In-laws with some pretty serious debt, need some advice!

[Mr. FI]

So my wife and I have been trying to help her parents get out of their debt situation. They are about 5-10 (5 for him, 10 for her) years away from the typical retirement age.

They have $37,000 in credit card debt. Most with APR's ranging from 15.65%-22.9% (yikes).
They also owe $2775 to the IRS for some past tax issues
And they borrowed $4000 from a family member, which they are eager to pay off (they'll see them end of May)

Currently, they have two mortgages. One for their current house (Value: $260,000 MTG: $157,000) and one for their old house which they kept and rent out (Value: $150,000 MTG: $46,000). The sad part is that the rent doesn't cover the mortgage payment, so they're losing money on that home. Their current home payment is $1905 w/escrow. It's interest rate is at 6%. Their rental home is $1041 w/escrow and also w/ an interest rate of 6%.

We finally got them to sign up for Mint so we could get a more complete picture of their finances/spending. They basically break even with their monthly payments + food, gas, etc.

They spend waaay too much on food. Somewhere around $750/mo for two people. And they don't even eat out that much. There are also things like $75/mo hair care, going to movies, etc. definitely not how they should be spending with their hair on fire.

They spend $147/mo on a storage unit on crap to store from their old home, which they haven't seen in probably 15 years since they moved up north. Their cell phone bill is nuts because they pay for their two daughters (not my wife).

Their net income (post tax) is about $6000/mo. Pretty sure they don't put anything into a retirement vehicle at the moment. I believe their total savings is $3800, which they keep in cash. They had their accounts seized by the IRS around the economic downturn, and so a little paranoid about that.

Positives for them:
No car payments
Their internet bill is like $17/mo because he works for a cable/internet provider.
They have a rental property--which should generate income if they would raise rent (current is $950/mo), or quickly pay down the remaining mortgage. They have $46,000 left on the loan around 6 years left.
Their current home's value should be somewhere around $250,000-275,000. They owe $157,000 on this home. So they have some equity.

That's it.

So we hope to get them out of debt, pay off their mortgages, and build some semblance of retirement savings within the next 5-6 years so they can retire before they're 90.

The initial thought is to have them do a cash-out refinance. They can consolidate their debt while simultaneously lowering their mortgage interest rate. They met with a couple different lenders, and the big issue is that they have a debt/income ratio of around 48%. Banks won't let you do a conventional refinance at anything over 45% and that's the absolute maximum. So they have been told a 15 year FHA is really their one option. That obviously comes with permanent PMI.

Still, I think they should do it. They would finally have a cash flow instead of paying $500+/mo for CC fees. We would help them learn how to cut down their other costs like food and use the extra income to aggressively pay down their rental mortgage. Then, I would tell them they need to downsize their current home. Plus they live in an expensive neighborhood and their property taxes are like twice what me and my wife pay (we live in the same city). Then they could actually start saving for retirement for like 4-5 years then claim SS around then.

The risk is obviously having so much debt tied up in a home, which is secured and so can be taken away should something happen to one of them. Plus the PMI is not great if they happen to stay in their current home (they really should move, but it was like pulling teeth to get to sign up for Mint--not sure how we're going to convince to move! Baby steps...)

So does anyone have any additional advice? Should they also look into refinancing their rental, or just put their head down and pay it off as quick as possible? Is refinancing into an FHA a bad idea?

[Catbert]

The cash out re-fi may be the best option in this case, BUT ONLY if they are really ready to make the changes necessary to solve the bigger problems.  If they don't quit spending in excess the larger mortgage will just put their house at risk.

Come up with the other things they should do (e.g., clear out the storage unit or just stop paying for it, rein in the food bill, get cheap cell phones, etc).  If they do those things you can readily identify then maybe in 6 months they could look at a re-fi. 

[Mr. FI]

The cash out re-fi may be the best option in this case, BUT ONLY if they are really ready to make the changes necessary to solve the bigger problems.  If they don't quit spending in excess the larger mortgage will just put their house at risk.

Come up with the other things they should do (e.g., clear out the storage unit or just stop paying for it, rein in the food bill, get cheap cell phones, etc).  If they do those things you can readily identify then maybe in 6 months they could look at a re-fi.

That would be the ideal--however, like I mentioned, they want to pay back that $4000 to the family member when they see them in May. They are also worried about interest rates going up in June when the fed starts to raise rates. So to them, the clock is ticking and I get that. My wife and I are going to discuss how they need to drastically cut down their spending. I believe they can do it as they are finally learning how dire their situation is..

[GizmoTX]

Don't just throw your money at the problems, or they won't have any incentive to change. They don't have to have the entire $4k by May unless they manage to save it or refi it themselves. Is the rental underwater?

