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April 05, 2013

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What are the interest rates on your first and second mortgages?

Personal finance is personal and you've set yourself up nicely to choose from several good choices. You could prepay mortgage, set up a taxable account, purchase real estate, or a combination. Good job!

I agree with Luis. It depends on your 2nd mortgage interest rate. If it's really high then yes, pay that balance off. If not, just make your regular payments and take the tax deduction. I'm in a similar situation to you with extra cash and age, and I've bought some lower risk bond and stock funds with Fidelity Investments. In general, it makes more than the .75% I was getting from my credit union. But I also kept $30k at the credit union for my next car purchase in a year or two. Anyway, looks like you're doing the right things (saving for future, planning, etc). Best of luck!

First of all, you are in great shape and are well on your way to financial security. I would immediately pay off the second mortgage as you would still be left with 6 months worth of expenses in you savings as an emergency account. With your strong cash flow, you would have enough for a car in about 6 months and that would still fit with your plans on car replacement. After having the 2nd mortgage and car savings taken care of, I would direct all excess cash to the first mortgage. You should be able to knock that put in about 5 years, leaving you with massive cash flow and the ability to invest freely, retire early, etc.

I agree with everything JimL said and it seems he took the words right out of my mouth. He did say it first so he gets the credit, nothing but spot on advice JimL.

You're in great shape. Is your significant other? That could have a huge impact on your future plans.

Congrats on doing a great job! Also, I do that wishlist thing! When there's something I feel like impulse purchasing, I add it to my cart on Amazon, but I don't purchase it. Then I close the tab with the site. The next time I have reason to actually purchase something on Amazon, I usually go through what I've added to the cart previously and delete everything. I've found it to be a great way of giving myself the satisfaction of both considering the impulse and not giving into it.

Keep the car a few more years and pay off that second mortgage. :)

You seem in very good shape, but some of your numbers were surprising
- How is IRA contribution $6000? The limits were $5000 until last year and now $5500 only
- You mention only liability is $130k mortgage but it's actually $150 with both mortgages
- You estimate the net cash surplus at $21k per year, but your savings are only twice that. Is this surplus related to a recent increase in salary, or is it possible that you have some hidden expenses and your projected surplus doesn't match what you are actually saving?
It may help you to track a bit more closely your expenses and see better the actual picture

To your question where to place the surplus, it seems from your plans that aside from car purchase, everything else is long term - the retirement in 15-20 years, you don't mention kids, but since not yet married, that should be a few years away. Nothing that requires you to keep cash liquid, so I would go for some stock/bonds investment. I am a fan of index funds - allocation appropriate for your risk aversion, and not too much messing around with stock picking


I am curious about the 1st mortgage - $800 per month for $130,000 mortgage holy cow! you should refiance into a 15 year mortgage

I don't share JB's disapproval of credit cards at all.
To me they are a great convenience. I like the rewards they give you on every purchase and I like not having to use cash. Currently I have $100 in my wallet and it has been there a couple of months. I also don't mess around with coins. On the very rare occasion when I have to use money I immediately give my wife the leftover coins ASAP.

Anyone that uses credit cards to get instant gratification will never be financially secure and ultimately their life will probably not turn out very well in retirement.

My wife of 56 years and I kept our finances separate before marriage since we didn't live together until after we were married. We are very "old school" where money is concerned. We are both excellent savers and I was happy having her keep separate checking and savings accounts right from the beginning. It wasn't until much later when we established a Living Trust that the majority of her savings account went into the joint trust. Our taxable investment accounts also all have joint ownership. Our IRAs of course are each in our own names.

It's essential that a married couple be on the same page where money is concerned. A marriage where one is a saver and the other is a spender is doomed and is very unlikely to last, and will the bring on one of the most devasting events that can happen to a couple, which is DIVORCE.

Something else that has worked great for us is that we each have two checks arriving every month, one a pension, the other is Social Security. They are deposited into our separate Credit Union accounts. We have a system where my wife pays for all of her personal expenses out of her accounts and I pay for everything else out of mine. Since my wife doesn't use a computer or an ATM I pay her bills for her using Bill Pay and withdraw some cash for her every week, as well as managing our investments. She also received a $200K inheritance last year which she uses to give our 3 children really nice monetary gifts at Xmas and on their birtdays.

It sounds like you are doing a great job. I'm very risk adverse like you, and my preference would be to pay off the mortgage as quickly as possible. Once that is gone I would start investing in dividend funds or real estate to create alternate income streams. This will give you a ton of flexibility to retire early/change careers in the future.

JB is doing a great job in general. Good income, low debt and spending is well in control.

I'd consider refinancing the mortgage assuming the rates are > 4% range. You can pay in some money to get rid of PMI and get a regular 30 year loan at 80%. A $112k 30 yr loan at 3.5% would run you around $500 a month. Or a 15 year at 2.75% would be around $750. Plus whatever you're paying in property taxes.

Or if you prefer you could just plow your extra cash into paying off the mortgage altogether within a few years.

Personally I'd like to lock in a ~3% loan for decades and then use my money elsewhere.

JB says : " I believe starting a family should remain a net positive on the finances if she continues to work, no?"

Not sure what you mean there. When you say 'start a family' I take that to mean have kids. No matter how you cut it, having kids costs money. If you just mean get married then yes 2 working people married can come out ahead due to shared costs.

@jane - the second is 8.35%. With the 350 per month payment actually already accounts for extra payments it’s a 30-year loan that due to my extra payments will pay off in 15 years. The balance this July will be 21k, from now till 1/2020 (pay off at 350/m schedule) that will save me about 6300 in interest (6.5 years of payments @ 350 less 21k). However, if I invested the 21k in FDIC account for 78 months (less tax) and accounted for the interest tax deduction the savings “only” amounts to 3000 net savings. And the first is @ 6.6%. So everyone must be asking why not refinance.? Actually, I probably could today. But years past the appraisal came in low requiring about 40-50k to hit 78% L/V. Paying PMI and refi costs makes the break even point further out (2021) I may move by then so declined at the time.

@Ivy – Well I round up assuming IRS increases the upper limit. I do this so I have the full contribution the day Im allowed to contribute. This way I can pounce on any market declines (buying stocks cheaply). 130k total, 21k in the second. Yes why is my cash surplus so low, good question. This is why I feel I should build it up. I paid off my car, undergrad debt, master debt/credit card and even went on a first time (expensive) vacation.

@Jim – My comments were centered on kids. If kids come into the picture at that point I would think our finances would be mixed, but should still be net positive (if she continues to work and we don’t have 20 of them ;)

Thanks everyone for your comments

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