Author Topic: Mortgage or....  (Read 1842 times)

FIRE_fighter

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Mortgage or....
« on: September 20, 2017, 07:49:55 AM »
My wife and I discovered the stash a couple weeks ago and have started working on our grand plan.
We had already cut cable. We just canceled the gym membership. We are eating at home every meal which is something we were already trying to do. So for the rest,
 Step one: Buy a used LEAF and sell our 2013 CR-V ($11k left on the lein) there are used LEAFs that pop up on CL which would get us pretty close to an even trade with the difference. 5% interest
Step two: throw all excess money at the student loan to get rid of the last $10k 6% interest
Step three: finish off CC debt. They are actually both 0% interest so not sure if we should spread this out or just destroy it.
Step four: not sure. We would be debt free except for our mortgage which has $160k remaining at 3.75%
I know mathematically paying off the mortgage makes less sense than going for the stock market or increasing my deferred comp (I am a firefighter and will be getting a pension when I'm eligible to retire in about 20 years-I would be 49 years old so still kind of early) deferred comp is 457b and is mine even if I left the fire dept. early.
My wife has a 401k at her job (nurse practitioner) but her employers contributions are connected to her total work hours, not her own contributions. So it's not like we are losing money on either of those because we aren't getting matched on either.
One of the reasons we want to pay off the mortgage is to allow my wife the freedom to go PRN once we have our second child. Our first is 2 months right now. Our monthly expenses would be cut almost in half. And we would still have extra money to invest. So there you have it. Yes it is an emotional decision but there are other advantages to having it paid off as well. We want to flip and rent houses in the future. I have done all the updates to our current house myself.
Other details my salary $55k hers: $100k
If I haven't given enough info just let me know and I will update. So let me have it. Advice about the car idea, the mortgage pay off etc.
thanks in advance fellow mustachians

sokoloff

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Re: Mortgage or....
« Reply #1 on: September 20, 2017, 08:13:05 AM »
If it's going to be your only car, I'd keep the CR-V. (I daily drive a LEAF and my wife drives a 2005 CR-V.) The LEAF is great as a second car. It's not particularly good as your only car, IMO. We've found the CR-V to be a very reliable car and is very convenient for kids. Would I wish you had a 2005 instead of a 2013? Sure, but I don't know that I'd go through the aggravation of changing at this point, rather just plan to keep the car a decade from now.

I'd pay off your non-mortgage debt in order of decreasing interest rates; I'm not a fan of paying off the mortgage before increasing your deferred comp. After that's maxed out, you can decide whether you want to pay off the mortgage for psychological reasons as you describe (which I support, but don't choose to do that myself).

FIRE_fighter

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Re: Mortgage or....
« Reply #2 on: September 20, 2017, 08:18:10 AM »
One detail I left out was that with our very aggressive plan the mortgage would we paid off in about a year and a half to two years from now. We started reading into MMM using a HELOC to get other properties which we could use to start our investments into real estate via fixing up houses and renting them out.

sokoloff

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Re: Mortgage or....
« Reply #3 on: September 20, 2017, 08:27:28 AM »
One detail I left out was that with our very aggressive plan the mortgage would we paid off in about a year and a half to two years from now. We started reading into MMM using a HELOC to get other properties which we could use to start our investments into real estate via fixing up houses and renting them out.
Your 30-year fixed 3.75% is probably better than you're going to get a HELOC, and you already have the money, meaning you can be a cash buyer for properties in 18-24 months. I wouldn't pay off a mortgage with the intention of replacing that mortgage with a HELOC as it seems like you'd just be buying more paperwork and a worse interest rate.

nereo

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Re: Mortgage or....
« Reply #4 on: September 20, 2017, 08:31:31 AM »
This thread really should be a full Case Study to garner the most useful advice.

https://forum.mrmoneymustache.com/case-studies/how-to-write-a-%27case-study%27-topic/

