Author Topic: Order to fund HSA/Roth/Pay off PMI?  (Read 7296 times)

HSLmom

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Order to fund HSA/Roth/Pay off PMI?
« on: June 15, 2014, 08:47:59 AM »
30, single mom, 3 kids
Income - Self employed - ~80K, I'm aiming for 120, but might not make it, I made 80 last year

No debt but the house, I'm paying $260 in PMI/mo though. 
Just bought it (facepunch, but it was worth it to me to pay the PMI and be able to be locked in a school district now that my kids are that age)

I need 50K to refinance and get rid of the PMI, I want to save for this after I've fully funded my HSA and Roth, correct?

I just got my income up last year, before then I was barely making ends meet and prior to that I was a SAHM, I don't have anything in retirement and just a modest emergency fund (3K)

Gin1984

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #1 on: June 15, 2014, 09:39:55 AM »
What are your normal expenses, for example what is your total housing cost, past PMI?  You should not need to refinance, as soon as you have 20% equity you should be able to get PMI off.

HSLmom

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #2 on: June 15, 2014, 09:53:45 AM »
I owe 240, purchased for 246.  1700/mo payment. For FHA, they changed in 2014 (I bought in March), and now you have to refinance to get rid of it, it's for the life of the loan :/

fragglebock

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #3 on: June 15, 2014, 10:09:22 AM »
Your HSA and Roth double as emergency funds (one for medical emergencies, one for life in general).  The PMI hurts, but you knew what you were getting into when you made that decision. Max the Roth for sure (you can always withdraw from there to refi down the road) and throw some money in HSA (build enough to cover 2 years of max out of pocket, in case there's a medical issue that extends over multiple plan years). Put a nominal amount in the no-PMI fund if you like; at 80k there's enough to go around.

Getting rid of PMI would help your cash flow, but it doesn't help your overall financial security. You're self-employed and supporting a family. If I was in that situation, I would want the security of a cash cushion.

HSLmom

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #4 on: June 15, 2014, 10:22:41 AM »
Thanks! That's what I was leaning toward.  FYI I'm using my HSA as a retirement account more than a healthcare account. Good point about withdrawing from the Roth if i need a little extra to get rid of PMI in the future.

HSLmom

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #5 on: June 15, 2014, 01:46:56 PM »
Yeah, PMI is ridiculous. 

Thanks for the help! :) My emergency fund is low because my income is mostly passive and from a few different sources, so I can weather illness/someone being late with payment, etc, quite a bit easier than someone who has to work 9-5.

rmendpara

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #6 on: June 15, 2014, 02:07:14 PM »
It may be helpful to have a bigger picture of assets, income, etc.

Without too much detail, I agree that with kids you want to make sure they are healthy and safe, so buying a home in a good area is a good decision (even if it costs you), and I would also be sure to fund the HSA.

1) Fully fund $5.5k to Roth (you can't go back in time and contribute to a prior year, so once time is gone, the opportunity is gone)
2) Full contribution to HSA ($3k-ish I think?), and stop funding once it reaches $5k or so.. maybe continue if you/kids start incurring more regular health expenses
3) Work toward paying off mortgage so you can refi
4) continue funding HSA once you refi the mortgage without PMI
« Last Edit: June 15, 2014, 02:08:45 PM by rmendpara »

HSLmom

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #7 on: June 15, 2014, 03:11:36 PM »
No assets, I am contributing to savings for my kids' at $75/ea/month (they're 7, 5, and 3 mo).  I guess I do have a paid off car, worth maybe 6K, I don't put many miles on it.

Thank you!

ampersand

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #8 on: June 15, 2014, 06:24:24 PM »
I'm new to the forum so I'm hoping this doesn't sound to off the wall.

This really boils itself down to "do I pay off my mortgage" kind of calculation. To really crunch that, the interest rate on the loan is needed as well as an assumed return from investments.

You are lucky in that it sounds like you could set yourself up with a SEP IRA, that has contributions limits surpassing even 401k's. SEP's are in essence the 401k plans for self employed. To find out how to best utilize one you would probably need to talk to an accountant, but its definitely something worth investigating as it would be a superior vehicle to an HSA for the purpose of retirement saving.

