My wife and I have just reached a major milestone – today we retire all of our debt with the exception of the mortgage on our home. At one point, just 2 ½ short years ago, we owed $38,000 in student loans, $25,000 in vehicle loans, plus we had $270,000 tied up in two houses – one that I lived in prior to marriage (~$40,000 underwater), and another house that we had just moved into (and due to the terms of the loan, I immediately became $10,000 underwater in this home the moment I closed on it). I’m still puzzled as to why the hell the bank actually gave us the loan for our current house, but even more puzzled why I thought it was a good idea to buy another house with 0% down instead of renting. FWIW, I earn ~65,000/year and my wife is a stay-at-home-mom.
Anyway, that’s water under the bridge. After much wringing of hands and gnashing of teeth and a couple years of fairly badass frugality (if I do say so myself), our only debt left is $131,000 on our current home. Unfortunately, I am pretty certain that we are still underwater by about $5,000 or so on this house, as the housing market here was never severely affected by the recession, and home prices have not changed much since we purchased.
So, that is where you all come in. We will now have about $2500/month in savings that I need to allocate, and I’m thinking of paying down pretty heavily on our house as well as funding some retirement accounts.
The nitty-gritty on our mortgage:
Outstanding balance: $131,000
Rate: 5.125%
Monthly payment: $956...
Breaks out as:
Escrow: $211
Interest: $563
Principal: $225
Other details:
-I currently kick in an extra $44/mo on the payment to make it an even $1000
-Escrow used to be about $50/mo cheaper, but our insurance rates skyrocketed after a $12,000 hail damage claim this spring
-There’s no way for me to re-finance at a lower interest rate; my credit was damaged pretty badly before we were finally able to get our finances in order. I do itemize my taxes, so the effective interest rate is almost a point lower.
It makes me very nervous to think that I may still be underwater on my house after paying on it for 2 ½ years (especially considering that it has not depreciated). I would feel a lot better if I had at least 10-20% equity in the house, since there is a very real possibility that my company will ask me to relocate in the not-too-distant future. So to that effect, I’m thinking of bumping up my mortgage payment to $2000/month, which would give me 10% equity within a year, and 20% equity in less than two.
I would still be maxing out my 401(k) + 3% company match, and I would be maxing out my HSA as well. The only thing that makes me nervous, I guess, is the idea that I would be putting money in the home that I can’t get out without selling it. Obviously a home equity line of credit is not in the cards for us any time soon. But I feel like I should have put down 20% to begin with, and it’s hard to turn down a guaranteed ~4.25% return on my money, with no prospects of earning that kind of risk-free return anywhere else. We will probably rent for a couple of years if we move, but after that we would like to buy another house, so I don't want to tie up to much money that we will need in the next 5 years in retirement accounts or in volatile investments (like stocks). Bonds may not be much better, given the risk that the principal will shrink if interest rates rise.
I’m just putting my thoughts out there to see if there’s any aspect that I’m overlooking, I suppose. My reasoning feels pretty sound after putting it all our there, but I'm sure someone will think of something I haven't thought of. Thanks in advance.
