The Money Mustache Community

Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: mikednj on April 10, 2012, 12:16:56 PM

Title: So many options, looking for advice.
Post by: mikednj on April 10, 2012, 12:16:56 PM
Hey all,

I've been following this and many other FI and PF blogs over the last two months. It's completely changed my perception of spending/saving and what I want to do with my future. Because of this, I feel over whelmed and confused as to what is the right path.

Here's some background.

Originally purchased home for $475k  with a 380k mortgage at 6.75%

Refinanced in May '11 for 365k at 3.75% (5/1 ARM, I'm 1 year into) but the LTV ratio was 90% because of real estate crash so the new mortgage includes PMI at $310/month. Monthly housing costs are $2857; breakdown is $570/principal, $1100/interest, $310/PMI, $887/escrow for insurance and taxes.

Taxes were $9,500 for 2011, we just had a reassessment so not sure what's going to happen with that, I'm hoping they go down a bit but I'm doubtful.

My wife and my combined income is ~$9,400/month (25% tax bracket). 

Assets look like this.
Cash Savings $45k
Checking varies between 4-12k /month depending on bills.
401k and 403b totals about $20,000
401k/403b contributions; me $5,700/year  wife $1,800/year (she's in public education so she pays into a pension as well).
No taxable investments yet.
No IRAs.

Current expenses can be kept at or near $5k/month including mortgage payment. We are really trying to shoot for 45-60% savings rate per month.  March was a successful month in this aspect, I'm hoping to recreate it going forward.

My wife's job is secure but we'd like to put her into a doctoral program to advance her career. My job is less secure as I'm in private industry.
 
Our monthly expenses usually run about $4000-$5000 with the mortgage included. We've done some healthy trimming to get that down from $6-$8/month.

So my question is, what do I do with this monthly savings? 

I have a few options. 
1) Pay down the mortgage to 78% (balance of $299,000) in order to drop the PMI then refinance in 5 years when the rate changes
2) Pay down the mortgage to drop the PMI and refinance to a 15year and aggressively down the mortgage and knock it out completely in 5-7 years.
3) Do nothing with the mortgage (aside from refi in 4 years) and just invest in a Vanguard index fund.
4) Max 401k, this will bring our monthly income down about $2,100.  But my options for funds in the 401k are limited. My wife's 403b is managed by AXA and mine is managed by Paychex.

I'm sure some combination of the right way to go.  I'm open to ideas.

Title: Re: So many options, looking for advice.
Post by: arebelspy on April 10, 2012, 12:49:02 PM
Depends on your personal preferences, risk tolerances, etc.

I'd pay down to get rid of PMI, then refi NOW into a 30 year to lock in today's low rates, then concentrate on investing. Others would go with the 15-year, or less.
Title: Re: So many options, looking for advice.
Post by: salmp01 on April 10, 2012, 12:56:11 PM
Iíd consider using your cash to pay down your mortgage to get rid of your PMI.  I would not feel comfortable having a 5 year ARM knowing that itís quite possible that interest rates will rise in the near future so I would refinance to a 15 year mortgage.   Taxes are a killer but if you want to live in this house I guess itís the price you pay.   Iíd also max out your 401k.
Title: Re: So many options, looking for advice.
Post by: mikednj on April 10, 2012, 01:04:44 PM
Yes moving is not an option right now. We are down a good $90k from purchase price and although we aren't underwater, I'm not willing to walk away from that much money. If it means living in the house for 10 years so be it.  Also the wife wants to stay in the area due to family ties and there's really no where in NJ that's low taxes.

Would you all recommend maxing the 401k and then paying down the mortgage to get rid of PMI after those deduction or pay down the house first then worry about the 401k/investments.

On one hand I can pay the house down in a year to get rid of PMI or I can split the money and put more into investments and take a longer time to pay down the PMI.
Title: Re: So many options, looking for advice.
Post by: salmp01 on April 10, 2012, 01:08:34 PM
This is what I'd do first:  Use your cash and refinance so that your loan is 80% LTV.  Get a fixed rate loan (either 15 or 30).  You'll get a better rate and you won't have to pay PMI which will save you $300/month. 
Title: Re: So many options, looking for advice.
Post by: James on April 10, 2012, 01:14:53 PM
This is what I'd do first:  Use your cash and refinance so that your loan is 80% LTV.  Get a fixed rate loan (either 15 or 30).  You'll get a better rate and you won't have to pay PMI which will save you $300/month.