[MDM]

My wife and I are going to discuss how they need to drastically cut down their spending.

That's the critical path.

Does the $6K/mo include rental income, or is that $6K what is left from salaries after payroll taxes?  You could introduce them to the reader case study sticky...or ghostwrite one for them....

[Mr. FI]

My wife and I are going to discuss how they need to drastically cut down their spending.

That's the critical path.

Does the $6K/mo include rental income, or is that $6K what is left from salaries after payroll taxes?  You could introduce them to the reader case study sticky...or ghostwrite one for them....

That's post tax + rental income.

Also, didn't know if a case study was fully necessary since I just want advice on the first steps and not the whole process.

[Retired To Win]

So my wife and I have been trying to help her parents get out of their debt situation. They are about 5-10 (5 for him, 10 for her) years away from the typical retirement age...

I don't understand why you and your wife are the ones asking these questions and evaluating these options.  Your in-laws are adults, supposedly responsible, and at least 20 years older than you two.  I don't believe they are too dumb or too ignorant to be able to figure things out themselves.  So I am going to conclude that you are trying your best to "sell" them on prudent and smart financial planning before it's too late.

There's just one problem.  And you know the saying. "You can lead a horse to water, but you can't make it drink."  So, how confident are you that you are dealing with honestly thirsty horses here?

In any case, good luck.

[Mr. FI]

Don't just throw your money at the problems, or they won't have any incentive to change. They don't have to have the entire $4k by May unless they manage to save it or refi it themselves. Is the rental underwater?

Well, I don't know if they HAVE to, but I understand it that the family member is hoping to get it then. And no, the rental isn't underwater.

[GizmoTX]

Of course they're hoping to get it then. It would be a mistake to pay it for them.
Why aren't they selling the rental?

[Mr. FI]

So my wife and I have been trying to help her parents get out of their debt situation. They are about 5-10 (5 for him, 10 for her) years away from the typical retirement age...

I don't understand why you and your wife are the ones asking these questions and evaluating these options.  Your in-laws are adults, supposedly responsible, and at least 20 years older than you two.  I don't believe they are too dumb or too ignorant to be able to figure things out themselves.  So I am going to conclude that you are trying your best to "sell" them on prudent and smart financial planning before it's too late.

There's just one problem.  And you know the saying. "You can lead a horse to water, but you can't make it drink."  So, how confident are you that you are dealing with honestly thirsty horses here?

In any case, good luck.

Well, I believe at one point, even recently, they were debt free. However, due to some self-employment gaffs, poor tax management and a propensity to buy things unnecessary things this is where they are. People are complicated and sometimes not very knowledgeable when it comes to these matters. Being in the FIRE community, this stuff seems obvious to me and most everyone here to do the opposite of what they have done. But everyone has their AHA moment I believe and we hope they're coming around. I believe they are, but there is more work to do. My wife and I are doing this for them because we understand that even dire situations can be reversed quickly with some discipline and knowledge.

Before we started talking to them, they thought they would have to work until they're dead. I think starting this process has given them hope and motivation. So I'm optimistic, but I can't guarantee anything.

[Mr. FI]

Of course they're hoping to get it then. It would be a mistake to pay it for them.
Why aren't they selling the rental?

Oh, we're not paying it for them. They would get the money through the re-finance (so that's why this is time sensitive. If they wait on the re-fi, they wouldn't have the money to pay the family member). Also, I'm not sure about the rental. It was their first home and I think they've held the idea that maybe they would move back into it one day. I will ask them, but it's in a different state (your state in fact!) and I think they are reluctant to part with it. I'm trying to make due with that for right now, but it's certainly something to explore.

[MDM]

I just want advice on the first steps and not the whole process.

Fair enough.  First step(s): Cut spending and pay down the highest interest rate debt ASAP. 

Beyond that it's a slippery slope to a full case study (i.e., what things do you include/exclude?) so you might want to take at least a high level look at "everything."

[Mr. FI]

I just want advice on the first steps and not the whole process.

Fair enough.  First step(s): Cut spending and pay down the highest interest rate debt ASAP. 

Beyond that it's a slippery slope to a full case study (i.e., what things do you include/exclude?) so you might want to take at least a high level look at "everything."

Agreed. And I've started formulating that in my head, but it's hard to proceed until we figure out the best way to tackle this debt.

[mtn]

If this were me and my in-laws, well, MIL probably would think anything I suggest would be too drastic. But in any case, I’ll lay it out—this situation doesn’t seem that hard to me:
•   Sell everything in the storage unit. Or just throw it away.
•   Forget about repaying the relatives right now, that can be done in a few months
•   Sell the rental house. Hopefully worth enough that they can pay off that mortgage, the credit card fees, and the family debt.  IT IS JUST A HOUSE
•   After that, start either aggressively paying towards retirement or the other mortgage. Their choice. And cut the GD spending.


