What direction to go

[poachedegg]

Hello everyone - 

I recently increased my monthly income by 2k per month, plan on saving 100% of it, and need some help with where to put it.

I'm 40, have a wife and two little girls ages 3 and 6.
I'm self-employed and make about 60-90k after taxes annually, my wife is a stay-at-home-mom.
I have 140k in a beneficiary account through American Funds from when my dad died - we let it sit and grow. There is essentially no other meaningful retirement money yet (small Roth and another small IRA).

We have a mortgage of $290,000 (5.25%) and our house is worth maybe $300,000 (we purchased in 2007 for $350,000, and it's slowly moving toward the surface).

We have no other debt other than about 13k in student loans at 2% interest.

So the question is: Do I put all $2k monthly surplus into paying down the mortgage to 80% and refi?  This would take approx. 2-3 years. 


Thanks for any suggestions/thoughts

[soccerluvof4]

Are you doing anything like a 529 for your kids? is that 2k a month before or after taxes? if its after taxes I would continue doing what your doing and maybe put 1500 a month in a few funds like VTSAX, VGSLX and VBTLX and put 500 a month in something for your kids. There is a big difference between taking home 60-90k annually and raising your income 2k a month?? In either case you werent specific in why you cant refi now? but in 2 years who knows where interest rates will be. 5.25% is still considered low as long as you dont have an arm.

[golfer44]

If you do plan the mortgage route, I'd consider putting the $2k a month into a cash-type account somewhere (CD ladder or high yield savings account) until you have enough to reach your 20% equity, then do one large payment. The reason for this is the money will be a lot less tied up in case something happens and you need to use it for something else.

You don't really gain anything by having 12% equity, 14% equity, etc.. so it may be worth it to keep that money readily accessible. Just a thought if you hadn't considered it.

[electriceagle]

You didn't mention whether you have an emergency fund. If you don't, Lake Michigan Credit Union has a high interest checking account that pays 3%.

[Frankies Girl]

If you're self-employed, why don't you have a solo 401K or traditional IRA so you can sock away some pre-tax savings? You'd reduce your taxable income and save pre-tax. I'd open one of those and put your additional and whatever else you can scrape up into something like that.


http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans



That 140K inherited account is going to end up costing you more at American Funds. I had something with them, and all of their funds are more expensive than what you could get from Vanguard. It would make more sense to move the account to Vanguard (and it isn't hard - you just need to contact them). Then you can get the money into the Vanguard funds and it will make a good amount and have the least expenses while doing so.

The house is way expensive considering your wife isn't providing any income and you're self-employed, that would be really scary for me. I would be selling and get something half that expensive, or even a nice apartment rather than have that sort of thing hanging over me. Why do you need to reach 20% equity before refinancing? Check around some different banks and credit unions in your area and see if something better is out there.


If your interest rate was under 4%, then I would be "save in a solo 401K" no problem. But that interest rate is steep. SO I'd say go out there and find a way to refinance the house ASAP and get that rate down now, and THEN start socking your extra money into a tax advantaged account.

[Thegoblinchief]

Open a Roth if you're eligible for one. Max that out each year. This leaves you another $15Kish (depending on taxes) to put into an IRA, towards mortgage, etc.

5.25% isn't terrible. How long are you going to stay there? Unless it's quite a long time, the costs of a refi won't justify the savings (but run the numbers).

Do you have PMI? Does it come off automatically at 80% equity? THAT does offer a decent ROI.

Move that $140K to Vanguard if you can.

[okashira]

I wouldn't necessarily sell the American funds. The issues with their funds is the high load fees. If you already own them, take a second look --- post what they are and the expense ratio.
Their growth fund has an amazing track record. Something like over 13% (after fees) for the last 30 years.

[tomq04]

2 good points above that need reiteration:
1)  Assuming you have PMI, do what you need to in order to get out from under it. 
2)  Retirement fund, socking what you can away is really helpful.