I hope the kid's savings is going into 529's :)

If you want, I can run a spreadsheet: I need the monthly loan payment (excluding insurance and taxes), and the rate/term, plus whatever assumed fees there would be for refinancing (I've never done one).

Gin1984

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #9 on: June 16, 2014, 08:04:52 AM »
Our PMI is $74 on a house that was purchased for $260K. Yours sounds high.

I am going a completely different angle than what you are (not that it is right). I am:
Paying off PMI
Working on retirement contributions/cash savings
Only after all those are satisfied will I be concerned with college accounts for kids age twelve and under).

Your retirement needs to come before their college, in my opinion.

I agree.  You can always, later, cash flow college.  You can even, if you end up with extra cash, pull from your Roth IRA for their college.  But until you are maxing out your retirement vehicles and KNOW you have enough for yourself, don't save for their college.

frugaliknowit

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #10 on: June 16, 2014, 08:09:05 AM »
How much do you have in emergency funds?  If you do not have 50K plus one year's expenses
(due to the fact that you are a single income and self employed), do not do the refi now.

UlyssesG

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #11 on: June 16, 2014, 08:32:57 AM »
I'd hold off on college and retirement contributions and the pay down the house (after making the maximum Roth contribution for 2014 today).  With an income of $80K and a loan balance of $240k, you could hopefully refi above 20% equity within 3-4 years (college contributions and your hypothetical Roth contributions already total more than $750 per month).  You can easily set up a SEP at that point and contribute an amount equal to the missed retirement contributions and interest over the next 3-4 years.  I compare your PMI payments to a 401(k) with a match that you're not taking advantage of.  And the match that you're foregoing is $260 a month.  That's free money you're leaving on the table (more money than your current college contributions).
You mentioned that most of your annual income is passive so in the event of a job loss you wouldn't need a large emergency fund.  I'd use the $5,500 contribution this year as my emergency fund and then tackle the mortgage.  After refinancing, I'd immediate start the Roth, the SEP and 529 plans while shutting down the extra payments to the house.

HSLmom

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #12 on: June 16, 2014, 03:39:14 PM »
How much do you have in emergency funds?  If you do not have 50K plus one year's expenses
(due to the fact that you are a single income and self employed), do not do the refi now.

My income is mostly passive (I'm a writer), and while I need to work to keep my business going, if I stopped work for a month or even 6 months, we'd still be able to pay our bills based on residual earnings.  That's why the low emergency fund number.  I also just emptied my savings to move to a better cost of living area/buy a house before my son started kinder.

Monthly I save:
400 - emergency fund - total 3K now, will stop when it gets to 15
300 - house repair - will stop when it gets to 10k - 1K now
400 - car repair/replace - will maintain at 10k once it get there - $500 now
500 - HSA, was going to use this as another IRA and try to cashflow my minimal healthcare costs
225 - kids' accounts.  I could put two on hold, my daughter has special needs and I'm more concerned about not having a trust set for her than my own retirement right now.
Roth - I was going to try to fund this at the end of the year, my Nov/Dec are usually really good and my childcare cost is going down quite a bit in Sept.


I like the idea of paying down the PMI and refinancing, but I'm not wanting to miss out on the Roth/HSA either.  I'm at 4.25 interest right now, so if I paid off 50K, refi'd and got rid of PMI my payment would go from 1700 to just a little more than 1000, that's nice.

clifp

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #13 on: June 16, 2014, 05:14:46 PM »
How much do you have in emergency funds?  If you do not have 50K plus one year's expenses
(due to the fact that you are a single income and self employed), do not do the refi now.

My income is mostly passive (I'm a writer), and while I need to work to keep my business going, if I stopped work for a month or even 6 months, we'd still be able to pay our bills based on residual earnings.  That's why the low emergency fund number.  I also just emptied my savings to move to a better cost of living area/buy a house before my son started kinder.

Monthly I save:
400 - emergency fund - total 3K now, will stop when it gets to 15
300 - house repair - will stop when it gets to 10k - 1K now
400 - car repair/replace - will maintain at 10k once it get there - $500 now
500 - HSA, was going to use this as another IRA and try to cashflow my minimal healthcare costs
225 - kids' accounts.  I could put two on hold, my daughter has special needs and I'm more concerned about not having a trust set for her than my own retirement right now.
Roth - I was going to try to fund this at the end of the year, my Nov/Dec are usually really good and my childcare cost is going down quite a bit in Sept.


