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July 28, 2010


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Figure out what your retirement # is (the age you want to retire and how much you need to have by then), then figure out how you need to save every year to make that happen (I always use low yeild estimates like 7 percent). Then, start saving. You're house is not your retirement...

Wow . . . I had no idea there were still balloon mortgages being sold as late as May 2009. Isn't that one of the mortgage products that got so many people into trouble?

I would say max out just the Roth IRA and put the rest on the house. That would be around 7.5% to retirement while aggressively paying down the house. I'd probably still refinance, as I'd be more comfortable with the 15 year. You could still finish in 4 years. Remember with the limits on the Roth you can't go back and make up contributions.

Either way I think you are doing great, keep up the good work.

I feel the other way -- I think that since you have the money to max out your 401(k), you should do so -- at the expense of not putting extra money into your mortgage. You are only allowed to contribute 16.5K into a 401(k) each year; you should take full advantage to do so, and not delay it. You can always put more money into your house later, but you can't contribute more to a 401(k) later.

After maxing out your 401(k) (and maybe you're Roths too?) I would put the excess money on your mortgage. I would try to refinance soon -- in a year or two. Mortgage rates have no where to go but up, and locking yourself into a low APR on a 15 year mortgage will definitely do wonders for you.

@Emily: I don't think 7% is a LOW estimate. It is average, even though some people will try to convince you the average is 10 or 12%. Of course, some people do much better than 7%, but some do worse.

@OP: Locking in a low interest rate and NOT paying off a mortgage in a big hurry is a good financial move. Being debt-free is an emotional decision, not a financial one.

You don't mention - Does the 401(k) have any match?
If so, deposit to get as much match as they offer.
Then, I'd aggressively pay down and find new financing.
The rate difference between 15 and 30 may be small.
I'd consider taking the 30 and then getting aggressive with retirement savings. A few thought why.
A $120K mortgage at 4%/30yr is $573. This is < 7K/yr. It's nothing compared to your income. But - you are house poor. No big savings or ret account. If I lost my job, I'd rather owe $100K, but have $50K in bank, than owe $50K and no bank account.
Stay tuned, there are many opinions on this, and mine is worth exactly what you paid for it... one of many.

I would max out the 401k before paying off the mortgage. Tax free investment is great! After retirement is fully funded, I would then pay toward the mortgage. Or, could you just refinance now to get rid of the balloon and get the great rates that are available now instead of waiting?? Or, would you end up paying pmi insurance if you don't have enough equity in the house?

You don't want to be house rich and cash poor at anytime during your lives.

So I go with the rest of the responders. Except, in addition to maxing out on your 401(k)s and your IRAs, I would begin to build a cash reserve of at least 6 months expenses. Probably more - what if one or both of you lost your jobs, got sick, etc. I am not in favor of using your emergency fund for paying off the mortgage.

After maxing your retirement and building the cash reserve, work on the mortgage; try not to ever shortchange your retirement funding. You won't regret it having a nice retirement savings; but you may regret not doing it.

I agree with Joe, the desire to own your house outright is understandable and if it's something that's important to you & your wife you should definitely make it a goal. However, given the current economy, it seems best to play things a bit safe -- even if it means delaying paying off your mortgage by a number of years. I'd say the priorities should be:
1) Refinance to a 30 year fixed loan with no pre-payment penalties (you may have to first save up enough to be able to bring your equity in the house to 20% -- do *not* use the 12k emergency fund for this)
2) Save up enough to take advantage of any 401k matches
3) Save up enough to max out your Roths
4) If you have no 401k match (priority 2), set aside an amount equal to your maxed out Roth contribution into 401k (assuming it's a decent 401k cost-wise -- otherwise look into using a low-cost mutual fund company)
5) Put remaining money towards paying off the house early

The idea being, as others have said, to make sure you balance paying off the house with investing for retirement -- the money you invest for retirement now is far more important than the money you invest 10 years from now.

On a side note, as far as I can tell, your 12k emergency fund is probably around 6 months of expenses, which ought to be sufficient in most scenarios. I'd focus additional savings on getting ready to tackle refinancing.

"Wow . . . I had no idea there were still balloon mortgages being sold as late as May 2009. Isn't that one of the mortgage products that got so many people into trouble?"

Oh yeah - those predatory lenders are still out there at large, and they will find SOME way to get around any Statutes from the new legislation coming down the pipe from Congress.

Unfortunately it will always be, "Borrower Beware".

