Author Topic: What should I do now?  (Read 4431 times)

Warden95

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What should I do now?
« on: February 27, 2014, 06:21:42 AM »
I was going to Wells Fargo to make a large principal payment on our home mortgage when a nagging voice said I should wait.  As a beginner Mushachian, I came home to check the blog and forum for any last minute advice on if this was the right call.  I've now read with interest ( and some confusion), all the threads weighing pros and cons of investing the money vs. paying off mortgage.  I'm now asking for some input as I really don't know which direction to take.  Here's our picture:

- I'm 42 and wife is 39
- $70,000 cash in two standard savings accounts (I know, I know, it's why I'm asking for advice)
- 215k mortgage on residence at 3.25% 30/yr fixed (house appraised at 285k)
- 99k Adjustable rate on rental currently 3.75% about to adjust. Rents are $730 monthly (house appraised at 91k) horrible decision in the housing boom of 2005.
- As of this morning we have 485k in 401, Roth, Trad IRA.  Wife maxes out 401k with match about $21,500 annually.  We both max Roth and my traditional which is another $15,500 annually.
- Cars are paid for with no other debt.
- Combined gross income about 195k.

We are working on getting our living expenses to Mustachian levels.  I realize that paying off the mortgage is an emotional issue but my wife is in a corporate high stress job and probably won't want to do it for ever although 160k out of our gross income is her salary.  I'm a newbie Realtor with a few side businesses.  Our initial philosophy was to pay off both mortgages in about 3-4 years which would loosen the belt and allow my wife to work part time at a less stressful job if she desired.  We would then take all extra money and invest until reaching FI. 

Any ideas or recommendations would be greatly appreciated.  I'm a child in the world of finance, accounting, investing, etc, but am having a blast learning.

FrugalSpendthrift

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Re: What should I do now?
« Reply #1 on: February 27, 2014, 07:00:19 AM »
If you sleep better at night, by reducing the mortgage, than you would by investing the money, then march right back to the bank and make that payment.  But maybe do it on the rental instead of the home mortgage.

nereo

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Re: What should I do now?
« Reply #2 on: February 27, 2014, 08:02:12 AM »
  Here's our picture:

- I'm 42 and wife is 39
- $70,000 cash in two standard savings accounts (I know, I know, it's why I'm asking for advice)
- 215k mortgage on residence at 3.25% 30/yr fixed (house appraised at 285k)
- 99k Adjustable rate on rental currently 3.75% about to adjust. Rents are $730 monthly (house appraised at 91k) horrible decision in the housing boom of 2005.
- As of this morning we have 485k in 401, Roth, Trad IRA.  Wife maxes out 401k with match about $21,500 annually.  We both max Roth and my traditional which is another $15,500 annually.
- Cars are paid for with no other debt.
- Combined gross income about 195k.

Dude, you're doing well! 
Paying down one of your two mortgages would be an emotional decision.  If that's what will make you feel better, go ahead and do it.
You mentioned $70k in "standard savings accounts".... I'm guessing those have extremely poor interest rates?  If it were me I'd move ~$30k-40k of that into an index fund where you will almost certainly earn more over hte next 5+ years.
your savings and savings rates into the IRAs and 401(k)s are awesome.   Keep that up for just a few more years and move towards mustashianism an you'll be FI!

soccerluvof4

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Re: What should I do now?
« Reply #3 on: February 27, 2014, 08:06:24 AM »
+1^. Nothing better than the feeling of being mortgage free but your doing well on your 401k's and stuff but to much cash doing nothing.

Another Reader

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Re: What should I do now?
« Reply #4 on: February 27, 2014, 08:24:09 AM »
If I wanted to reduce financial risk by paying off mortgages, I would be looking at getting rid of the rental mortgage first.  Then you are down to one mortgage payment that must be made every month.  However, with your new career and the vicissitudes of corporate employment, I would also want a solid reserve.  In your shoes, I might continue to save until I could write one check to pay off the mortgage and have some reserves.

At some point, I would have a better look at the rental.  The yield is not that great and unless it is rapidly appreciating, I would think about where it fits in the long term portfolio.

