Author Topic: Confused about how to move forward  (Read 6296 times)

Djeayzonne

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Confused about how to move forward
« on: October 06, 2016, 07:22:10 PM »
Hey everyone,

So, after first discovering this site and mentality, I quickly learned that the first thing you should do is pay off debt that exceeds a certain interest rate threshold. In my case, that would be my second mortgage (7.99%) as I did an 80/15/5 to avoid PMI. Only other debt is two consumer purchases on 0%, car lease, which is a business expense, and the primary mortgage.

So, for the last 4 months I have been paying the second mortgage. I have paid off a little over 10K with 24K left. I then intend to refinance the primary to a 15-year mortgage.

At that point, I will have 270K in equity, 100K of which is my original down payment and what I have paid on the mortgage for the first 5.5 years. Obviously, I have never paid just the minimum payment.

So, I had been thinking that would be a good point to stop worrying about wasting money on mortgage interest, pay only the minimum payment, and put all net monies into investments by maxing out solo 401k, Roth IRAs, and then the rest into a post-tax account.

However, I was just reading several posts advocating not to have equity in a house and that when I refinance, I should do another 30-year, and invest the difference.

So, I'm a bit confused as, according to this, I should just refinance both mortgages into one new 30-year and start going gung-ho on investing.

Basically, my thoughts over the summer were that I currently pay over 900 dollars a month in interest, 750 on the primary mortgage, so going 15-year would cut that in half even from the start of the loan, which would justify closing costs.

So yeah, anyway, really confused now, as some of this seems to be conflicting info.




MDM

  • Senior Mustachian
  • ********
  • Posts: 10666
Re: Confused about how to move forward
« Reply #1 on: October 06, 2016, 09:10:44 PM »
So yeah, anyway, really confused now, as some of this seems to be conflicting info.
That's true.

Some of the conflict arises because people talk about what makes them "feel better."  Different people will have different feelings.

Some of the conflict arises due to different assumptions about what market returns will be over the next X years.  Different assumptions lead to different conclusions.

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3054
  • Location: Emmaus, PA
Re: Confused about how to move forward
« Reply #2 on: October 07, 2016, 05:50:49 AM »
First question-do you really need such an expensive house?

Djeayzonne

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Confused about how to move forward
« Reply #3 on: October 07, 2016, 11:07:42 AM »
No, and I have looked into that.
We bought/built this house with the hopes of starting a family, which isn't going to happen, so I want to downsize.
However, prices have gone up so much that getting a house 40% smaller but at the same finish level would actually cost a little more than what I originally paid for this house.

So, my plan is basically to wait until the infrastructure of the area is built up a bit more before selling this house and move to a completely different area, probably a different state. This would be about 5-6 years from now I think.

Ebrat

  • Stubble
  • **
  • Posts: 239
Re: Confused about how to move forward
« Reply #4 on: October 07, 2016, 12:43:31 PM »
Can you just refinance now? What percent of the house value is your equity?

I was planning to pay my mortgage down enough to get rid of PMI next year, but then I realized that between what we'd paid in principal already (2 years into the mortgage), a little bit of appreciation on the house, and a few grand out of pocket, I could get my equity to 15% of the house value (we originally put down 5%). We chose to go with a 15 year mortgage. The lower loan-to-value ratio (85% vs 95%) and shorter term of the new loan brought our PMI down from $90/mo to $33/mo, and we'll get rid of PMI about 6 months sooner than we'd originally planned.

That's a slightly different situation, but I think it illustrates the possibilities well. Don't assume you have to pay off the second mortgage before refinancing. Rates are so good right now. With what you've paid down already, you might be able to get a new mortgage at 80% LTV and get the whole thing squared away with little to no extra money on your part.

Re: a 15 vs 30 year mortgage, we went with a 15 year because we plan to live here at least that long, and it gives my husband the warm fuzzies to pay it down more quickly. But since you're not planning to be in your house very long, I think the 30-year probably makes more sense.

human

  • Pencil Stache
  • ****
  • Posts: 787
Re: Confused about how to move forward
« Reply #5 on: October 07, 2016, 12:51:23 PM »
If you have a mortgage at 8% and can't refnance to less than 4 I would definitely pay off the mortgage, why is the rate so high?

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3054
  • Location: Emmaus, PA
Re: Confused about how to move forward
« Reply #6 on: October 07, 2016, 12:59:32 PM »
No, and I have looked into that.
We bought/built this house with the hopes of starting a family, which isn't going to happen, so I want to downsize.
However, prices have gone up so much that getting a house 40% smaller but at the same finish level would actually cost a little more than what I originally paid for this house.