Really no reason to do an FHA loan or anything else. They can't afford two homes, they need to sell one. Or else make them raise the rent, but frankly that would be too slow.

[Mr. FI]

If this were me and my in-laws, well, MIL probably would think anything I suggest would be too drastic. But in any case, I’ll lay it out—this situation doesn’t seem that hard to me:
•   Sell everything in the storage unit. Or just throw it away.
•   Forget about repaying the relatives right now, that can be done in a few months
•   Sell the rental house. Hopefully worth enough that they can pay off that mortgage, the credit card fees, and the family debt.  IT IS JUST A HOUSE
•   After that, start either aggressively paying towards retirement or the other mortgage. Their choice. And cut the GD spending.


Really no reason to do an FHA loan or anything else. They can't afford two homes, they need to sell one. Or else make them raise the rent, but frankly that would be too slow.

Yeah. There are a lot of obvious moves here. Selling their rental being the most obvious. I haven't gotten a clear answer, but there's a big hesitation about selling it. Like I said before, it might be that they plan on moving back into it soon. It's in Texas and they are up here in MT. But I think their plan is to move back to that house. When, I don't know. I get the feeling they keep putting that decision off and shouldn't.

[ltt]

Haven't read through all the posts.  If it were me, I would pay the IRS first and foremost.  I would most definitely consider selling their current home and moving into the rental home (when the lease is up).  Skip the relatives for now. 

[cartechguy]

I hate too say this but, they won't change!!  But, that wasn't your question!! IRS debt needs to go!  Can they sell one house and take that money and pay down the mortgage on the one house they keep?  They need to CUT UP EVERY credit card and live off CASH!!  All extras need to go and they need to throw all extra money toward the cc debt!!

I have helped three friends over the years one with 40K cc debt ( we are still friends and he is debt free).  The other two not my friends anymore.

I did get ALL my money back but, I won't do it again!!

[ShoulderThingThatGoesUp]

A house most places in TX should have increased in value substantially. If they aren't willing to sell that they aren't "thirsty horses" and there's nothing you can do.

[alsoknownasDean]

Can they refinance/balance transfer the credit cards to ones with a lower rate? Increase rent on the rental place in TX (if prices have gone up, rents may have done the same)?

Currently almost a tenth of their income is going towards the credit card companies in interest. They'd need to refinance, get their spending under control, and then attack the debts.

[frugaldrummer]

Here's another option, if they're really attached to the idea of retiring to the Texas house....why not sell their Montana house and just rent?  Surely they could rent a small place for two people for less than $1900? Then the cash from that sale could pay their credit cards and other obligations. The rest could either go into retirement savings or, if it would put them close to paying off the Texas house, put it to that mortgage. Then they would have the security of a paid off house to retire to,  and income from that rental in the meantime to fund retirement savings.
And yes, get rid of the storage unit!!!  Maybe add up for them all the money they have already spent and ask them if the contents are worth that (ie $1800 a year in storage fees for say 3 years....their stuff better be worth a lot to justify that.)

[Mr. FI]

I hate too say this but, they won't change!!  But, that wasn't your question!! IRS debt needs to go!  Can they sell one house and take that money and pay down the mortgage on the one house they keep?  They need to CUT UP EVERY credit card and live off CASH!!  All extras need to go and they need to throw all extra money toward the cc debt!!

I have helped three friends over the years one with 40K cc debt ( we are still friends and he is debt free).  The other two not my friends anymore.

I did get ALL my money back but, I won't do it again!!

You could be right, however, I think we have to at least try. At least give the chance to see there is a different way (a superior way) to live and not be in constant debt/worry. I think selling one of the houses is the answer. But that option isn't feasible right at this moment so I think at least refinancing gets them out from under the CC/IRS debt and then they can start exploring selling a home and all that entails.

They've stopped using their credit cards for a good while now. Agreed on cutting their spending way down and throwing all extra money at their debt. I just think the re-fi makes sense at this point especially if we can get them to sell a home.

Thanks for your input!

[Mr. FI]

Here's another option, if they're really attached to the idea of retiring to the Texas house....why not sell their Montana house and just rent?  Surely they could rent a small place for two people for less than $1900? Then the cash from that sale could pay their credit cards and other obligations. The rest could either go into retirement savings or, if it would put them close to paying off the Texas house, put it to that mortgage. Then they would have the security of a paid off house to retire to,  and income from that rental in the meantime to fund retirement savings.
And yes, get rid of the storage unit!!!  Maybe add up for them all the money they have already spent and ask them if the contents are worth that (ie $1800 a year in storage fees for say 3 years....their stuff better be worth a lot to justify that.)

