worse, having liquidity of cash is better than having the money tied up in an asset that the bank may/may not allow you to get out (market value drops = no equity).  By having the cash on hand, you have options. 

Had a friend who used an LOC as his "emergency fund."  Then bank decided that he had too much debt (rental property) in this market and cut his line of credit by more than half.  He initially freaked out, but later saw it as a "notice" to get his stuff in order. 

Like with any small business, cash is king.

[different but real]

Another factor that I have to consider is my spouses opinion. There is a real security (trust)  issue as the last 8 years has been a nightmare and took a toll on our lives. I own that, took risks with our future without the others real input and beat  myself up daily with regrets. The 10k is only have of what the spouse really wants for security and I can not blame them. My job is secure (as one could be in this day/age), but my industry is sketchy. We are debt-averse and feel like prisoners based on our past experiences. Hope this gives a little perspective that sometimes you can not factor into the math.

[twinge]

With all the info given, in your shoes I would:

1) Leave the emergency fund in place (it sounds like your spouse is deserving of some peace of mind and I respect your sensitivity to this).
2) Invest in Roth IRAs for you and your spouse (where you can withdraw contributions without penalty at any time--explain to your spouse this aspect of the IRA so they can be "counted" as emergency fund money--this will get you 10K of emergency fund additions each year you max out both). While in your tax bracket it may make sense to max out 401k's first, this can help the "peace of mind issue"
3)Invest more in 401k if not maxing it out to reduce your tax burden.
4) Keep monitoring your credit to do a re-fi asap. 

[Another Reader]

At $3,000 a month, you should be able to substantially increase your retirement contributions and your cash savings.  That should make your spouse more comfortable and help with the trust issue and the safety margin.  Obviously, a HELOC will not work as an emergency fund in your case.  Given the flexibility of the Roth contributions, in your shoes, I would fully find them.

I would let the mortgage ride until you are in better financial shape.

You are lucky to be married still after what you went through.  In your shoes, I would lay out the financial plan for the spouse and secure agreement before moving forward.

[Done by Forty]

it would depend if the penalty (withdrawal from 401k) would be more expensive, which I would guess would be more than the savings of paying the mortgage down.  I tend to favor the idea of hording cash in a separate bank from where my mortgage is. 

In the case of a job loss, burning through the emergency fund, and needing to withdrawl from the 401k just to keep making payments, yes, the cash plan is going to save the OP money.

But in the case of keeping his job, or even losing it but finding another prior to needing to tap the 401k, the cash plan loses money (because he's likely to earn much less in a savings account than he's paying in interest, at least for the forseeable future).

It's a matter of how likely you think each scenario is.  I think the "worst case" scenario we're envisioning is fairly unlikely.  It's dire enough that you would want to have a sufficient emergency fund & other savings prior to paying down a mortgage, but not likely enough for me to say he needs to pile up cash just in case.