+1

You don't need the 15 year unless you aren't disciplined enough not to spend the money you save with a 30 year, but definitely get rid of the PMI ASAP and get your rate locked in.
Title: Re: So many options, looking for advice.
Post by: AJ on April 10, 2012, 01:19:14 PM
We are down a good $90k from purchase price and although we aren't underwater, I'm not willing to walk away from that much money. If it means living in the house for 10 years so be it.

Throwing good money after bad is not a good reason to stay. It is an emotional reaction. There may be perfectly valid reasons to stay there, but "we'd lose money" is not one of them.

This is what I'd do first:  Use your cash and refinance so that your loan is 80% LTV.  Get a fixed rate loan (either 15 or 30).  You'll get a better rate and you won't have to pay PMI which will save you $300/month. 

+1
Title: Re: So many options, looking for advice.
Post by: tooqk4u22 on April 10, 2012, 01:58:34 PM
Agree with everyone.  Take cash and pay down enough to refi ASAP - (1) rates are low and will likely be higher in 4 years and (2) $310/mo for PMI sucks.  Think about it this way you have $45k earning 1% if your lucky vs. ROI if you drop PMI.  Assuming your home value has not changed since last year you had $365k loan at 90% LTV equals $405k value - 80% LTV would be $324k loan and $41k pay down.  PMI of $310/month equals $3,720 per year.   $3,720/41,000 = 9.1%. 

9.1% is what it is costing you vs. 1% savings rate.  Hopefully the math speaks for itself. 

BTW I am in NJ and taxes are horrific, I don't know why it is so screwed up. 
Title: Re: So many options, looking for advice.
Post by: mikednj on September 28, 2012, 06:25:25 AM
I just wanted to bump this topic back up. I've made some moves I think are in the right direction.


Housing;  we paid down some of the mortgage and refinanced to a fixed 3.8% 30 year. PMI gone. I'm paying ~$1650/month for the mortgage and about $2400/qtr for taxes.  We aren't moving anytime soon because our home is close to where my wife works and we like the area/neighborhood right now.

Monthly expenses hover around $3k-4k a month with the mortgage payment. We can shrink that down some more if we really tired and got frugal. To be honest our largest expenses is food and gifts. I'm working on that with the wife.

Monthly income is at $10k/month. Which leaves us with 5-7k/month to push into savings. I'm working towards building a $50k nest egg for emergencies. This would cover 12 months of keeping the mortgage paid, lights on and food in our bellies. The odds of both of us loosing our jobs at the same time is very remote but piece of mind is nice to have.

We have zero debt besides the mortgage and I'm going to keep it that way.

So with that. My new question is this. Keep in mind my wife works in public education so there's a chunk of money being taken out automatically for her pension which she will be fully vested in 2 years.

Option 1)  Max the crap out of the 401k and 403b for maximum tax savings. The down side with this, in my opinion, is that my fund options in the 401k/3b aren't all that great. They are the usual mutual funds and I don't have access to any index funds in those companies. I do have the option of saving the money into a money market (low savings rate, less than ING) or as cash but that doesn't seem to make sense to me.

Option 2) Screw the 401k/3b and take all my post tax money and shove it into vanguard index funds.

Option 3) Forget investing and pay down the mortgage as soon as possible.  The balance is just under $350k and if I do things right maybe I could pay it down in 10 years. Though I feel like over 10 years the market should beat 3.8%.

Thoughts?

Title: Re: So many options, looking for advice.
Post by: salmp01 on September 28, 2012, 07:34:32 AM
I would max out your 401k/403b.  Thatís an instant savings of 25% (federal tax) + your state tax rate.  If you ever change jobs you can always move this money into an IRA that you control.   
Title: Re: So many options, looking for advice.
Post by: alandjackson on September 28, 2012, 09:15:14 AM
Why not all three options?

1) If you aren't taking advantage of an employer match, obviously fix that.  If not, maybe bump up your 401k contributions just a bit.  I'd run the numbers and figure out what target you'd like to hit for your 401k to fund your golden years.

2) Take the rest and split it half and half between the mortgage and buying index funds.  Having the index funds and cash in case you ever need/want it is nice, but having the cash flow flexibility (and piece of mind) of no mortgage is also awesome.  You can also use those index funds to pay off the remaining mortgage in 10 years.

If you pay off the mortgage then you might lose the market returns over 3.8%, but you'll also be living off 2k/mo which creates a lot of possibilities (changing jobs, extended travel, or just a huge savings rate).