Author Topic: Case Study 5.99% Mortgage  (Read 2759 times)

StNick

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Case Study 5.99% Mortgage
« on: March 07, 2023, 09:20:45 AM »
Life Situation: Married, 3 kids (and counting), Texas, 28 years old

Gross Salary/Wages: 80k

Taxes: No state tax, just federal

Current expenses (Monthly):
Home/Auto Insurance: $186
Auto Loan: $300, 2.3% interest
Gas: $232
Mobile Phone: $60
Groceries: $944
Restaurants: $151
Health Insurance: $263
House Help: $270 (we hire a family friend once a week to help tidy up the house)
"Mortgage": $1385+$400(escrow) | 5.99% interest | 186k loan [We have a mobile home on land we don't own, so its technically a chattel loan, not an actual mortgage, hence the interest rate]
Property Tax: $168
Savings: >$350
VTI ETF: $50

Savings:
$5000 Emergency Fund
$1000 Health Savings (not hsa)
$100 Car savings
$3000 Checking
$500 VTI
TOTAL: $9600

2013 Toyota Sienna: $13.7k left on loan 2.3% interest
2009 Ford Fusion: $0
"Mortgage": $1385+$400(escrow) | 5.99% interest | 186k loan

I'm open to any and all criticism, but my main question is, with a 5.99% interest rate on my mortgage it makes it a little harder for me to know whether I should be investing additional money into the stock market or paying down the loan.

In terms of the investment order, because of the new home purchase, the mortgage falls in the #2 category, otherwise I'm on 4/5 of maxing out the 401k/IRA (don't really know which one to max out)
« Last Edit: March 07, 2023, 09:32:53 AM by StNick »

achvfi

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Re: Case Study 5.99% Mortgage
« Reply #1 on: March 07, 2023, 11:54:01 AM »
Follow investment order in following link. Its well reviewed established order.

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

You can get ibonds OR CDs rather than pay off loan you will get similar interest. Which gives some flexibility in case of any unexpected shocks.

401k contributions up to match are very important. Should be very high on your priority.



dandarc

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Re: Case Study 5.99% Mortgage
« Reply #2 on: March 07, 2023, 12:14:29 PM »
+1 to the investment order being a good guide. 5.99% is still not in any of the "pay off the debt" range listed in that thread with the 10-year treasury yield about 4% today.

Absolutely not before you've maxed all tax-advantaged space in any given year - once you cannot put any more into IRAs, 401k, HSA, etc, then any further extra could go to the mortgage, although at 5.99% today, I'd still favor the taxable account (or 529's for kids) as listed in the investment order thread, unless maybe you've got enough to pay house all the way (investing still probably the best move, but if you can pay the loan 100% off, then at least you do pick up some cash-flow benefits).

StNick

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Re: Case Study 5.99% Mortgage
« Reply #3 on: March 07, 2023, 12:45:27 PM »
+1 to the investment order being a good guide. 5.99% is still not in any of the "pay off the debt" range listed in that thread with the 10-year treasury yield about 4% today.

Absolutely not before you've maxed all tax-advantaged space in any given year - once you cannot put any more into IRAs, 401k, HSA, etc, then any further extra could go to the mortgage, although at 5.99% today, I'd still favor the taxable account (or 529's for kids) as listed in the investment order thread, unless maybe you've got enough to pay house all the way (investing still probably the best move, but if you can pay the loan 100% off, then at least you do pick up some cash-flow benefits).

Why is 5.99% not above the treasury yield? Isn't it at about 4% right now?

dandarc

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Re: Case Study 5.99% Mortgage
« Reply #4 on: March 07, 2023, 12:46:54 PM »
+1 to the investment order being a good guide. 5.99% is still not in any of the "pay off the debt" range listed in that thread with the 10-year treasury yield about 4% today.