Oops -- meant to also mention that, y'all have done a great job paying off the student loans and that, regardless of the approach you take with this decision, you and your wife appear to be doing a good job at investigating your options & seeking to make wise financial choices.

I wouldn't do either. At least the way you described.

Of course my opinion, but saving money in a retirement vehicle that has no guarantee of return and higher risk along with paying taxes either on the contributions or the gains is foolish when compared to eliminating mortgage debt.

Notice I didn't say pay down the debt. Paying it down does you little good. Paying down a mortgage simply transfers the rsik from the lender to you.

Think about it. Right now you have no equity, because you have no personal assets invested the house. No skin in the game. You have no financial risk, because you risked no money.

The bank has the financial risk. It is their money at stake, not yours. paying down the loan balance without a corresponding drop in the risk premium, otherwise known as interest rate, is not beneficial. You are transferring default risk to yourself, yet still paying the rate associated with the bank carrying all the risk.

Banks aren't dumb. This is actually the centerpiece of a banks profit. Yet many do not understand it. Decreasing risk. Increasing yeild based on risk.

What I would do is save the money in a taxable guaranteed return account (CD's, HYMM, etc) until you have the entire home loan in cash, or as you say about 3 years, and pay it off with one check. Then you maintain flexibility during those three years and have a cushion in case life happens.

You are giving up retirement contributions during those 3 years of saving but it is cheap insurance and a wise risk strategy.

First, Emergency fund
Second, save in 401k and get a match
Third, max out ROTH
Fourth, paying off house or saving funds to hit the 20% to refi into 15/30 year mortgages
Fifth, after hitting above max out 401k
Sixth dump rest of money into house or have fun.

1. Get the house refinanced on a 15 or 30 year loan and then just make the payments. The interest rate will be so low if you do it now that it's not worth worrying about the debt.

2. Then max out Roth and in your case you can max out your 401k if you like as well. I gave advice in a previous instance to not put more money into a 401k because the person was in the 15% tax bracket. You are in the 25% bracket so the tax benefit is worth it in your case.

3. Save the rest in cash accounts and don't pay extra towards the house once you get it refinanced.

The reasons others gave for not paying the house to zero are all good and I agree with pretty much all of them.

I especially like what Mark said about "Being debt-free is an emotional decision, not a financial one." I totally agree with that and love the succinctness and clarifying nature of that statement. I fully intend to "borrow" (pun intended) that statement for my own use, so thanks!

What's the rush?

You and I are in the exact same situation (27y/o, $148K on ARM mortgage w/ $750 payment, $120K combined salaries).

I'm not too worried about owning my house outright. I'd much rather save aggressively for retirement. Compounding is magnified greatly when you save early. My wife and I currently contribute fully to both Roths and my 401(k). She also contributes 13% to her state pension (teacher) which is matched.

I know a huge burden will be lifted if you payoff your mortgage, but as many of the other comments say, you are probably better off being savings rich than house rich.

I would, however, refinance ASAP. Get out of the balloon mortgage. If not for the small savings, then for the peace of mind. You can always refi into a 15 year, which would increase your monthly payment by roughly $400 a month.

Anyway, there is no rush to own a home outright. You should be aggressively focused on savings.

I'd say:
1. top off the emergency fund.
2. max your 401k contribution
3. put whatever left into the mortgage if you want.

For taking in $130k it sounds like you're putting virtually nothing into retirement. (unless theres other retirement or pension benefits we don't know about) I wouldn't be in such a rush to pay down the house at the sake of not saving anything for retirement. Your home loan is costing you abut 3% after taxes which is quite cheap. And its a pretty small mortgage given your income. I'd max your 401k and then throw the rest into your home if you want. I'd go with a 401k over the Roth given your income level and tax bracket. If theres a 401k match then its a no-brainer.

There are many options here but it does seem to be obvious that you should refinance into a fixed rate mortgage once you have 20% to put down. This money is separate from your 6 month emergency fund. My advice on the refinance is to take a higher rate where the closing costs are built into the loan. It varies by loan but the break even point for the lower interest rate is usually 4-7 years. Considering you may pay off the loan or move to another house, take the higher rate and lower closing cost option.

As for the house vs. retirement question, how likely are you going to want to upgrade houses in the next 5 years? If you aggressively pay off this loan, will you then wind up rolling this equity into a larger home?

