Author Topic: Making a decision  (Read 2451 times)

Greg C

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Making a decision
« on: March 25, 2015, 11:29:23 AM »
One of my biggest problems is decision making.  This one is to regain a little focus on what's important and where I should be concentrating my efforts through the end of 2015, and I need a little help.  My goals are the same as most people on here, save money, pay off debt, financial freedom.  For background, I'm a 37 yr old mortgage banker with no wife/kids (although this will be changing over the next 2 yrs) income ranges from $45k-200k annually, averaging $125k.  Most recent year was $45k as I took 6 months off to travel and generally dick around, which was awesome.  However, in November I had some kind of panicked meltdown where I realized that my last 8 years of complete wastefulness and horrific decision making meant I had very little saved and massive bills rather than an easily attainable retirement.  Whoopsie-do.  So a slow-but-sure about-face began in November and continues to pick up pace today.  Since then I've eliminated all consumer debt including my car loan and have driven my monthly budget way down and have stuck to it.  My discretionary spending (everything outside housing expenses) has been cut by 75% so far.  Also, I haven't received a commission check since last March having just gotten back to work in December and bankers make very little in base salary compared to the commission.  Commission will start coming in by the end of next month as building a pipeline of loans takes some time and March is my first funding month payable April 30th.  So after the consumer debt I'm left the following:
-mortgage of $347k @ 3.25%, $1950/mo 5/1 ARM FHA that was just refinanced to trim $205/mo off the mortgage insurance, home value roughly $400k.
-Student loan of $44k @ 2.5% interest. 
-Assets are $75k in IRA, $29k liquid, a free and clear car (I know, liability, but 31 mpg avg and only 10k mi on it) worth maybe $24k, $29k home equity considering 6% commission/expense to liquidate.

So as the money starts coming in, there are four areas I'm considering to focus my efforts through next December, any weigh in would be hugely appreciated, because like I said I suck at making decisions.
 
Pay down student loans and focus on those till they're gone.  $44k balance, 2.5% interest and $167 per month current payment.  This is a beast, and the pro's and cons throw a lot of weight here because of the size of the debt coupled with the ridiculously low interest rate.
•Pros:  lower overall monthly expenses, eliminate a 'forever' loan (can't BK out of these, not collateralized), save 2.5% in interest (not much of a pro) and have the peace of mind that they're gone.
•Cons:  This money is sometimes tax deductible (if I earn under $105k) based on my income bringing the rate closer to 1.875% those years, which is way under inflation.  Money could very well be better invested elsewhere at much higher returns, offsetting their cost and then some.
 
Fund tax deferred retirement accounts (pretty sure this is a $5500 cap this year for IRA after-tax money and $18k this year for 401k pre-tax money, no employer matching till December) and focus on saving in general.
 
Give the house some love.  $10k will cover my floors (polishing the concrete DIY with my brother who does this for a living), all trim, interior doors, front door, painting the kitchen cabinets and new hardware, new farm sink, butcher block countertops, new subway tile backsplash, kitchen lighting, and opening a wall to connect the two small living rooms.  There are a few more necessities left such as replacing two single pane windows that don't open (fire hazard), the single pane patio door and some others, but those are projects for another day.  If you've been to my house, you know these things are REALLY dated and tired (original everything except carpet and tile which were updated sometime around when Flash Gordon was a national hero) and could use some love, both for livability and potential resale.  $10k isn't something that will take me too long to adjust to, this can be spent over the next several months as 75% of this project will be DIY and my income can be allocated to one of the other possibilities through the end of the year.
 
•Save to refinance (again) (this time I will only structure as no-cost, last one was $2400 with BE point in 11 months).  3.25% interest, $347k balance, house valued at who-the-fuck-knows, maybe $400k.  The monthly MIP is only deductible as often as my student loans are and are now at $245/mo I think vs the $375/mo I was paying before this last refi.  I'd like to be in a 30 yr fixed or maybe 7/1 ARM of course without the MIP (plan to pay off in 10 yrs at worst, 7/1 is more advantageous with this goal in mind).  If I appraise at $400k, I'll need to save to pay the balance down by $27k+ which I think I can do by the time I qualify with my commission income in December, rates obviously being a factor to consider at that time.  But who knows where the rates will be, and who knows where the value will be.  The only constant is my date to qualify, and I can save till then to make the move at that time, or if the market isn't right I can then allocate the funds elsewhere.  The updates to the house may help this effort somewhat with appraised value.  Either way, if I did that I'd save another $100-200 per month on the payments, improve my tax deductibility by transferring MIP expense to interest expense (saving maybe another $61ish monthly) and secure a longer term with the low rate, especially with the 30 yr.

