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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: RubenDF on September 13, 2013, 10:23:23 AM

Title: Update, debt issues, and action plan
Post by: RubenDF on September 13, 2013, 10:23:23 AM
Hey Everyone,

Here is a link to my first post and introduction, for background info if you're interested :)

https://forum.mrmoneymustache.com/ask-a-mustachian/new-to-the-boards-introduction-and-request-for-advice-)/msg129339/#msg129339

So the following has happened since then: After much discussion (thanks in no small part to all of your great advice!) I managed to convince my fiancee to join finances and adopt a budget. We settled on an allowance-type arrangement (she will get $400 (!) per month and I will get 65% of that). Naturally, my plan is to use my allowance to do some additional savings or to pursue activities that increase our net worth. The remaining line items on our budget are fairly generous, but set at a level that will allow us to save around 70% of our take home. She also agreed to create a joint Mint account, and I'm trying to optimize some of her expenses (car insurance, etc.). I think by the end of the year, the projected savings rate will go up to around 73%, hopefully...

Now to the current issue of housing: One of the big triggers for all of the above was a rate increase on the first mortgage on our condo (yes, she bought with no money down...) from 4% to 8.6%. This happened because some time ago she talked to the bank and managed to get a temporary modification on her interest rate, which expired this month. Not going into what a fucking suicidal decision this was initially, the change made it very clear that no new house should even be considered for the time being, and that this debt must be killed ASAP

So here is what our plan is:
 
 - 100% of any penny we earn above our expenses after we build up an emergency fund of around $5k will go to killing this mortgage (it has a current balance of around $163k)

 - Try as hard as we can to refinance. We've already visited a mortgage broker and per his advice, it would be almost impossible given the fact that the loan isn't fannie/freddie backed and the condo is 100% upside down. Any words of wisdom in this area would be appreciated.

 - Here is the iffy point: My fiancee has around $17k in available borrowing from her 401k. The rate is 4.25% over five years, and the payments are directly deducted from her paycheck. I think it's a no-brainer (immediate $800-$900 savings in interest per year), but she has doubts/fears. Am I missing something? I don't want to push this too hard if there are real risks involved that I can't see at the moment - All advice is welcome.

Anyway, despite the crazy amount of debt, I'm very excited to be on-track to FI and to be marrying an amazing woman who (although she hates "money talk" as she puts it), is willing to look the problem in the eye and solve it, instead of pushing it under the rug...

Cheers!
Title: Re: Update, debt issues, and action plan
Post by: Zaga on September 13, 2013, 10:28:20 AM
The biggest risk of a 401-K loan is if you leave your job for any reason (including death, getting fired, leaving, etc) then the loan is due in full in (I think) 90 days.  If you can't pay in full, it becomes an early withdrawal, which is taxed at your tax rate, plus penalized 10%.  So you could easily end up paying a pretty large penalty for taking out this loan.

by all means, have her invest just to the match while you get this home loan sorted out, but I would not recommend a 401-K loan!
Title: Re: Update, debt issues, and action plan
Post by: Rebecca Stapler on September 13, 2013, 10:30:41 AM
There are risks to taking out a 401k loan, the biggest of which is that it will be due and owing within 30 days of her job separation. If she never plans to leave and has seniority that would protect her if they conducted layoffs, then there is less risk of this happening. But I'm a cautious person by nature (and I just got laid off, so I'm even more cautious!), so I wouldn't take a big 401k loan unless I had reserves to call upon to pay it off quickly in the event of a layoff.
Title: Re: Update, debt issues, and action plan
Post by: Mazzinator on September 13, 2013, 01:52:29 PM
Quote
Mine - $54k after tax (doesn't include variable bonuses which could be very substantial; keeping it conservative)
Hers - $104k before tax

Housing (biggest issue):
My fiancee owns a 2 bedroom condo which is really ridiculously small but in a good area. She bought it at the absolute peak of the 2008 bubble for $240k. The current Zillow estimate for the condo is $94k and our remaining balance on the debt is $196k @ 4.5%. We want to have kids soon and buy our permanent home within the next 2 years (She is 35... if we wait too much for kids, it'll be risky).  The current market for the kind of home we'd like is between $270-$320k

Student loans (second largest issue):
Mine: $64k @ 6.25% average
Hers: $140k @ 3%

Other debt:
Mine:
I owe two personal loans (from a dark past... not worth getting into) -
Loan one: $5k current balance @ 4.5%
Loan two: $18k current balance @ 0% (making $100/month payment)
Hers:
10k personal loan @ 5%
 

How's the other debt??

My rough math has you guys "saving" 70% of take home, so around $7000/month??? Is that right?? How much of this is going to retirement vs debt repayment?? I just ask because i'm going through this issue..how to prioritize this 70% (in my case it's only 50%) but it helped me to break it down into 2 categories. Debt and retirement.

I don't understand the mortgage issue? Is there just one? Was $196k at 4.5% but now $163k at 8.6%?? Is this correct??

Sounds like you guys are killin' it..great job!!