So, my plan is basically to wait until the infrastructure of the area is built up a bit more before selling this house and move to a completely different area, probably a different state. This would be about 5-6 years from now I think.

But wouldn't you get a big pile of money out of your house?

boarder42

  • Walrus Stache
  • *******
  • Posts: 8095
Re: Confused about how to move forward
« Reply #7 on: October 07, 2016, 02:00:01 PM »
No, and I have looked into that.
We bought/built this house with the hopes of starting a family, which isn't going to happen, so I want to downsize.
However, prices have gone up so much that getting a house 40% smaller but at the same finish level would actually cost a little more than what I originally paid for this house.

So, my plan is basically to wait until the infrastructure of the area is built up a bit more before selling this house and move to a completely different area, probably a different state. This would be about 5-6 years from now I think.

But wouldn't you get a big pile of money out of your house?

why not sell the house and downsize ... if the market has appreciated now is the perfect time to make this kind of move.  if you plan to move in 5-6 years why not just sell and rent for that time assuming the rental market is more affordable than the housing market. 

when down sizing a bull housing market is your friend. Dont think about what you paid for your house vs what a house costs now.  think about what can i get for my house vs what a house costs now.

Axecleaver

  • Magnum Stache
  • ******
  • Posts: 3488
  • Location: Columbia, SC
Re: Confused about how to move forward
« Reply #8 on: October 07, 2016, 03:02:09 PM »
The tradeoff between 15 year and 30 year is the spread of the interest rate (advantage 15 year), vs increased flexibility/lower payments (advantage 30 year). My credit union offers 3.5% on a 30 year and 2.75% on a 15 year. On $100k loan, payments would be $449 or $678 with a spread of 0.75%. The spread varies from zero up to 1.5%, depending on what's happening in the mortgage securities market.

I think what you read was advocating that you get a 30 year loan for 80% LTV, get rid of PMI or second mortgage (which is costing you a lot) and invest the principle you pull out in the market. You're paying 3.5% (or 2.75% for a 15 year) to earn an average of 10% in stocks. The flip side to that, is that many folks feel better with a paid off house than with a big investment account, despite the math. Know thyself. There is no wrong answer as long as you're saving a large chunk of your income.

frugaldrummer

  • Pencil Stache
  • ****
  • Posts: 842
Re: Confused about how to move forward
« Reply #9 on: October 07, 2016, 05:32:45 PM »
Do remember what happened in the last recession in 2008.  People with large mortgage balances lost their homes when they lost their jobs AND their mutual funds tanked at the same time, while their home values also tanked.  It was a mess.  So I think anyone who advocates just keeping all your money in the market and carrying a large mortgage is ignoring the fact that this leaves you very vulnerable to an event like that.  Evemn if you have significant savings, you don't want to be forced to pull a lot of it out when the market is tanked. 

Conversely, people who had small mortgage balances or paid off homes were less vulnerable.  BUT you don't want all your money tied up in home equity, which is not easy to access.

human

  • Pencil Stache
  • ****
  • Posts: 787
Re: Confused about how to move forward
« Reply #10 on: October 07, 2016, 06:19:40 PM »
This is why you shouldn't be a crazy expensive house, keep it to less than 3-4 times your annual income. Meanwhile if you do dump all that money in the mortgage and economy tanks you will lose out on the bounce back.

ruraljuror

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Re: Confused about how to move forward
« Reply #11 on: October 07, 2016, 09:00:43 PM »
I'm in the same boat as you, confused. But i've boiled it down to the understanding that the amount of money you have in a house should be a reasonable proportion of your net worth. Having too much of your net worth tied up in a home will limit overall returns and wealth building until you downsize. I decided to stick with my 15-year mortgage (3.5%) and only pay the minimum payments. It's a compromise solution that allows you to build equity and pay less in interest than you would with a 30-year.

Djeayzonne

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Confused about how to move forward
« Reply #12 on: October 07, 2016, 09:58:30 PM »
Thanks for the feedback.
Sorry for the confusion. Let me recap the situation.

Primary 30-year mortgage is 4.25%
Secondary 15-year mortgage is 7.99%

Current LTV is just over 50%

Why the second is so high, I don't know. It was just the package the mortgage dealer came up with to avoid PMI.
It was totally unnecessary though, I would only have ended up paying PMI for 12-18 months.