Beach_Stache

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Re: Mortgage or....
« Reply #5 on: September 20, 2017, 08:54:43 AM »
I like the piece of mind of paying off a mortgage early but not if you still have other debt and don't have emergency savings or much in retirement plans.  Having a pension is great, so that's nice to have in the future and that much less you'll have to save for retirement, but at 3.75% you really can't beat that.  My order of savings was:
401k - max out Mine and DW
Roth IRA - max out mine, started maxing out DW this year
emergency savings - around $20k and contribute a few hundred/month
529 plans - $750 per month for our 3 kids
post-tax investment - a few hundred per month

Then after all of that we started paying down student loans aggressively (had a good rate on them - but just piece of mind getting 1 more debt off of the plate).  Then after that we've started putting extra money towards the mortgage which is at 3.75% also.  I fully realize that that extra money would do better (historically anyways) in the stock market, but in my view I don't want to retire until the house is paid off, so turning our 30 year into a 15  year by doing advance payments makes me feel good.

My mom growing up would transfer credit cards like every year (or whenever the 0% transfer interest rate expired) which I thought was a pretty cool trick!  Myself, I prefer to use my credit card for everything and pay it off each month.  With a 2% rewards card I'm basically paying 98% for everything instead of the full price. 

boarder42

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Re: Mortgage or....
« Reply #6 on: September 20, 2017, 08:55:36 AM »
step 3 - this depends on when the 0% runs out and what it allows you to tax defer this year
step 4 - this is a terrible idea as you're not even maxing your tax advantaged accounts yet.   this is only really a "debate" on these forums when deciding what to do with taxable money.  and even then i dont think its a debate. 

for all of this we really need more info b/c your income levels could be low enough to hit the EITC and other key things that would lead to using a roth style account over a tax deferred account. 

FIRE_fighter

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Re: Mortgage or....
« Reply #7 on: September 20, 2017, 09:05:34 AM »
Thanks for the advice so far. I will gather more information and post a full case study soon. And yes I know that paying off the house in full is not the smartest thing to do with our money. We are basically just trying to see if there is a way to get my wife down to PRN while the kiddos are young and not in school yet. And we were thinking of selling the CR-V and using the profit $18k or so minus the $11k we owe to get something used that is better on fuel. The CR-V gets about 23 mpg city. Plus we end the loan immediately so no more interest.

Laura33

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Re: Mortgage or....
« Reply #8 on: September 20, 2017, 11:33:15 AM »
One big-picture issue I would suggest you keep in mind is avoiding the trap of trying to buy your way into frugality.  E.g., when the first action item is "OMG, I need to be more frugal, so I need to buy a different car!"  In your case, that may actually be the appropriate first step; we don't know, because we need to wait for the full case study.  But the first thought has to be how you can change your lifestyle overall -- rather than replacing one car with a cheaper one, is there an option to get rid of the car altogether?  How's the house/mortgage -- does that contribute to a sustainable, low-cost lifestyle where you can walk a lot of places, or do you need to get in the car to drive everywhere?  Etc.  You need to get out of the box where spending is the first solution -- again, it might be the right solution, but it isn't where you start.

Second, take your time and do a lot of research.  E.g., if your long-term plan is to buy and rent houses, do a ton of research on RE investing so you can spot a good deal and understand the kind of capital you need.  There are many people here who FIREd by buying RE at low prices after the crash and finding tenants who are providing a significant profit.  But those circumstances did not exist in all markets, and they no longer exist at all in some areas.  There is a lot of work between the initial conception of the idea and the execution.

Along those lines, before you jump into a new money-making enterprise, make sure you have your downside covered -- primarily, life and disability insurance, along with wills and a guardian for the little one and the one(s) to come.  And you need a good emergency fund -- especially if you plan to go down to one income, and especially if you are going to then invest in something that requires large-and-unknown capital outlays (like, say, RE in need of renovation). 

On your specific questions:  the CC Q depends on how long the 0% remains in effect and whether you will owe back interest when that rate expires.  If you will owe interest back to the date you first bought the whatever, then no matter what else you do, you must have those paid off before that deadline.  If there is no back interest but you will just start paying interest on whatever the balance is at that time, then how important that deadline is depends on the new CC rate, your other debt, and other priorities. 