Yes, that's a good idea. I think ultimately selling their current home is the answer. Especially if they plan to move back to their Texas home. But selling a home and moving across the country (or even across the city) is a large undertaking and one I'm not sure they're ready for just yet. I will push that, but in the meantime, eating up their debt with consolidating and then selling the home makes sense to me. Especially if it's a small time frame so the interest/PMI doesn't stack up much.

If they were in their 20's or 30's, I would say forget the re-fi and just sell but trying to uproot someone in their 60s is tougher. But getting them to take a hard look at their finances and making them realize they aren't just "stuck" was a big first step so I think this will progress quickly.

They are going down to Texas in May for their daughter's graduation and then she's moving back in with them for a bit and she got a job back here in MT. So I think getting them to move wouldn't really work with this in mind.

[kathrynd]

I also don't think anything you say to them, will make any difference.

Before going the route of refinancing, I would get them to cut out almost all 'wants'..but themselves on an allowance.
Reduce their grocery budget in half.(or more)

When they can do that for 6 months...then refinance

[Mr. FI]

I also don't think anything you say to them, will make any difference.

Before going the route of refinancing, I would get them to cut out almost all 'wants'..but themselves on an allowance.
Reduce their grocery budget in half.(or more)

When they can do that for 6 months...then refinance

I mean, I understand your logic. But I don't think letting them wallow in unnecessary debt is the answer. I don't think punishing them for being financially ignorant is the answer. I was pretty financially illiterate until I stumbled upon this site.

I'm not trying to bail them out so much as get them to realize that they can get out of debt if they simultaneously curtail their spending, develop better habits and understand that having retirement savings is necessary and possible.

That's how I'm approaching this...

[frugaliknowit]

1.  Get rid of the crap in storage.

2.  Sell one or both properties and pay off the debt.  If they only sell one property, refinance the other (no cash out, no fha).  Invest the remaining proceeds (put aside any capital gains due).

3.  Go on a freagin' money diet.

The FHA refi while keeping the rental is a really bad idea for them. 

[Mr. FI]

The FHA refi while keeping the rental is a really bad idea for them.

Could you elaborate?

[Chrissy]

When your SIL moves in with them, she needs to pay for her own expenses and rent.  They can give her a deal, but she has a job, so there's no excuse for her not to contribute.  If necessary, clue her in on her parents situation (with their permission, of course).

[MetalCap]

I don't think you can get an FHA while oweing the IRS unless that is paid off with the refi. 

The IRS debt and the storage unit are your hottest and easiest first steps.

Those two can show you if they can do it.  Most important debt and getting rid of crap.

[frugaliknowit]

The FHA refi while keeping the rental is a really bad idea for them.

Could you elaborate?

They will be stuck with a payment which when combined with other debt is a huge percentage of income, paying a ridiculous insurance premium and owning too much real estate relative to their net worth and closeness in time to where they either will not be able to work or might not want to work. 

[Mr. FI]

The FHA refi while keeping the rental is a really bad idea for them.

Could you elaborate?

They will be stuck with a payment which when combined with other debt is a huge percentage of income, paying a ridiculous insurance premium and owning too much real estate relative to their net worth and closeness in time to where they either will not be able to work or might not want to work.

Ok. Yeah I have considered the added risk. My reasoning is--their current mortgage has an interest rate of 6%, which is ridiculous with today's rates. My other line of thinking is that they will sell the refi house sooner rather than later freeing them of the insurance premium. Unless the housing market crashes again, their home is worth a good amount more than what their new loan amount will be so they'll have some equity. Especially if they move into their TX home, they should have a paid off home to live in.

[frugaliknowit]

If the plan is to sell the SFH, it makes no sense to refinance it. 

They need to choose where they will extract equity to pay off debt and invest, then do it.  Sell either the SFH or the rental, or both (and rent).  They cannot continue to carry both unless they instantly turn into minimalists (which they won't).

[acepedro45]

Cutting out the storage unit and trimming the grocery bill to something reasonable are good steps...

...but these in-laws have a huge hole to dig out of and they need to get going with a big shovel, not just a cash out refi and some cutting around the margins. The solution here is not by moving around numbers on a spreadsheet and financial alchemy. They have a decent enough income but they have just a few years left before their retirement years. Given the levels of assets and the scant time remaining until retirement, they need Massive Lifestyle Change.