Yes, I guess I would get a nice amount of money if I sold now, but the buying and selling processes themselves are expensive, so I want to minimize the number of times I do that in my life.

At the time of purchase, I was still working as an employee. The house was 3.7 times my salary.
Currently, the remainder of the loan is less than 2 times my gross. The value is just under 4 times my gross.

The posts I read recently were not discussing details like PMI and second mortgages.
This is the first post I read:
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Which caused me to do a Google search, and then I read this post:
https://investorjunkie.com/13979/fool-prepay-mortgage/

And a few others saying virtually the same thing.

So, here is my dilemma.
To me, refinancing the two mortgages into one does not eliminate the high interest debt. It is just sweeping it under the rug.
For at least this, I want to finish paying it off.

However, I am a man of numbers and logic, and according to these posts, I already have too much equity in my house.
I do not want to make the emotional feel-good decision. I am very comfortable with high levels of calculated risk.
However, I do not agree with overextending leverage. That isn't risk; that is an accident waiting to happen.
So, if this is the case, as much as I don't like changing directions in the middle of something, I will stop paying the second mortgage and start building up the retirement accounts.

Also, if I end up agreeing with the argument that 30-year is better while investing the difference, would it really be worth the closing costs just to change from 4.25 to 3.5-3.75?
As I said before, I felt the 15-year refinance was worth the closing costs because of the dramatic and immediate difference in absolute interest dollars spent every month.

Actual situation right now:
I was planning on paying another 4 K to the second mortgage next week.
September was a good month (variable income), so next month is going to be 10K.
Then, probably another 4-5 K in December.

At that point, the remaining 24 K as of right now will be paid off either during January or February.
However, after reading these posts, my confusion and concern is if I should direct these funds towards retirement investment accounts?

Note: My retirement investment accounts as of right now are nearly zero.
The past few years have been a focus on recovering from my layoff and building up my freelance business.
This year's focus has been on eliminating debt and building up a very slight emergency fund.
The rest of the emergency fund was to be resolved by also establishing a HELOC when I refinanced the mortgage.

Next and subsequent years' focus will obviously be just building up the stash.

I hope this helps with clarity!
I certainly wrote that first post while feeling a bit overwhelmed.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10666
Re: Confused about how to move forward
« Reply #13 on: October 07, 2016, 10:49:10 PM »
At that point, the remaining 24 K as of right now will be paid off either during January or February.
However, after reading these posts, my confusion and concern is if I should direct these funds towards retirement investment accounts?
Perhaps "maximize the amount paid toward the second mortgage, subject to the constraint of maximizing retirement account contributions for the 2016 tax year" would work.

See your first post in the MMM forum for the generic prioritization rules.  The nuance in your case now is that it probably doesn't make sense to give up a year's 401k/IRA contribution space just to pay the 2nd mortgage a few months early.

Quote
Note: My retirement investment accounts as of right now are nearly zero.
This, and your low expectations for SS income, indicate that traditional accounts are likely better for you than Roth.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth for details.


Djeayzonne

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Confused about how to move forward
« Reply #14 on: October 07, 2016, 11:28:41 PM »
At that point, the remaining 24 K as of right now will be paid off either during January or February.
However, after reading these posts, my confusion and concern is if I should direct these funds towards retirement investment accounts?
Perhaps "maximize the amount paid toward the second mortgage, subject to the constraint of maximizing retirement account contributions for the 2016 tax year" would work.

See your first post in the MMM forum for the generic prioritization rules.  The nuance in your case now is that it probably doesn't make sense to give up a year's 401k/IRA contribution space just to pay the 2nd mortgage a few months early.

Quote
Note: My retirement investment accounts as of right now are nearly zero.
This, and your low expectations for SS income, indicate that traditional accounts are likely better for you than Roth.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth for details.

MDM, that sounds reasonable.
Can I clarify with you if you mean just the employee side of the 401K contributions or both the employee/employer contributions?

Any opinion on the refinance?

MDM

  • Senior Mustachian
  • ********
  • Posts: 10666
Re: Confused about how to move forward
« Reply #15 on: October 08, 2016, 12:15:04 AM »
MDM, that sounds reasonable.
Can I clarify with you if you mean just the employee side of the 401K contributions or both the employee/employer contributions?
I guess I was thinking about the employee side only, using a mental back-of-the-envelope assumption that you might have ~$60K between now and the end of 2017 to
a) contribute $18K to the 401k in both 2016 and 2017, and
b) use the remaining $24K to finish the 2nd mortgage.

If your cash flow will allow even more, then so much the better for you.