I like the idea of paying down the PMI and refinancing, but I'm not wanting to miss out on the Roth/HSA either.  I'm at 4.25 interest right now, so if I paid off 50K, refi'd and got rid of PMI my payment would go from 1700 to just a little more than 1000, that's nice.

50K will save you almost $700/month = 8K/year that is like 16% which is amazing.  It is also entirely possibly because I know that really jacked up the PMI rates on FHA loans due to the crazy number of defaults.  (If you only require 3% down, people will walk away when house prices drop 25%+)

At 16% you can practically fund any emergency on credit cards at come out near even.

So my advice is screw the kids accounts, ditto for the car and house repair funds, the HSA is important so I'd use it but don't go overboard. Get the overall emergency fund up to whatever you feel comfortable with $5-15K and then refi while the rates are still reasonably low. If you can borrow from parents I'd even do that..

GregO

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #14 on: June 16, 2014, 05:59:26 PM »
How much of your $1700/mo payment is PMI?  If I plug in $240k, 4,25% interest, and 30 years, it comes out to $1180/mo.  How much of the $1700 is PMI?  Because if it's close to the $500/mo that it appears, it should be priority #2 (behind an emergency fund).  Also, do you have an adjustable or fixed rate?  It's even more important if you have a variable interest rate, just because you have the added risk that your monthly payment will start going up and eroding your refinance savings plan.

According to what you just listed, you're saving $1825/mo plus the extra that you can fund the Roth with during the holidays.  I'd seriously start saving up to get rid of the PMI.

So my advice is screw delay the kids accounts, ditto for the car and house repair funds, the HSA is important so I'd use it but don't go overboard. Get the overall emergency fund up to whatever you feel comfortable with $5-15K and then refi while the rates are still reasonably low. If you can borrow from parents I'd even do that..

I agree with Clif (with a slight rephrase ;-)).  Cashflow the HSA so you are getting a tax break on any medical costs.  Then take all that savings and put it all toward an emergency fund.  Once that is to a comfortable level, take all your monthly savings and put it toward a downpayment.  If you can put $2k a month toward a refi fund, you'll have $50k in just over 2 years.  Get there as soon as possible and refinance ASAP.

THEN you can start saving in your other 'buckets'.  You'll be in an excellent place to do that with close to $2700/mo in surplus savings to put towards all the Roth/HSA/car/529/401(k)/whatever else you want.  That PMI is a TON of money you are burning through and will handicap your finances until you can get rid of it.

One last quick point: there are other options to refinance besides a conventional 20% down loan and FHA programs.  It'd be worth it to try to refinance another way to lower your PMI down to a reasonable $100/mo or so and then have the ability to have the PMI removed at 80% LTV.  I used a Wells Fargo 90/10 loan to get into our home last year and was able to get rid of the PMI within 8 months.  You might be able to do something similar in a few months.  And Wells Fargo isn't the only one that does it.  Chase was willing to match the terms, and I'm sure other banks would be too.  You should investigate it when you have saved up some or if your house appreciates quickly.

HSLmom

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #15 on: June 16, 2014, 06:04:06 PM »

I'm curious why you keep looking at the Roth.  With an income of $80-120k, it seems like you would be in a good position for taking advantage of some tax-deferred accounts, especially when you have some nice little tax deduc...err, kids, running around.  As head of household, $80k/yr, 3 kids under 16, you could actually get back more in federal income taxes than you pay in.

What are your average expenses each month?

I thought that roth was what people always want to use, I'm super new to investing. I might start a new thread to figure out the roth/trad IRA.  With the house interest I'm itemizing this year at least, last year I took standard.

My expenses as of sept are ~4k/mo if needed I could cut it down to 3K but I would rather keep the expenses in and put off being FI.  This summer they're 4500 because of more childcare.

