Hello Everyone,
My name is Robert and I discovered MMM in early 2012 and since then I have put his techniques into practice and went from a net worth of negative tens of thousands to over $150,000 in less than 3 years. I am almost to the point of being 100% debt free except for my mortgage. This should be a simple case study because it revolves around whether or not it is in my best interest to refinance my house. Currently I have the following debt:
Credit Card = $7,300 @ 9.65 % (paying about $100.00 per month in favor of car note)
Auto Loan = $10,000 @ 1.79 % (short term loan requiring $1,000 minimum payment every month)
Mortgage = $111,000 @ 3.50 % ($1,000 per month payment)
I already refinanced my house about 6 months ago to pull out the equity and pay off my student loans and part of the car note. Now fortune has smiled on me again and Zillow says that my house is currently valued at $171,000. During my last refinance Zillow said $125,000 and it appraised for $117,000. I know that it is a risk to keep pulling the equity out of the house when the value can drop like a rock at anytime but I'm thinking that the benefits might be worth the risk. Here are the 2 scenarios that I am currently working with:
1. Do nothing, in about 4 months I will have the car note paid off with my quarterly bonus, tax refund, and extra monthly payments. Once this is complete, I will then have the $1,200.00 that I am paying on the car to pay down the credit card and have it paid off in an additional 4 months. Once this is done, I will then be able to put that money into a Roth IRA and a Vanguard account (side note, I am already maxing out my 401k and HSA). From this moment on I will be aiming for Early retirement in about 10 years with $600,000 in 401k, $55,000 in Roth IRA, and $125,000 in Vanguard to bridge the gap for my Roth IRA Ladder. I expect to pull about $24,000 a year in retirement.
2. I refinance and pull out $50,000 in equity from the house. I will also reduce my interest rate from 3.5 % to 3.125 % for 15 years. This will likely make my payment around $1400 with taxes and insurance. The fun part is what I get to do with that money. First the car gets paid off, which allows me to drop the insurance down to about $40 a month (currently $90 for full coverage) and kill that $1000 per month payment. I will also pay off the credit card completely getting rid of the finance charges and the balance. With the left over money I will open a Roth IRA and max out the contribution for 2014 and 2015. I would then take the last of the money and open a Vanguard account and invest $10,000 in VTSAX Admiral shares. This will hopefully allow me to retire in 9 years instead of the 10 in the first plan. Of course this all depends on the stock market and economy. Any leftover funds will be put into the house, I'm interested in putting in MMM's open loop radiant floor system, but I digress.
I have always been told that with low interest rates on Mortgages that your equity would serve you better invested instead of the guaranteed 3.125% return from the money you pay every month. So my question is whether or not I should take the risk and end up paying $400 more for my house at a lower rate while getting a jump start on my retirement accounts and simultaneously destroying all of my debt? Or if I should just buckle down and ride out the storm for the next 8 months and then start my retirement accounts toward the end of 2015?
Thanks for any advice you throw my way,
Best Regards and Happy New Year,
Robert
P.S. If you have another plan that I haven't considered, please let me know, there might be a better solution than the ones I have thought of and I would appreciate the insight.
Update 1: Thanks for the suggestions and for clarification here are some answers to questions brought up so far:
The reason that I am paying so much for my car is because a year ago my credit card was paid off and I was putting $1000 a month toward the car to pay it off. Since my interest rate at the time was 3.99% I figured refinancing it and getting away from the original lender and over to my bank plus reducing the interest rate to 1.79% would save me more money in the long run. I also figured it would be easier to make payments through my own bank.
Unfortunately, I had a family emergency and I was forced to put the expense on my credit card which has been paid off until a few months ago. The reason why I concentrate on the car payment is because it requires a large payment every month. If I spend my extra cash and bonuses on the credit card my monthly expenses would be $1000 on car and around $500 on the credit card. I looked at a payoff calculator and determined that while I would pay about $100 more in interest paying off both these debts I could save several months if I killed the car before the credit card. This was my reasoning on this.
Update 2: My income is net pay of around $60,000 of which 30% goes toward maxing out my 401K and HSA through payroll deductions. The rest goes to paying down debts and other monthly expenses. I am unsure what my tax return will be this year as it is the first time that I have maxed out my 401k (before I just did the company match at 6%). Every year I usually get $100 or I have to pay $100 depending on the luck of the draw. I am vehemently against giving the government an interest free loan or paying any more tax than I have too. That is why I am maxing out the tax deferred accounts now, since I can always move or change my situation in the future to avoid paying taxes during FI.
Update 3: Unfortunately, the refinance will not be free. I will be getting a VA loan and the closing cost will be about $7,000 which what I paid during my last refinance. Changing my debt from one place to another is part of the reason why I have been so successful with my journey thus far. I have converted lots of high interest debt to lower interest rates to help pay them off faster. It is unlikely that I will be able to get lower rates than this in the future now that the fed is going to start increasing the rates again. Basically, By converting my last remaining debt to the house I will get the tax right off from the mortgage interest which I won't get from the car or credit card and I will get a boost to my FI goal.