PeteD01

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Re: What should I do now?
« Reply #5 on: February 27, 2014, 10:02:37 AM »
You are doing extremely well with your investments and your liabilities are clearly the main issue on your path to FI.
I'd deal with the rental mortgage ASAP and then move on to the other mortgage while maxing tax deferred investing.
Unless you are looking at having millions in retirement savings, you would probably have enough investments by the time the mortgages are gone. Going forward it would be all gravy (some would say excess).

I disagree with the idea that mortgage payoff is mainly an emotional issue.
It has more to do with where you are in relation to your goals and if leveraged investments make sense in that light.
As long as the biggest risk is not to have enough market investments, paying off a mortgage makes no sense.
Once your risk of not having enough market investments has subsided, the need for leveraged investments has also subsided - regardless how good the conditions appear to be at the time.
 

Peter

unpolloloco

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Re: What should I do now?
« Reply #6 on: February 27, 2014, 10:10:56 AM »
I'd seriously consider shooting the rental entirely.  Sell the house at ~90k, take the 10k hit, and put the effort into one of the side businesses.  I doubt it's cash-flow positive (or at least significantly so), and it's almost certainly a loss on the books.  More importantly, it's probably a time-sink or at least takes some mindshare.  Not worth the hassle IMHO.

Warden95

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Re: What should I do now?
« Reply #7 on: February 27, 2014, 10:27:04 AM »
Man you guys kick ass!!  I can't tell you how appreciative I am.  What's funny is right after I wrote that, I went to meet with my financial advisor. I know general feelings about them on this forum but he's family and I rolled several old 401k account over with him.  I went prepared with several spreadsheets prepared to explain Mustachian concepts and our increased levels of badassity.  We just spent an hour and a half bouncing off each other in a rubber room.  Explaining that we could be FI in about 5-7 years with expenses in about the 25k a year range didn't seem to be getting through.  Maybe I was doing a shitty job explaining it.  He did agree with everyone's suggestion of paying off rental mortgage.  We have also thought of selling it and taking the hit because your right, it can be draining.

PeteD01

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Re: What should I do now?
« Reply #8 on: February 27, 2014, 10:43:44 AM »
Man you guys kick ass!!  I can't tell you how appreciative I am.  What's funny is right after I wrote that, I went to meet with my financial advisor. I know general feelings about them on this forum but he's family and I rolled several old 401k account over with him.  I went prepared with several spreadsheets prepared to explain Mustachian concepts and our increased levels of badassity.  We just spent an hour and a half bouncing off each other in a rubber room.  Explaining that we could be FI in about 5-7 years with expenses in about the 25k a year range didn't seem to be getting through.  Maybe I was doing a shitty job explaining it.  He did agree with everyone's suggestion of paying off rental mortgage.  We have also thought of selling it and taking the hit because your right, it can be draining.

If you can sell for a good price, that would be a good way to deal with the rental mortgage.

But consider one thing: regardless what you paid for it and what it could fetch now, it could still be part of a diversified ER income stream. The way you ended up owning it is certainly an unpleasant memory - but going forward that should not play into the decision to sell or not.

Peter

bacchi

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Re: What should I do now?
« Reply #9 on: February 27, 2014, 11:21:30 AM »
Get rid of the rental ARM.

For the house mortgage, don't pay it off. You can instead buy T-bonds that yield more than your mortgage.

PeteD01

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Re: What should I do now?
« Reply #10 on: February 27, 2014, 12:28:25 PM »
Get rid of the rental ARM.

For the house mortgage, don't pay it off. You can instead buy T-bonds that yield more than your mortgage.

The current yield on T-bonds is a little higher but you would be getting rid of everything what's good about a fixed rate mortgage (interest and inflation risk).
Am I missing something?

Peter

Warden95

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Re: What should I do now?
« Reply #11 on: February 27, 2014, 06:05:56 PM »
Thanks for the input everyone.  I just made a 40k principal payment on the rental ARM.  I'm keeping the reserve cash on the high side for now.