If both properties really do have positive equity, they should be sold ASAP. Like another poster said, surely two people can live comfortably and well on less than half of $1,905 in cheap COL Montana. It might be a little challenging to get that first apartment or a much smaller house with dinged up credit (I'm assuming it's dinged because of the mortgage rates, IRS bills and outrageous credit card totals.)

Take the sale proceeds and pay off all this disgusting killer bee high interest DEBT. Drop the storage unit and cut down on a lot of this frivolous spending. If you are ten years out from retirement and have no savings and $37,0000 of credit card debt YOU DO NOT HAVE SUFFICIENT MEANS TO PAY FOR YOUR OWN CELL PHONE, let alone two more for your kids.

It is very frustrating to me and a lot of Mustachians to see people who are prioritizing having a storage unit full of dusty junk over retiring, but that is what your in-laws are doing.

Given that it was a struggle just to make them sign up for Mint, it sounds like these two are unlikely to make the sorts of radical changes they will need to make to have anything but a subsistence level retirement.

But It CAN be done if they are willing to buck up and go whole hog into MMM land, even with just a few years to go until retirement. But there aren't any shortcuts or workarounds.

[Mr. FI]

Cutting out the storage unit and trimming the grocery bill to something reasonable are good steps...

...but these in-laws have a huge hole to dig out of and they need to get going with a big shovel, not just a cash out refi and some cutting around the margins. The solution here is not by moving around numbers on a spreadsheet and financial alchemy. They have a decent enough income but they have just a few years left before their retirement years. Given the levels of assets and the scant time remaining until retirement, they need Massive Lifestyle Change.

If both properties really do have positive equity, they should be sold ASAP. Like another poster said, surely two people can live comfortably and well on less than half of $1,905 in cheap COL Montana. It might be a little challenging to get that first apartment or a much smaller house with dinged up credit (I'm assuming it's dinged because of the mortgage rates, IRS bills and outrageous credit card totals.)

Take the sale proceeds and pay off all this disgusting killer bee high interest DEBT. Drop the storage unit and cut down on a lot of this frivolous spending. If you are ten years out from retirement and have no savings and $37,0000 of credit card debt YOU DO NOT HAVE SUFFICIENT MEANS TO PAY FOR YOUR OWN CELL PHONE, let alone two more for your kids.

It is very frustrating to me and a lot of Mustachians to see people who are prioritizing having a storage unit full of dusty junk over retiring, but that is what your in-laws are doing.

Given that it was a struggle just to make them sign up for Mint, it sounds like these two are unlikely to make the sorts of radical changes they will need to make to have anything but a subsistence level retirement.

But It CAN be done if they are willing to buck up and go whole hog into MMM land, even with just a few years to go until retirement. But there aren't any shortcuts or workarounds.

Amazingly, my mother-in-law has a credit score over 800. It's my father-in-law who has a less than stellar credit report. Which he also working on to fix. The struggle for Mint was convincing them that it's a secure thing. Another amazing thing is that we finally got them to move their dusty junk out of their other storage unit last summer. So for a good while, they had two.

Our biggest task is really stressing the need to change how they operate. I guess I'm trying to ease them into a big turn around, rather than overwhelming them. I hope they quickly start seeing the obvious large changes they need to make with our help and that they'll be motivated to do something about it. It's baffling to me that it's taken this long. I really didn't know their financial situation going into marriage with my wife other than some hints that they were struggling with the economic downturn. But they have a nice house, go out to eat, etc. the façade of well-to-do-ness. But once I learned my wife had to loan them a significant amount of money (which they still owe on, but we have let them focus on their other debt for now) it was apparent they had more issues than just losing a job temporarily. They tried to keep living like they were still making the same income--that obviously doesn't work.

So yeah. In theory, it's nice to say do this, do that, and the problems are solved but getting to execute it in real life with real people who took this long to wave the white flag is a tough matter.

I appreciate everyone's feedback up to this point!

[Mr. FI]

When your SIL moves in with them, she needs to pay for her own expenses and rent.  They can give her a deal, but she has a job, so there's no excuse for her not to contribute.  If necessary, clue her in on her parents situation (with their permission, of course).

Yes, we've talked about this. She should contribute. And we will help clue her in on all we're doing with this situation.

[frugaldrummer]

I would suggest roughing out the outcomes of the various options so they can see where they would be 5 or 10 years down the road.
For instance (you didn't state how much they owe on Texas house or how much equity, for sake of example I'll assume it's worth say $150k and they owe $75k still).
Scenario 1: no real change. 5 years from now credit card debt has ballooned and eats up profit on sale of MT house.  They move back to Texas house and take part time jobs to cover their $1000 mortgage payment there.