Mortgage:  Look, this is your life.  Financially, it is clearly better to invest the money than pay off such a low-rate debt (those of us who are older and remember the days of 16% mortgage rates are dancing in the aisles at our 3-ish-% rates and have zero desire ever to pay it off).  So if you choose to pay it off, do so in the full knowledge that you are choosing current lifestyle -- having a SAHM -- over future profits, and that this choice will delay your FIRE date by X amount.  E.g.:

Option 1:  pay off mortgage within next 5 years, DW becomes SAHM.  Cost of the choice:  (growth received from investments through FIRE date) - (avoided interest at 3.75%); this cost delays FIRE by X amount.  Benefit of the choice:  guarantee that DW can become SAHM. 

Option 2:  invest prepayment amounts in VTSAX in a tax-sheltered account and let it ride until FIRE.  Cost of the choice:  need to figure out some other way for DW to SAHM, or both continue to work, or you SAHD instead.  Benefit:  significantly higher long-term investment growth (growth received from tax-sheltered investments through FIRE date - 3.75% interest paid over remaining term of mortgage) = FIRE much earlier.

Option 3:  invest prepayment amounts in VTSAX in a regular brokerage account for 5 years.  At 5-year point, remove amount sufficient to pay off mortgage, DW becomes SAHM.  Cost of the choice:  if market goes down, DW may not be able to SAHM as soon as you'd like, or you may need to come up with extra money to pay off the mortgage; can't use tax-preferred retirement accounts if need to use money within 5 years.  Benefit:  (growth received from remaining non-tax-sheltered investments through FIRE date) - (extra interest paid at 3.75% for 5 years). 

Etc. -- there are a ton of other options, like downsizing to a smaller home that you could afford on your salary alone.  I am not implying that any choice is good or bad, right or wrong; what matters is that you do the analysis so it is a knowing choice that you are both making with a critical eye (avoiding confirmation bias and rationalization as much as possible), and with your values and long-term plans in mind. 

frugaldrummer

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Re: Mortgage or....
« Reply #9 on: September 20, 2017, 05:22:58 PM »
So - you owe $160 k on your mortgage. Can you buy a rental property for that amount?  If so, don't pay off the mortgage, but save that money to buy a rental property. Then use the income from the rental property to help make it possible for her to be a SAHM. 

(BTW - it might be wise for her to find a very very part-time job to keep her skills up and her hand in.  I'm an MD and when my three kids were small I worked 4 days a month at an urgent care center.  )

wordnerd

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Re: Mortgage or....
« Reply #10 on: September 20, 2017, 05:57:21 PM »
If it's going to be your only car, I'd keep the CR-V. (I daily drive a LEAF and my wife drives a 2005 CR-V.) The LEAF is great as a second car. It's not particularly good as your only car, IMO.

This is highly lifestyle dependent. We've only had LEAFs for 3 years, and it's worked great.

FIRE_fighter

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Re: Mortgage or....
« Reply #11 on: September 20, 2017, 07:28:32 PM »
Okay I just finished up my case study write up and will be posting more details over there. But I think I stated above that she won't stop working, just go PRN. She will still have an income but will have control over which days she will work and be able to work a little less while the kids are young.

AccidentalMiser

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Re: Mortgage or....
« Reply #12 on: September 20, 2017, 08:52:20 PM »
Laura33 gave a bunch of great advice.  Personally, I wouldn't pay off the mortgage.  It's tax-advantaged, which is significant to you given your income.  I wholeheartedly agree with investing the money and having enough liquid capital available to pay off the mortgage at a moment's notice.  If your life situation then requires that you pay off the mortgage, then you can do it with that money.  On the other hand, if you pay off the mortgage, you don't have the liquid capital available AND you lose your tax break.  Your investments will almost certainly outperform 4% YOY.

IF you were getting ready to retire tomorrow, I might feel differently about your situation.  I am within 4 years of RE and I don't intend to pay off any of our mortgages early.  I'd rather have the cash and to keep my options open.

Finally, thank you for being a firefighter.  I was on an industrial fire brigade for many years and had close dealings with a number of FFs over the years.  You have my thanks and my respect.  Be safe out there!