Absolutely not before you've maxed all tax-advantaged space in any given year - once you cannot put any more into IRAs, 401k, HSA, etc, then any further extra could go to the mortgage, although at 5.99% today, I'd still favor the taxable account (or 529's for kids) as listed in the investment order thread, unless maybe you've got enough to pay house all the way (investing still probably the best move, but if you can pay the loan 100% off, then at least you do pick up some cash-flow benefits).

Why is 5.99% not above the treasury yield? Isn't it at about 4% right now?
Did you read the investment order? The investment order clearly states that the lowest interest rate debt you should consider paying off early is 10 year treasury yield + 3%. So today the cutoff by that criteria is 7%. Long-term fixed rate debt is a gift to be used wisely as a big inflation hedge, so the cost of the loan needs to be quite high to overcome that.
« Last Edit: March 07, 2023, 12:53:40 PM by dandarc »

StNick

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Re: Case Study 5.99% Mortgage
« Reply #5 on: March 07, 2023, 02:43:05 PM »
+1 to the investment order being a good guide. 5.99% is still not in any of the "pay off the debt" range listed in that thread with the 10-year treasury yield about 4% today.

Absolutely not before you've maxed all tax-advantaged space in any given year - once you cannot put any more into IRAs, 401k, HSA, etc, then any further extra could go to the mortgage, although at 5.99% today, I'd still favor the taxable account (or 529's for kids) as listed in the investment order thread, unless maybe you've got enough to pay house all the way (investing still probably the best move, but if you can pay the loan 100% off, then at least you do pick up some cash-flow benefits).

Why is 5.99% not above the treasury yield? Isn't it at about 4% right now?
Did you read the investment order? The investment order clearly states that the lowest interest rate debt you should consider paying off early is 10 year treasury yield + 3%. So today the cutoff by that criteria is 7%. Long-term fixed rate debt is a gift to be used wisely as a big inflation hedge, so the cost of the loan needs to be quite high to overcome that.

Ah, I did read it but missed the part that it says ~5% or more.

That helps me feel confident passing by step 2 then.

So in that case, it seems like investing in VTI on the side is somewhat unnecessary, when i could just max out contributions to my 401k.

dandarc

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Re: Case Study 5.99% Mortgage
« Reply #6 on: March 07, 2023, 02:52:19 PM »
"2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield." - if the risk free rate is 4%, then step 2 line is 9%. 5.99% is well under 9%.

You should almost certainly fund your 401k to the max before throwing extra at a mortgage or taxable account. Actually, the key for me for seeing the light with regards to tax-advantaged first was to really understand that yes you can withdraw before age 59.5. https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

StNick

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Re: Case Study 5.99% Mortgage
« Reply #7 on: March 07, 2023, 03:17:13 PM »
Yeah that is huge, thanks, I'll work towards that.

zolotiyeruki

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Re: Case Study 5.99% Mortgage
« Reply #8 on: March 10, 2023, 10:05:30 AM »
What are your long-term goals? Do you have plans to FIRE? At what age?

In order to FIRE, you have to have funds available in places other than tax-deferred accounts, in order to avoid extra taxes and penalties.  When I was your age, I was *all* about tax minimization, to the point that I neglected to put money in Roth and taxable accounts.  I eventually realized that I could end up in a position with plenty of money to retire, but without penalty-free access to those funds.

When you hit the point when you want to retire, you'll want 5 years' of living expenses in taxable accounts, Roth contributions, etc. that you can use while you build your Roth Conversion Pipeline.  I'm not going to make specific suggestions on that, but it's something you should definitely keep in mind, and it's something the Investment Order doesn't account for.

Something else to keep in mind:  You're still pretty young in your career, and your income is likely to increase in the future.  In 2025, the 12%, 22%, and 24% tax brackets will return to 15%, 25%, and 28%.  So, once you've maxed out any 401k match, you may want to consider contributing to Roth and taxable accounts before contributing to a traditional IRA or adding to the traditional 401k.  Especially with kids to knock down the tax bill :)

StNick

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Re: Case Study 5.99% Mortgage
« Reply #9 on: March 14, 2023, 02:54:20 PM »
My long term goals would be to FIRE, I only recently started believing it was even possible, so I don't have a specific goal.