Scenario two:  Sell MT house and move into $1200 rental. Take $100k proceeds from house sale, pay cc, irs, family loan.  Take remaining 50k or so and pay it towards TX house mortgage.  Current mortgage payments for TX house would then have it completely paid off before the 5 years is up. Meanwhile they can start saving $1k per month (since they no longer have big MT mortgage and credit card payments). At the end of five years, they move to paid off TX home with $60k plus interest in savings and FILs Social Security

Scenario three (assumes they want to retire in MT): 
They sell TX house and pay off debts with that money. The remaining $25k goes into retirement savings. They Refi their MT house to a better interest rate now that they've paid off their debts. They start saving $500 a month that was previously going to credit cards and rental property and in five years have savings of 500/mo x 5 yrs + 25k from TX sale = $55k plus interest, but still have mortgage pymt of ? $1700 after refi.

Scenario 4: stay in MT., do all of the above, but downsize their house in five years to a property that can be paid for with whatever equity they have in their house.

Scenario 5: stay in MT, sell Tx, pay bills, refi house. Then use $25 k remaining to make deposit on small rental home in MT. After 5 years sell current MT home and move into smaller MT rental home, using proceeds of sale to pay off remainder of mortgage.  Would have paid off smaller home in MT and $30k savings.

[Mr. FI]

I would suggest roughing out the outcomes of the various options so they can see where they would be 5 or 10 years down the road.
For instance (you didn't state how much they owe on Texas house or how much equity, for sake of example I'll assume it's worth say $150k and they owe $75k still).
Scenario 1: no real change. 5 years from now credit card debt has ballooned and eats up profit on sale of MT house.  They move back to Texas house and take part time jobs to cover their $1000 mortgage payment there.

Scenario two:  Sell MT house and move into $1200 rental. Take $100k proceeds from house sale, pay cc, irs, family loan.  Take remaining 50k or so and pay it towards TX house mortgage.  Current mortgage payments for TX house would then have it completely paid off before the 5 years is up. Meanwhile they can start saving $1k per month (since they no longer have big MT mortgage and credit card payments). At the end of five years, they move to paid off TX home with $60k plus interest in savings and FILs Social Security

Scenario three (assumes they want to retire in MT): 
They sell TX house and pay off debts with that money. The remaining $25k goes into retirement savings. They Refi their MT house to a better interest rate now that they've paid off their debts. They start saving $500 a month that was previously going to credit cards and rental property and in five years have savings of 500/mo x 5 yrs + 25k from TX sale = $55k plus interest, but still have mortgage pymt of ? $1700 after refi.

Scenario 4: stay in MT., do all of the above, but downsize their house in five years to a property that can be paid for with whatever equity they have in their house.

Scenario 5: stay in MT, sell Tx, pay bills, refi house. Then use $25 k remaining to make deposit on small rental home in MT. After 5 years sell current MT home and move into smaller MT rental home, using proceeds of sale to pay off remainder of mortgage.  Would have paid off smaller home in MT and $30k savings.

These are good suggestions. I will edit my original post to include the price of the homes. I have to go by Zillow on their rental because it's in San Antonio and I have no idea what their market is like. Zillow says it's worth $130,000 but I think $150,000 seems more accurate. There are literally no homes for sale within 5 miles of that home so I have no comps. They have $46,000 left on that mortgage.

Their MT home is worth $260,000 roughly with $157,000 left on the mortgage. With the cash out refi, their newly monthly payment would be about the same as the $1900, but with out the CC debt/IRS debt.

[frugaldrummer]

Only $46 k left on San Antonio house?  If they want to retire there, they should just sell their MT house, rent someplace nice nearby, and use the cash from the sale to pay off cc, irs, personal loan AND San Antonio house.  Then they would have reduced expenses (no cc payment, rent less than $1900 mortgage, no MT property taxes) AND an extra $950 a month in income from the rental house. They could easily start saving $2k per month and retire to San Antonio in 5 years with $120k savings (plus interest)  and a paid off home.

[kathrynd]

I also don't think anything you say to them, will make any difference.

Before going the route of refinancing, I would get them to cut out almost all 'wants'..but themselves on an allowance.
Reduce their grocery budget in half.(or more)

When they can do that for 6 months...then refinance

I mean, I understand your logic. But I don't think letting them wallow in unnecessary debt is the answer. I don't think punishing them for being financially ignorant is the answer. I was pretty financially illiterate until I stumbled upon this site.

I'm not trying to bail them out so much as get them to realize that they can get out of debt if they simultaneously curtail their spending, develop better habits and understand that having retirement savings is necessary and possible.

That's how I'm approaching this...

I do wish you and the in-laws success.
Just don't get upset, if they seem to follow your suggestions and then fall back into their spendy habits.

Similar to dieters. They can lose the weight, but sticking to it, is the struggle.