Running the numbers on that mortage should be your primary goal I would think, including the question of "is there where you really want to be?"

[poachedegg]

Thanks everyone for your comments - let me answer some of these questions:

No 529 set up.  Not sure what to do with this just yet. Need to figure out retirement savings first.

2k a month is before taxes.

The current mortgage is a fixed rate 30 year at 5.25%.  Some of you asked why not refi now, and the reason is that I'm assuming to make it worthwhile I need to own 80% and get rid of PMI, which we are currently paying.  We have refinanced once already and when I tried to refi again the lender we originally went with said we couldn't unless we owned 80% - can't remember but has something to do with the type of loan with have.  Fannie Mae? Freddie Mac? Freakin Frack?  (will have to get it out of the files to find out what we have)

Golfer44 - thanks for the tip on keeping the pay down $ more readily available - good food for thought.

We do have an emergency fund here are the details I left out regarding other savings:

Emergency fund in Capital One 360: $6000
Vanguard REIT non-retirement account: $11,000
Roth (for me) currently being transferred to Vanguard from Valic: $5000
Valic IRA (from prev. job): $13,000
TIAA-cref IRA (from wife's prev. job): $8000
SEP-IRA in Vanguard (just started): $1500

We love the house and plan on staying at least until kids graduate high school (15 years or so) - I wouldn't mind keeping it if we move as a rental property, so owning outright someday sounds like a good plan.  Moving would entail moving farther away from work (we live in the city) in order to move into a less expensive house.  This would mean new schools, longer commute, and a major major change we're not really feeling up to.  We love the city and love our community.

I have seriously considered moving the 140k to Vanguard from Amer. funds - but it's been doing so well there I've been hesitant so far.

So back to my original question of having this 2k extra each month (let's just call it 2k after taxes) - I'm hearing differing thoughts on prioritizing - 1. get out of PMI which means I need to save up 50k and refi and 2. max out retirement fund.   

Any other thoughts on why it would be a bad idea to put 100% of the 2k each month toward a savings account meant to accrue 50k, then refi and get rid of PMI, THEN start socking away into retirement funds?  I realize there could be an infinite number of distributions of what to do with the 2k, and that's exactly why I'm posting - just curious to hear thoughts on ways to distribute.

Thank you all again for your suggestions -

[Emg03063]

Here's a thought:  Refi 80% Ltv now, borrow against the beneficiary account to bring the cash needed to close.  Once closed, you can open a HELOC to access 10% of the remaining equity.  I'm on a 5/1 arm at 2.25% (ran the numbers and it made more sense for me to do that and apply the money saved on interest to pay down principal before the rate resets vs. fixed rate mortgage-- do the math -- your mileage may vary).  Repay your bridge loan and HELOC in interest rate order. 

[poachedegg]

Emg03063 - you're idea is very helpful.  It seems that refinancing now is the way to go and figuring out how to get $50k to do so is maybe the real question here.  I'm not sure what you mean by needing to "access 10% of the remaining equity" though. 

[tomq04]

PMI is money flushed down the drain, nailing that + a refi = big savings!  Don't forget to consider a  20/15 year to knock off the extra .5% off a refinanced mortgage.

[Another Reader]

What do you mean by a "beneficiary account"?  If this was an IRA, you may have required minimum distributions.  If this was a taxable account, then you can do what you want with it.  You would need to consider capital gains if the shares have appreciated a lot since your father's death and you sell the funds.

[Emg03063]

Emg03063 - you're idea is very helpful.  It seems that refinancing now is the way to go and figuring out how to get $50k to do so is maybe the real question here.  I'm not sure what you mean by needing to "access 10% of the remaining equity" though.

You don't need to access the equity, but I was assuming you don't want to liquidate the beneficiary account to generate the cash to close.  If so, and your loan against the account is at a higher rate than a HELOC (it probably would be), than taking money out of a HELOC would help repay the bridge loan faster.