HSLmom

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #16 on: June 16, 2014, 06:12:46 PM »
How much of your $1700/mo payment is PMI?  If I plug in $240k, 4,25% interest, and 30 years, it comes out to $1180/mo.  How much of the $1700 is PMI?  Because if it's close to the $500/mo that it appears, it should be priority #2 (behind an emergency fund).  Also, do you have an adjustable or fixed rate?  It's even more important if you have a variable interest rate, just because you have the added risk that your monthly payment will start going up and eroding your refinance savings plan.

That payment includes taxes and insurance as well, PMI is 260.  Fixed rate. I'm counting on my payment to go way down when I refi because the 30 years would start again at 50k less, but without the PMI this time. This is all assuming that the house value stays the same.


Quote
THEN you can start saving in your other 'buckets'.  You'll be in an excellent place to do that with close to $2700/mo in surplus savings to put towards all the Roth/HSA/car/529/401(k)/whatever else you want.  That PMI is a TON of money you are burning through and will handicap your finances until you can get rid of it.

Thank you! This is what I needed to hear, I keep hearing that you have to max out retirement accounts or you'll never retire, so I've been afraid to go after the PMI without doing that.  My payment feels reasonable to me (I grew up in northern cal) so I wasn't sure.


Quote
One last quick point: there are other options to refinance besides a conventional 20% down loan and FHA programs.  It'd be worth it to try to refinance another way to lower your PMI down to a reasonable $100/mo or so and then have the ability to have the PMI removed at 80% LTV.  I used a Wells Fargo 90/10 loan to get into our home last year and was able to get rid of the PMI within 8 months.  You might be able to do something similar in a few months.  And Wells Fargo isn't the only one that does it.  Chase was willing to match the terms, and I'm sure other banks would be too.  You should investigate it when you have saved up some or if your house appreciates quickly.

I'll look into that, thanks. I'm going to go ahead and just save up/pay down as much as I can until next spring and then see what my options are.  Right now my credit is still trashed from my ex, so that'll give me another year of solid payment history before evaluating too.

HSLmom

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #17 on: June 17, 2014, 07:43:29 AM »



It depends on your plans.  If you are looking to FIRE and you're in a higher tax bracket now than you will be in retirement, then using tax-deferred accounts like a 401k and Traditional IRA are better options for you.  Even if you are going to be in the same marginal tax bracket, it can still work to your advantage since the tax brackets are progressive.

Here are a couple links about investing for early retirement:

http://www.madfientist.com/retire-even-earlier/

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Lots of good stuff between MadFIentist and Jim on ways to optimize your retirement savings and taxes.

Thanks - I had originally thought that, but was under the impression that it growing tax free was more important.  I'll read those articles before I invest for sure.

GregO

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Re: Order to fund HSA/Roth/Pay off PMI?
« Reply #18 on: June 17, 2014, 01:23:18 PM »
That payment includes taxes and insurance as well, PMI is 260.  Fixed rate. I'm counting on my payment to go way down when I refi because the 30 years would start again at 50k less, but without the PMI this time. This is all assuming that the house value stays the same.
$260 is a lot better than $500 and makes it much closer between retirement and PMI.  Each of your options (PMI, HSA, Roth, 401(k)) offer savings, so you just have to balance what is most important to you.  You can save money in an HSA or 401(k) and get the tax break of 25%, you could put money in a Roth and get earnings that are tax free, or you could put the money towards a down payment and remove the PMI.  It might be worth your time to run a calculation and see which one saves you the most.  Other people may be right, it might be the HSA and 401K that offer the most savings.  Or you may decide it's more important to you to not have so much debt out on your first home...
Thank you! This is what I needed to hear, I keep hearing that you have to max out retirement accounts or you'll never retire, so I've been afraid to go after the PMI without doing that.  My payment feels reasonable to me (I grew up in northern cal) so I wasn't sure.
I don't think it's a good thing to put off retirement savings for a long time.  But if you have a specific goal in mind and stay on track for it, I don't think it's a mistake. 
I'll look into that, thanks. I'm going to go ahead and just save up/pay down as much as I can until next spring and then see what my options are.  Right now my credit is still trashed from my ex, so that'll give me another year of solid payment history before evaluating too.
For the record, I was suggesting saving the money in cash, not paying down the mortgage with it.  You're giving up a 4% return on your money if you keep it in cash, but it provides more flexibility.  I guess if you have a comfortable emergency fund and are determined to pay off the PMI fast, it should be fine.