Even here on MMM, I see so many people who really aren't willing to do what is needed, to retire FIRE, even though they know what is required. They  always have  a reason why they can't....or they don't need to.

[frugaldrummer]

I agree with the above, which is why I think they should pay the San Antonio house off rather than invest the extra money. That way, at lesst they'll have a paid off house and social security even if they don't save another cent.

[SU]

Well done for being willing to help and for gaining their confidence. I think it's a big step that they are willing to share this information with you. Looking at their circumstances rather than the financial information, I wonder if one issue is that they have difficulty making decisions and letting things go. For instance, they have moved interstate but kept a house in the old state, and two storage units. That suggests to me that they want to have the feeling of having options such as: maybe moving back to Texas, one day having a bigger house where they will need all their 'stuff' again.

I'm pointing this out because when it comes to presenting them with financial options, you might find that the real resistance is around accepting where they are in their life right now e.g. the kids have left home (but you can imagine them mentally telling themselves that they need to live in a house rather than a small condo because the kids might want to move back in with them), their lives have changed and they no longer need everything in the storage unit that was once necessary, etc.

The key might be to help them accept - emotionally - that downsizing their spending and committing to one place of residence is actually going to increase, rather than diminish, their options.

[Daleth]

My reasoning is--their current mortgage has an interest rate of 6%, which is ridiculous with today's rates.

Uh, how's their credit? I'm guessing not very good? They're not going to be able to get a cash-out refi at reasonable interest rates without decent credit. Checking their credit scores (or his credit score if the plan is for him to be the only signer on the refi) seems like a necessary first step because the credit scores might limit your options.

[Mr. FI]

My reasoning is--their current mortgage has an interest rate of 6%, which is ridiculous with today's rates.

Uh, how's their credit? I'm guessing not very good? They're not going to be able to get a cash-out refi at reasonable interest rates without decent credit. Checking their credit scores (or his credit score if the plan is for him to be the only signer on the refi) seems like a necessary first step because the credit scores might limit your options.

In fact, my mother-in-laws credit score is over 800. Not sure about my FIL but I imagine his is lower. But they visited with a couple lenders and got pretty good rates.

BUT--Big update. They came over last night and I ended up talking to my MIL about their TX house. I said honestly the best way to get from under this debt, and have some left over money for investing and/or paying down their other mortgage is to sell it. Their reasoning for keeping the house (ironically) was to make money in retirement once the mortgage was paid off. But I explained that since they are actually losing money on it right now, and will for the forseeable future, that selling and investing what's left over would yield a far greater profit than some rental income.

I shared the power of compound interest and gave them an estimate of a 4% return (after inflation) over 5-10 years vs. keeping the rental and it was no contest.

So they are looking into selling that home! It was surprisingly easy to convince them once the math was shown to them.

And I think that is the biggest thing. They've never sat down and did the back of the napkin math. So we're on our way I think.

[Daleth]

The fact that they're convinced by math is very, very promising.

Re credit scores, you need to know either (1) both or (2) the credit score of the person with the main income. If the MIL is retired or a stay-at-home mom/wife or otherwise not the earner, then her credit score is pretty meaningless because the bank will always take either the lowest credit score of the couple or, if the main earner applies for the loan alone, then his/her score.

[Mr. FI]

The fact that they're convinced by math is very, very promising.

Re credit scores, you need to know either (1) both or (2) the credit score of the person with the main income. If the MIL is retired or a stay-at-home mom/wife or otherwise not the earner, then her credit score is pretty meaningless because the bank will always take either the lowest credit score of the couple or, if the main earner applies for the loan alone, then his/her score.

She's the only signer on both mortgages and currently working. With the refi, he would become a signer yes. But I don't think his credit score is so low it disqualifies them according to the lenders they met with. But if they could refi this house w/o a cash out, that new rate would be way better and no FHA loan which means no PMI

[frugaldrummer]

One thing to consider about selling the TX house, how long since they lived in it?  ,Will they have to pay capital gains?

,Assuming they dont: 
Say they get $90k out of sale. $50k pays off debts, $40k into retirement savings.
MT mortgage  refi ... 4 percent, 30 yrs PI 750, or 15 years PI 1160. Add taxes snd insurance, they'll still be able to save 500 -900/mo over current mortgage payment. I'd vote for the 15 year mortgage, and save 500/mo. Add an additional 500/mo savings now that cc and rental costs are gone.  $1,000/mo in savings x 5 years + $40k=$100k plus interest. they won't have a paid off house but they could continue to work part-time to cover the mortgage, or could downsize their house at that time.

[acepedro45]

So yeah. In theory, it's nice to say do this, do that, and the problems are solved...