So it sounds like what you're saying is max out the 401k contributions first, then Roth, but what other options would you consider putting money into other than those?

zolotiyeruki

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Re: Case Study 5.99% Mortgage
« Reply #10 on: March 14, 2023, 03:59:04 PM »
My long term goals would be to FIRE, I only recently started believing it was even possible, so I don't have a specific goal.

So it sounds like what you're saying is max out the 401k contributions first, then Roth, but what other options would you consider putting money into other than those?
You're well within the 12% tax bracket, so I'd suggest Roth 401k and IRA, honestly.  In a few years, as your income grows, you can shift to tax-deferred contributions.

In other words, take advantage of the low tax bracket you're in as much as you can, as long as it lasts.  You're unlikely to have lower than a 12% marginal tax rate from now to the end of your life.

nouseforausername

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Re: Case Study 5.99% Mortgage
« Reply #11 on: March 14, 2023, 04:24:24 PM »
"2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield." - if the risk free rate is 4%, then step 2 line is 9%. 5.99% is well under 9%.

You should almost certainly fund your 401k to the max before throwing extra at a mortgage or taxable account. Actually, the key for me for seeing the light with regards to tax-advantaged first was to really understand that yes you can withdraw before age 59.5. https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

I had no idea that poster had their own blog. Great info on there.

OP -- consider DIY'ing your house cleaning? I see the appeal with 3 kids in a mobile home, but this is a forum devoted to FIRE after all.

Finances_With_Purpose

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Re: Case Study 5.99% Mortgage
« Reply #12 on: March 14, 2023, 05:52:16 PM »
I'll be the contrarian here: what's the realistic (not marketed) expected lifetime of your home?  Mobile homes have a shorter shelf life.  Do you have a plan for buying the next one?  Ditto your cars.

All houses and cars wear out, it's just that mobile homes tend to do so more rapidly. 

I would sort that out in your budget first and then address savings, because it may be the case that you do need to pay it sooner in order to be clear for another purchase at some point, as needed.  Once you cover that issue, then jump to Roth IRA/etc.  I agree w/ the others that it's likely your best bet at your current marginal tax rate. 

StNick

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Re: Case Study 5.99% Mortgage
« Reply #13 on: March 15, 2023, 08:50:48 AM »
OP -- consider DIY'ing your house cleaning? I see the appeal with 3 kids in a mobile home, but this is a forum devoted to FIRE after all.

I completely agree, it started when our youngest was just born a couple months ago, and our oldest is only 4, so DW was pretty overwhelmed by everything. We have discussed cutting back on this gradually over the next few months.

I'll be the contrarian here: what's the realistic (not marketed) expected lifetime of your home?  Mobile homes have a shorter shelf life.  Do you have a plan for buying the next one?  Ditto your cars.

All houses and cars wear out, it's just that mobile homes tend to do so more rapidly. 

I would sort that out in your budget first and then address savings, because it may be the case that you do need to pay it sooner in order to be clear for another purchase at some point, as needed.  Once you cover that issue, then jump to Roth IRA/etc.  I agree w/ the others that it's likely your best bet at your current marginal tax rate. 

This I agree with as well, I know that from a FIRE perspective the traditional route would have been better. The pros of this situation were that our family bought some land, and we were able to move onto their land, the only caveat being that it had to be a mobile home. We bought a large 5 bedroom mobile home with the hopes that it would last us as long as possible, so ideally it won't be necessary to buy another home. If we did buy another home, it's going to be in 30+ years. Our mortgage is only 20 years, so we'll be paying it off earlier than average.