Quote
Any opinion on the refinance?
It's may not be mathematically optimal, but "minimizing the mortgage interest rate" subject to
a) allowing one to fill all available tax-advantaged investment space, and
b) keeping the interest rate less than ~2.0-2.5% above the current 10-year treasury rate (with a 1.7% treasury rate, that's "less than ~3.7-4.2%").
seems reasonable.

Because
- lower mortgage rates usually come with shorter loan lengths and thus higher monthly payments, and
- higher mortgage rates usually come with longer loan lengths and thus lower monthly payments,
"your" optimum mortgage rate is usually determined by one of 3 things:
1) the lowest rate any lender will give for a very short, high monthly payment mortgage when your cash flow is more than enough to meet spending needs and fill tax-advantaged space.
2) hitting the highest interest rate you are willing to pay (e.g., ~3.7-4.2%)
3) finding the monthly payment (and thus loan length and interest rate) that exactly lets you maximize tax-advantaged space and meet spending needs

Does that make sense?

boarder42

  • Walrus Stache
  • *******
  • Posts: 8095
Re: Confused about how to move forward
« Reply #16 on: October 08, 2016, 04:56:56 AM »
You could also look for a no cost refi. The rate will be maybe a quarter higher to account for no closing costs. But you will definitely lower your primary rate and rid yourself of the crazy high secondary

Axecleaver

  • Magnum Stache
  • ******
  • Posts: 3488
  • Location: Columbia, SC
Re: Confused about how to move forward
« Reply #17 on: October 10, 2016, 07:00:34 AM »
Agree with MDM's strategy. That's pretty solid given your stated goals. Max your tax advantaged space, pay off your secondary mortgage ASAP, then re-assess.

A second mortgage is typically used in one of two situations: when a primary mortgage would be for a "jumbo" amount, or when the LTV is higher than 80%, or both. It's often a better idea to do a primary conforming loan, and a higher rate secondary in these situations, and then pay down the secondary ASAP. There are typically no restrictions on paying off secondaries early, while PMI removal is subject to a waiting period after the loan has been made. You probably saved money on the 8% secondary mortgage compared to what PMI would have cost you.

Conforming loan limit is currently $417k, or up to $625k in HCOL areas.

Djeayzonne

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Confused about how to move forward
« Reply #18 on: October 10, 2016, 07:52:22 PM »
MDM,

Thanks for the info.

Actually, I hadn't even considered taxes or was even aware of the Saver's Credit until I read your post in another similar thread.
Learning so much these last few weeks, and it is all very interesting and exciting!

And, yeah, I should have a total of 75-80K after expenses between now and the end of 2017.

Ebrat

  • Stubble
  • **
  • Posts: 239
Re: Confused about how to move forward
« Reply #19 on: October 11, 2016, 12:38:57 PM »

To me, refinancing the two mortgages into one does not eliminate the high interest debt. It is just sweeping it under the rug.
For at least this, I want to finish paying it off.

However, I am a man of numbers and logic, and according to these posts, I already have too much equity in my house.
I do not want to make the emotional feel-good decision. I am very comfortable with high levels of calculated risk.
However, I do not agree with overextending leverage. That isn't risk; that is an accident waiting to happen.
So, if this is the case, as much as I don't like changing directions in the middle of something, I will stop paying the second mortgage and start building up the retirement accounts.

I'm not following your logic here. If you refinance the 2 mortgages into one, you're refinancing the higher interest rate to a lower interest rate. If you don't pull out equity, you'll substantially lower your payment, and can put that money into retirement savings if you want.

You can always put more money into your mortgage, but retirement contribution limits are use-it-or-lose-it. For that reason, I've always prioritized maxing mine out. From a numbers perspective, it seems like you would want to refinance the second mortgage into something with a lower rate and then use that money to get going on your retirement savings instead of sinking it into your house.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3620
  • Age: 43
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Confused about how to move forward
« Reply #20 on: October 11, 2016, 02:06:18 PM »
You should have enough equity to minimize your cost of credit. In most cases that is somewhere between 10 and 20%.
Above 80% LTV, rates usually go up, and you generally have PMI, which means that the marginal cost of that extra financing is much higher than the rate on 80% (or occasionally higher, depending on the institution and exact program). In my case, the last time I bought a place, I worked out the marginal rate  In your case, it's only 7.99%, which is still more than you want to pay, so you're right to kill it off.

The real question, obviously, is "what next"? I won't necessarily advocate cashing out equity, but I fully support paying as little as possible on that debt. As long as you have good investing options, the early paydown is mathematically inferior.

