Author Topic: What should I do with an extra 100 I squeezed out of my budget?  (Read 4489 times)

mcarter13

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What should I do with an extra 100 I squeezed out of my budget?
« on: October 05, 2012, 02:39:39 PM »
Usually I'm pretty good with PF questions, but I'm stumped on this one.
Background for store: About 12k left in student loan (projected pay off July 2013). Currently investing 0 in retirement (Dave Ramsey Plan), but will be contributing what I'm currently contributing to pay off my debt when I pay off my debt. My current home loan is 3.875%/20 years (only 6 months in, refinanced earlier this year), with a balance of 153k.
I squeezed $100 out of my budget this month, and given the current current mortgage rates, I'm at a dilemma.
I can currently get refinance to 2.75%/15 year, that would cost about $100 extra per month, but add about an extra $100 in equity per month, for a given difference of about 13k extra in equity over 5 years.
Should I put the extra $100 in my debt repayment, and then eventually into retirement; or put the $100 into my house equity via the refinance?

Note 1: I do have an emergency fund (about 30k), and have some retirement (about 30k).

Note 2: Re the refinance, the closing costs would be about $900, thus the total cost over 5 years (including closing costs, and extra payments), would be about 7k, but I would have about 13k more in equity. The way I view it is I'm spending 7k to get 6k in returns, almost doubling my money.

Note 3: Re my student loan, it is at the typical 6% interest rate, but I'm projected to pay it off in about 9 months, so they extra $900 ($100 per month over 9 months) towards it wouldn't make too much of a difference in the long run (e.g., pay the debt 1 month faster)

Note 4: I'm really reluctant to pay down my student loan with my e-fund. I really like the e-fund in place, and by not using it, it forces me to pay down my debt faster.

Note 5: The only reason I'm considering refianncing is how low the mortgage rates have gotten. 3 years ago (when I bought the house), I got a 5.875%/30; refinance 6 months ago to a 3.875%/20; and now I can get a 2.75%/15. In theory, I would like to refinance after I pay off my debt, but the driving force is i) how low the rate is now and ii) what will the rates be in summery 2013 when I projected to pay off my debts.

Update:  I've decided to pay off my student loans with my E-Fund.  I'm now debt free!!!!
« Last Edit: October 12, 2012, 09:45:08 AM by mcarter13 »

Guardian

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Re: What should I do with an extra 100 I squeezed out of my budget?
« Reply #1 on: October 05, 2012, 02:48:01 PM »
As a 22 year old renter, but an avid reader of MMM, my suggestion is as follows:

1) Pay off all debts
2) Pay off mortgage (to me, a mortgage IS debt)
3) Invest in retirement
4) "Retire" and contribute to society
5) ???
6) Profit.

mcarter13

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Re: What should I do with an extra 100 I squeezed out of my budget?
« Reply #2 on: October 05, 2012, 02:53:42 PM »
Now that I think about it, I guess the more general question is would you rather pay off your mortgage, or invest in retirement?

sockmunkee

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Re: What should I do with an extra 100 I squeezed out of my budget?
« Reply #3 on: October 05, 2012, 03:26:05 PM »
The answer to this question from most readers is usually the latter (invest).  Your returns (assuming you are doing mostly index funds with low cost) will almost definitely be higher than you mortgage rate. 

Paying off mortgage provides peace of mind but postpones FI and hurts the overall stache.


Daley

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Re: What should I do with an extra 100 I squeezed out of my budget?
« Reply #4 on: October 05, 2012, 03:52:51 PM »
I don't think you should try to re-refinance the house again, just pay more against the principle if you want it paid off sooner. Also, I know you like that emergency fund, but that student loan is debt and debt is an emergency, remember? You said the magic words yourself, "it forces me to pay down my debt faster." What is faster than paying off something dinging you 6% interest than paying it off immediately!? You might lose $12k from the emergency fund, but the emergency fund likely isn't actually sitting there working for you financially, and even if it is, I sincerely doubt it's working at above 6% interest given that it's an emergency fund, which indicates immediate liquidity. This will free another $1200 in your budget per month RIGHT NOW for better long-term investments and debt obliteration plus saving you a few hundred dollars of interest over the next year. These are not peanut numbers we're talking about here.

