Does this make sense?

[easton]

Hey Everyone,

Been lurking for a few weeks here and am trying to get myself righted and on the right track financially here and need help deciding what to do. Currently 25, work for the DOD and make around 60k a year. In a long distance relationship for 2 1/2+ yrs with a girl who lives in Baltimore, MD. I live around Harrisburg, PA so around 1 1/2 hrs away. We make an effort to see each other each weekend, so I usually drive down there 2 weeks a month, she drives up here the other two weeks. (no biking with this set up, so razor mark one against my mustache) She is currently going back to school to get a doctorate in physical therapy. This summer she will be moving up to harrisburg with me for a year to finish her gen ed courses. She will then have 2 more years of PT school which will probably be back in baltimore.

Anyways, I have owned a house since I was 22. Have essentially made zero progress/have actually increased my mortgage in those years because I have been taking out home equity loans to do improvements to the place. Current balance of around 160k on the mortgage and home equity loans. After talking with the girlfriend, I've decided to stay in my current house for the next 3-5 yrs until she graduates, and then the game plan is she moves to harrisburg and we would get married and buy another house.

About a year and a half ago I refinanced from my 30 yr at 5.375% to a 15 yr at 3.375% because the thinking at the time was that I should pay off my mortgage debt as quickly as possible. After reading a bunch of finance sites, now I'm not so sure that makes sense since interest rates are so low.

My current thinking is I should refinance back to a 30 yr mortgage, and use the freed up cash flow to pay off my car quicker/ or to start putting a bunch more towards retirement funds.

I was planning on getting a Pen Fed 5/5 ARM with 30 yr amortization starting at 2.875%. It has no closing costs, and they give me a credit equal to the first months payment. I have to not sell or refinance for 3 yrs or I owe a prorated amount of the closing costs and credit. The current payment is $1465 a month on my 15 yr mortgage. The new payment would be $965 a month with the 30 year 5/5 ARM.

Car is a 2010 prius I bought used in August on a 5 yr note. Cost 20k. have $17,700 @ 2.5% left on the car note. Previous to that was driving a 1999 Ford explorer which was paid off, but was nearing the end of its life, had some major issues going on with it(transmission/engine), and got 16mpg...pretty awful for a commuter.

Basically, do you guys think that's a solid game plan of refinancing back into the 30 yr, and then using the difference in payments ,which would be around $500 a month to put into retirement accounts/possibly pay off car quicker? I was just doing 5% into my TSP account (401k) but bumped that up in January to 11%. If I added another $500 a month to that it would be around 20% a yr.  Or I could throw the $500 at the car to pay it down quicker, or I could sort of split it between the two.

The only thing that is nagging at me would be the adjustable rate feature if for some reason I end up staying in my house longer then 5 years. Rate can adjust 2% every 5 years with a max of 7.875%

So what say ye, is that a solid game plan? (and sorry for the rambling)

[sherr]

Given that you plan on selling in less than 5 years, yes a 5/5 ARM sounds like a reasonable plan. If you were planning on keeping it long term I'd definitely recommend a 30 year fixed mortgage. I would put the extra money in my 401k until that is at maximum.

There are truly no closing costs? None whatsoever? Sometimes they'll roll the fee into the amount you owe for the house and call it no closing costs, that's not happening here is it? If there is a cost to refinancing you'd have to make sure it's worth it. You're saving 0.5% a year for 4ish years, depends on how big the principal is but you might not break even if there is actually a fee for refinancing. If you don't break even then I wouldn't bother, just keep the 15 year mortgage.

[Another Reader]

The fee for refinancing and all the closing costs are rolled into the interest rate.

In your shoes, I would not consider an adjustable rate mortgage.  You really do not know where you will be in five years.  Yes, the relationship is serious and there is an education and marriage plan, but things can and will change. 

Are you affected by the sequester?  At $60k with $160k in mortgages and a car payment, that could put some pressure on you.  However, without seeing all your income and expense numbers including the mortgage and home equity loan payments, I can't say what I would do in your shoes.

[easton]

Thanks for the responses!

@ Another Reader- Yes, I would be directly affected by the sequester, had our basewide meeting on it today in fact. basically 20% pay cut starting at the end of april. That would equate to about a $500-600 pay cut per month. So I would have to make some adjustments to the budget to not go negative.

Here is the rough monthly budget

   bi weekly   monthly
gross pay   2273   4546
net pay   1457   2914
      
mortgage      1462
car payment   354
car insurance   105
Home Equity Loan   85
electric      146
internet      50
security system   40
land property taxes(second property)   120
Credit Cards   300
Student loan   50
Food      125
Gas      75

Total                        2912

Basically if I infact do get furloughed, and have to cut the monthly budget. I could probably remain the break even budget if i cut out the security system, told my gf i cant visit her and cut down gas and food expense. and started just paying the minimum on the credit cards.

Have about $1000 left on one credit card, and $2450 left on another. Was planning on using my third paycheck this month to pay off the one with $1000 balance, and my tax return to pay off the $2450 one. Although since the furlough is actually real now, will probably use those to build up the emergency fund.

Going back to the 30 yr definitely seems to make a ton of sense as it would pay off the home equity loan as well and free up the difference in the 15 yr payment. That would give me alot more breathing room if I got furloughed. and actually just about make up for the furlough.

I think I'm gonna plan to move regardless in the next 5 yrs which is why I am ok with the 5/5 arm, but you are definitely right where if for some reason I stay I would end up paying alot more money. My current thought process is that if I do end up staying 10 yrs, it would avg out to 3.875% interest (2.875% for 5 yrs and $4.875% for 5 years), which isnt actually that bad. I would really start feeling the brunt of it if I stayed past 10 yrs and the rate jumped to 6.875%

@ Sherr- Yea, it's my understanding that the closing costs are made up by interest rate as pen fed will pay the $3k portion of the closing. I still have to pay for the taxes and escrows which I will be rolling in to the loan since I dont have that cash sitting around unfortuneatly. I should however get most of that back as I already have money in the escrow, and from my last refi I remember getting refunded what I already had in escrow.

[the fixer]

Have about $1000 left on one credit card, and $2450 left on another. Was planning on using my third paycheck this month to pay off the one with $1000 balance, and my tax return to pay off the $2450 one. Although since the furlough is actually real now, will probably use those to build up the emergency fund.

To paraphrase MMM, credit card debt IS an emergency. All extra income should go toward paying that off.

If another emergency happened, what would you do then? Absolute worst case, you'd carry a balance on your credit card again and be no worse off than you are now. So by paying off those cards things can only get better, and can't possibly get worse.

[easton]

Truth. Thanks fixer for the reality check