What do you mean by cars? I thought the general rule of thumb was to drive an old car with 200k miles on it so that way you arent paying more than what you need for a car?

dandarc

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Re: Case Study 5.99% Mortgage
« Reply #14 on: March 15, 2023, 10:02:37 AM »
"2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield." - if the risk free rate is 4%, then step 2 line is 9%. 5.99% is well under 9%.

You should almost certainly fund your 401k to the max before throwing extra at a mortgage or taxable account. Actually, the key for me for seeing the light with regards to tax-advantaged first was to really understand that yes you can withdraw before age 59.5. https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

I had no idea that poster had their own blog. Great info on there.

OP -- consider DIY'ing your house cleaning? I see the appeal with 3 kids in a mobile home, but this is a forum devoted to FIRE after all.
We have some exceptionally good US-tax folks here that are giving away great advice and materials for free. seattlecyclone, MDM, SeattleCPA all come to mind immediately.

Finances_With_Purpose

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Re: Case Study 5.99% Mortgage
« Reply #15 on: March 16, 2023, 05:29:01 AM »
What do you mean by cars? I thought the general rule of thumb was to drive an old car with 200k miles on it so that way you arent paying more than what you need for a car?

I mean that it's an expense that you have to plan for, that's all.  Yes, driving a car until it's worthless is great, you just want to have some money saved in advance for the next one is all.  Houses are similar if you know that the house isn't likely to last your lifetime. 

six-car-habit

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Re: Case Study 5.99% Mortgage
« Reply #16 on: March 20, 2023, 10:37:53 AM »
 Need to severely reduce the "family friends- hired help" impact on cleaning the house, and it's cost.   @ $270 per month is too much on an $80K income covering 5 people's normal expenses. Maybe you are attempting to help supplement this friends income, but the cleaning service is a luxury as well.

 Is there a plan for acquiring the underlying property that the large mobile home sits on ?

    From reading your description, I picture an older relative owns acreage, perhaps with another home already existing on it, that had zoning/ permitting  availability to add your mobile and relevant utility lines, but not a 2nd "stick built/ full foundation" home.... ??

  Does the escrow portion of the mortgage include real estate / land taxes, or is that only structure / liability insurance for the mobile ?

 I would get money into the 401K and/or general savings before paying down the mortgage - but mainly because it's not a typical homeowner situation where the borrower is paying off the land as well. There is an intangible here- where a risk of a future unpleasant relative or inheritance situation - could leave you with a home that needs to be moved to another property , with related costs of moving the home + buying / renting other underlying land... or, you are scrambling to buy the underlying land because you don't want to move.

 
   
 

 

StNick

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Re: Case Study 5.99% Mortgage
« Reply #17 on: March 31, 2023, 01:56:19 PM »
Need to severely reduce the "family friends- hired help" impact on cleaning the house, and it's cost.   @ $270 per month is too much on an $80K income covering 5 people's normal expenses. Maybe you are attempting to help supplement this friends income, but the cleaning service is a luxury as well.

 Is there a plan for acquiring the underlying property that the large mobile home sits on ?

    From reading your description, I picture an older relative owns acreage, perhaps with another home already existing on it, that had zoning/ permitting  availability to add your mobile and relevant utility lines, but not a 2nd "stick built/ full foundation" home.... ??
Yes to all of these.

  Does the escrow portion of the mortgage include real estate / land taxes, or is that only structure / liability insurance for the mobile ?

 I would get money into the 401K and/or general savings before paying down the mortgage - but mainly because it's not a typical homeowner situation where the borrower is paying off the land as well. There is an intangible here- where a risk of a future unpleasant relative or inheritance situation - could leave you with a home that needs to be moved to another property , with related costs of moving the home + buying / renting other underlying land... or, you are scrambling to buy the underlying land because you don't want to move.
I was told by the credit union that has the loan that its for taxes. I told them I don't pay property taxes but they just said, "it's for taxes". If I knew what I was talking about a little more I might be able to push back but I don't actually know if I can or not. I do think some of it is probably for the escrow as well.

On second point, I agree, and thanks for your advice.