Djeayzonne

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Confused about how to move forward
« Reply #21 on: October 12, 2016, 01:25:44 AM »

I'm not following your logic here. If you refinance the 2 mortgages into one, you're refinancing the higher interest rate to a lower interest rate. If you don't pull out equity, you'll substantially lower your payment, and can put that money into retirement savings if you want.

You can always put more money into your mortgage, but retirement contribution limits are use-it-or-lose-it. For that reason, I've always prioritized maxing mine out. From a numbers perspective, it seems like you would want to refinance the second mortgage into something with a lower rate and then use that money to get going on your retirement savings instead of sinking it into your house.

Well, I was trying to simply follow the sequence that MDM often posts without realizing other possibilities.
I also wanted to just simply get rid of the second mortgage so that I can refinance the primary to a 15-year mortgage with little difference in monthly payment.
If I refinance both right now, I am looking at around 1,500 a month P&I vs the current monthly payment of just the primary at 1,150.
Refinancing the primary to a 15-year after the secondary is gone would be 1,300 or so.
Note that I always pay a little extra on both mortgages by default, so my current minimum P&I payment is 1,800 a month for both mortgages.

Also, I was thinking that reducing the total interest of the mortgage had more value in ABSOLUTE dollars (as opposed to the percentages) than investing RIGHT NOW because the absolute number of dollars spent on interest every month is quite high.
Which is why I became confused and started this thread.

After what I read this past week and the info in this thread, I may just go with a 20-year instead though after I at least get 2016 IRA/401K contributions finished.

At any rate, as MDM suggested, I will maximize IRA/401K contributions for this year before continuing to make large payments to the secondary/reassess.



boarder42

  • Walrus Stache
  • *******
  • Posts: 8095
Re: Confused about how to move forward
« Reply #22 on: October 12, 2016, 09:49:51 AM »

I'm not following your logic here. If you refinance the 2 mortgages into one, you're refinancing the higher interest rate to a lower interest rate. If you don't pull out equity, you'll substantially lower your payment, and can put that money into retirement savings if you want.

You can always put more money into your mortgage, but retirement contribution limits are use-it-or-lose-it. For that reason, I've always prioritized maxing mine out. From a numbers perspective, it seems like you would want to refinance the second mortgage into something with a lower rate and then use that money to get going on your retirement savings instead of sinking it into your house.

Well, I was trying to simply follow the sequence that MDM often posts without realizing other possibilities.
I also wanted to just simply get rid of the second mortgage so that I can refinance the primary to a 15-year mortgage with little difference in monthly payment.
If I refinance both right now, I am looking at around 1,500 a month P&I vs the current monthly payment of just the primary at 1,150.
Refinancing the primary to a 15-year after the secondary is gone would be 1,300 or so.
Note that I always pay a little extra on both mortgages by default, so my current minimum P&I payment is 1,800 a month for both mortgages.

Also, I was thinking that reducing the total interest of the mortgage had more value in ABSOLUTE dollars (as opposed to the percentages) than investing RIGHT NOW because the absolute number of dollars spent on interest every month is quite high.
Which is why I became confused and started this thread.

After what I read this past week and the info in this thread, I may just go with a 20-year instead though after I at least get 2016 IRA/401K contributions finished.

At any rate, as MDM suggested, I will maximize IRA/401K contributions for this year before continuing to make large payments to the secondary/reassess.

another option is to get a HEL or HELOC at a low rate for the amount of your second mortgage to reduce your rate.

Ebrat

  • Stubble
  • **
  • Posts: 239
Re: Confused about how to move forward
« Reply #23 on: October 13, 2016, 07:10:53 AM »
Also, I was thinking that reducing the total interest of the mortgage had more value in ABSOLUTE dollars (as opposed to the percentages) than investing RIGHT NOW because the absolute number of dollars spent on interest every month is quite high.
Which is why I became confused and started this thread.

After what I read this past week and the info in this thread, I may just go with a 20-year instead though after I at least get 2016 IRA/401K contributions finished.

At any rate, as MDM suggested, I will maximize IRA/401K contributions for this year before continuing to make large payments to the secondary/reassess.

I think the 20-year and maximizing make sense. The HELOC idea mentioned above is also an interesting one. Short-term, paying down the mortgage saves interest and potentially lowers your payment (depending on whether you refinance and the loan term). Long-term, investing will likely come out ahead in absolute dollars. So it all depends on which you want to prioritize.