-Wild card:  I plan to get engaged and married this year, and the budget for that is something I'm trying unsuccessfully to ignore.  She is a nurse, earns $50k and comes with $35k in student loans at 6.8% interest, no consumer debt and has maybe $8k liquid and $5k in 401k.  That student loan may be something to save for and pay off when it flops out of her lap and lands in ours.  Also, we both want her to squish out a baby pretty soon-ish, as she's 30 and that clocks a-tickin'.  (it's my assumption she won't work for 2 yrs at least at that point)
 
So that's a lot to decide between.  Thoughts?

frugaliknowit

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Re: Making a decision
« Reply #1 on: March 25, 2015, 11:45:59 AM »
You refied into a 5/1 ARM?  That means your rate is locked until when?  If so, what were you thinking?

Greg C

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Re: Making a decision
« Reply #2 on: March 25, 2015, 12:24:18 PM »
You refied into a 5/1 ARM?  That means your rate is locked until when?  If so, what were you thinking?
I bought the home in Oct 2014 with a 5/1 ARM FHA, and the refinance was a streamlined (not income-qualifying with no appraisal) and closed end of last month.  Payment starts 04/01 along with the fixed term of 5 yrs.  Refi took loan from remaining 3.5 fixed term at 3.375% down to 3.25% but the larger move was with the mortgage insurance (FHA significantly reduced their MIP rate a few months ago coupled with very low interest rates triggering an FHA streamlined refinance boom because even at the same rate, a loan will save a significant amount with the sizeable MIP reduction).  I dug up the loan documents, the refinance saves $189.91 per month and cost a total of $2400, my BE calc was wrong, should have been 13 months.  Rates hit a very low point in January, couldn't pass up the opportunity even if I did have future plans to refi as I can't predict the market and don't know if a refinance will be feasible in December when I can qualify for a standard refinance to ditch the FHA entirely.  I need 12 months commission minimum with my new position to income-qualify.

FranzJoseph

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Re: Making a decision
« Reply #3 on: March 25, 2015, 02:44:42 PM »
I'm in a similar situation although we have paid off the student loans and are focusing on the mortgage which is currently at $348k.  Also doing renovations around the house which am able to DIY part of which is a basement apartment that we can rent out to bring in additional income.  Spending about $25k cash on renovations.  The renovations so far have been really nice upgrades from what was there before so definitely worth it otherwise would tell you to ditch those plans.  Hopefully your refinance goes through.  Any possibility of selling the home and getting something smaller or closer to work?

As far as prioritizing debt: 35k loan @ 6.8% interest takes the cake for top priority.  Were you planning on using that $29k of liquid asset to fund the renovations?  If not, drop it on that loan and pay it off ASAP.  Personally, would go after the other student loan after that since it can be gone faster than the mortgage.  We're not saving anything other than the 401k's right now and putting the wife's entire salary towards the mortgage.

Tax Deferred Accounts - ROTH IRA has a max contribution depending on income as well so be careful or you will pay a penalty as I found out the hard way.  Now our 401k's are maxed out, HSA maxed out, pre-tax child care of $5k maxed out all to drop AGI as low as possible.  Investing the HSA account too so hopefully in the future can just use the investment gains or interest to pay for medical needs.

Wedding-wise - my wife and I got married on Kauai at the end of a week long 'honeymoon' adventure with some friends.  Family were invited to the wedding which consisted of a beach and a certified dude who married us.  Out of pocket cost including wedding rings - $4k.  This was a very no hassle, no stress wedding with few guests but it was still tons of fun.  Just an idea for something that can be done outside of the typical $20-30k extravaganza with hundreds of guests, etc.

What are your monthly expenses?  Any more savings there?