You're right, Mr. FI. I think in my earlier post I was too inclined to apply the blanket Mustacian plan of a 70% reduction in expenses without fully considering the habits of the people we are dealing with.

You are good to try to work with relatives who, as you say, have never even done the math to figure out where they are. I think there is a general tendency on these forums to sneer at people who aren't great with money, and I have definitely been guilty of it in the past. You can be a good person who is bad with money and the converse can be true too.

It's a big step to sell the Texas home and it's one that will go a good long way to getting them straightened out. Congrats!

Selling the second home gets them out of the dreadful hole of high interest debt. I would keep pushing to make the least painful lifestyle changes that could help them build some savings, like getting rid of the storage unit.

[SwordGuy]

See if they cut spending for two months.  If they do, continue to work with them.  If not, your advice will fall on deaf ears but you will be blamed for all the results of their bad decisions.  If they don't, I would bail and tell them you'll be happy to help when they are willing to help, too.

[Mr. FI]

One thing to consider about selling the TX house, how long since they lived in it?  ,Will they have to pay capital gains?

,Assuming they dont: 
Say they get $90k out of sale. $50k pays off debts, $40k into retirement savings.
MT mortgage  refi ... 4 percent, 30 yrs PI 750, or 15 years PI 1160. Add taxes snd insurance, they'll still be able to save 500 -900/mo over current mortgage payment. I'd vote for the 15 year mortgage, and save 500/mo. Add an additional 500/mo savings now that cc and rental costs are gone.  $1,000/mo in savings x 5 years + $40k=$100k plus interest. they won't have a paid off house but they could continue to work part-time to cover the mortgage, or could downsize their house at that time.

They did ask about capital gains. It's been 14 years since they lived there and have been getting rent income for pretty much that entire time. I still don't think that should dissuade them from selling. It just means they have a little less to invest post transaction. But those capital gains taxes can be tricky so I can't adequately answer for them. I know you get a big tax break if you sell your primary residence, but rental homes are a different beast and I've read up a little on it, but I fear my knowledge is limited here.

[mtn]

One thing to consider about selling the TX house, how long since they lived in it?  ,Will they have to pay capital gains?

,Assuming they dont: 
Say they get $90k out of sale. $50k pays off debts, $40k into retirement savings.
MT mortgage  refi ... 4 percent, 30 yrs PI 750, or 15 years PI 1160. Add taxes snd insurance, they'll still be able to save 500 -900/mo over current mortgage payment. I'd vote for the 15 year mortgage, and save 500/mo. Add an additional 500/mo savings now that cc and rental costs are gone.  $1,000/mo in savings x 5 years + $40k=$100k plus interest. they won't have a paid off house but they could continue to work part-time to cover the mortgage, or could downsize their house at that time.

They did ask about capital gains. It's been 14 years since they lived there and have been getting rent income for pretty much that entire time. I still don't think that should dissuade them from selling. It just means they have a little less to invest post transaction. But those capital gains taxes can be tricky so I can't adequately answer for them. I know you get a big tax break if you sell your primary residence, but rental homes are a different beast and I've read up a little on it, but I fear my knowledge is limited here.

Ok, then why not have them sell their current home and rent another? Especially if they're going to retire to the old one?

[Mr. FI]

One thing to consider about selling the TX house, how long since they lived in it?  ,Will they have to pay capital gains?

,Assuming they dont: 
Say they get $90k out of sale. $50k pays off debts, $40k into retirement savings.
MT mortgage  refi ... 4 percent, 30 yrs PI 750, or 15 years PI 1160. Add taxes snd insurance, they'll still be able to save 500 -900/mo over current mortgage payment. I'd vote for the 15 year mortgage, and save 500/mo. Add an additional 500/mo savings now that cc and rental costs are gone.  $1,000/mo in savings x 5 years + $40k=$100k plus interest. they won't have a paid off house but they could continue to work part-time to cover the mortgage, or could downsize their house at that time.

They did ask about capital gains. It's been 14 years since they lived there and have been getting rent income for pretty much that entire time. I still don't think that should dissuade them from selling. It just means they have a little less to invest post transaction. But those capital gains taxes can be tricky so I can't adequately answer for them. I know you get a big tax break if you sell your primary residence, but rental homes are a different beast and I've read up a little on it, but I fear my knowledge is limited here.

Ok, then why not have them sell their current home and rent another? Especially if they're going to retire to the old one?

Well apparently,

They aren't going to retire to the old one. They plan to retire back to San Antonio, but not to that house. I believe their plan is to keep working in MT for another 5-6 years and then retire. That's a long time frame, so it makes sense to me to sell the old one and refi the current for right now.