You need to be more realistic about the size of your emergency fund... that much in liquid assets could be more of a liability than a security blanket. Six to nine months of regular expenses in immediately accessible liquid assets should be more than plenty, and if that number is anywhere near $20k, you either need to be married with children or really need to reduce your spending elsewhere.

If you care that much about paying off the house, imagine how much quicker you'd hit that finish line pumping the next year's worth of money that would've gone into the student loan directly into the house instead. You could save far more than just $6000 in interest across the life of the current loan just paying it off sooner. An extra $10-15k put into equity over the next year will pay off in spades, and doesn't require you taking out your third loan on the same house in as many years of ownership.

sibamor

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Re: What should I do with an extra 100 I squeezed out of my budget?
« Reply #5 on: October 05, 2012, 07:09:44 PM »
Make that student loan disappear with the emergency money!  You have enough that you will eliminate 300-400 dollars in interest payments! Is holding that 30k making you $300-400 in the next 6 months. Nope.

The second that is paid off you can take all those debt payments and kick towards rebuilding a comfortable emergency fund, add to mortgage principle, and/or invest.

*assuming monthly payment now is $946.89

Scenario 1: keep current mortgage, no change in payment for life of loan
 Payoff 20yrs, total interest ~$65k.

Scenario 2: keep current mortgage, add $900/mo after loan paid off in July 2013.
Payoff 8yrs 9mo, total interest ~$28k.

Scenario 3: keep current mortgage, contribute 10k from emergency fund, 1/2 of loan savings (other half to rebuild E fund)
Payoff 10yrs 8mo, total interest ~$31k.

*new payment amount $1,065.44 (disregarded closing costs)
Scenario 4: new mortgage 157k at 2.75% 15yr.  No added contribution
Payoff 15yrs, total interest ~$35k

Scenario 5: new mortgage .  add $900 in July 2013.
Payoff 7yrs 10 mo, total interest ~$18k

scenario 6: new mortgage, 10k from e fund, 1/2 of savings from loan payoff (450)
Payoff  9yrs 3mo, ~$19k


Compare Scenario 2 &4. Long story short if you convert all loan payments to mortgage payments after its done you will save 7k in interest payments and 6yrs in payments.

Keep your current mortgage. Refinancing 1% doesn't mean anything if you just do additional payments. Toss that student loan yesterday and split the difference between rebuilding your Emergency Fund and the current mortgage.

jrhampt

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Re: What should I do with an extra 100 I squeezed out of my budget?
« Reply #6 on: October 06, 2012, 08:08:37 AM »
I would pay off the student loans immediately with money from your emergency savings - you'll still have plenty left over.  Next I would refinance and start contributing to retirement.

smalllife

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Re: What should I do with an extra 100 I squeezed out of my budget?
« Reply #7 on: October 06, 2012, 09:01:00 AM »
My advice would stem from your answer to this question: are you following the Dave Ramsey plan because you bought the sales pitch/it's what your religious community follows, because you need that kind of rigid structure, or because you feel it is the right "fit" for your situation?   There are valid reasons for all three, but they will affect how you view your current situation and we need to know which it is in order to best help you.

Lars

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Re: What should I do with an extra 100 I squeezed out of my budget?
« Reply #8 on: October 06, 2012, 10:36:26 PM »
Should I put the extra $100 in my debt repayment, and then eventually into retirement; or put the $100 into my house equity via the refinance?

I would recommend putting the extra $100 into debt repayment and then into retirement but the best choice IMHO depends on your risk tolerance so the best choice for me may not be the best choice for you.

A good framework to think about your choice is that of certain payoff versus expected payoff. To build on the scenarios presented by sibamor the three main choices are:

A: Keep current mortgage. Payoff student loans with emergency fund. Rebuild emergency fund and invest balance.

B: Refinance to 15 year mortgage. Payoff student loans with emergency fund. Rebuild emergency fund and invest balance.

C: Refinance to 15 year mortgage. Payoff student loans with emergency fund. Rebuild emergency fund and paydown mortgage. Invest when morttgage is paid.

Option C has the highest certain payoff since the interest saved in known in advance. Option C gives you the earliest certain retirement date. Option A has the highest expected payoff since historical returns on investment are higher than the mortgage rate. On average, Option A would give you the earliest likely retirement date but future returns are not certain so you could retire later with Option A than Option C if your investment returns for the next 10 or 15 years are well below average. Option B is intermediate between A and C.