I think both options are fine. I don't agree with everything that @Troy said but I like his conclusions. You may want to consider building the cash and only paying off the fixed rate loan once you have the entire balance. Sure you may lose a tad in interest but it is a much more flexible option. For example, what if you decide that you hate your job and want to buy a franchise or a business. Wouldn't it be nice to have the cash?

Also note that Roth IRA accounts are a good secondary emergency fund. This is probably a bad way to look at it but if something REALLY bad did happen, you can withdraw the original pricipal with no penalty. (If you put in $6k and this grows to $6.5k you can take out the original 6k with no penalty)

Before everyone starts telling me what a bad idea it is to empty a Roth, I understand. However, when I look at my overall liquidity and ability to deal with a disaster, I consider my Roth money as a secondary emergency fund.

Good luck with the debt repayment.

I said above that their mortgage is costing them 3% after taxes, which may be wrong. THey may not be itemizing given the size of their mortgage. So they may be getting no tax benefit from their mortgage. Can't say for sure. They may or may not be getting some tax benefit from it.

Oh, and you should probably refinance now while the interest rates are so low and take out PMI.

Priorities should be as follows:

1. Giving first
2. Maxing out Retirement (401K and IRS's)
3. Paying for house
4. Other expenses
5. And if you still have money left over and want the freedom of having no house payment sooner than later, add additional principal payments to the house

My husband and I are 27 and only have our mortgage left as well. We make about $80,000 a year jointly. Here's what we're doing and I hope it helps you make up your mind:

1) We have a 15 year mortgage at 5.375% that we got in 2007 and have been paying extra towards since it started ($900 a month instead of $740).
2) I contribute the minimum to my 401(k) to get the maximum company match (6% from me and 6% from my employer).
3) We max out one Roth IRA a year and will be starting another one by December.
4) My husband automatically contributes to his pension plan.
5) We invest a minimum of $2500 a year to high dividend individual stocks.
6) We're also rebuilding our emergency fund to have at least 3 months of living expenses...we have VERY stable jobs (school librarian and customer service/cubicle monkey).
7) We divide our extra paychecks every year (the two each we get because of biweekly pay periods). 50% goes to the mortgage, 12.5% goes to stocks, 12.5% goes to the vacation account, and 12.5% goes to each of our fun money accounts.

With you two making $130,000 a year, you could easily pay off the house early and contribute to retirement at the same time (I'd make sure to prioritize retirement). Feel free to check out our budget at my site if it helps (we just used our emergency fund to pay off my husband's car, so the budget hasn't been updated yet, but it will give you a general idea).

You two are doing great! Good luck on whatever you choose!

Thanks folks for all the comments. For the record, I do not get any 401k match at work and my wife does contribute to the state pension.

It appears that the best way to proceed will be to refinance the house at the first opportunity after saving up 20%. After we refinance out of the balloon mortgage, we can then prioritize retirement savings and pay any remaining funds toward the house.

I do have a few other considerations.
1. As noted, I get no 401k match and my wife contributes as required to state retirement.
2. Our long term goal is to keep our current house long term and rent it out.
3. We will probably have to buy a car/truck in the next year for about $20k.

I like your first option the best.
Make sure there is no prepayment penalty when you refinance into a 15 year fixed rate loan.
Check out your local credit unions. If you have 30% loan to value you will have no problem getting a fixed rate loan that is better than banks offer. Under no circumstances go for a variable rate loan with interest rates currently so low.
You seem to be on the right track - keep it up - keep your marriage happy and It appears to me that you have a bright future ahead of you.

I agree with Stephen, with the exception to #5. Before paying down the house with ALL leftover money, consider beefing up your cushion even more. Do you have kids yet? If you plan on having kids, you should also consider that you'll want to get an education fund started.

I abide by the theory that personal finance is ... drumroll please ... personal. You and your husband seem to have great financial heads on your shoulders and either one of your options will likely end up fine for you.

It's not just about the math. It's about your mind. If you and your husband both share that goal of paying off your house, the journey will strengthen your marriage and when you get it done you will not only be debt free, but also relatively stress free. Talk about a great recipe for a long, happy marriage!

So if I were in your shoes I would do what makes you and your husband sleep better at night - I assume that's option 2? I would not worry about taxes, interest rates, retirement accounts or anything else and just pay down the house as fast as possible with an emergency fund in place that fits your life. It's not just about the math. It's personal. You're doing great!

I don't think I can add anything to all the great mortgage, retirement and emergency fund advice that you've already gotten. I'm a little surprised that not a single responder commented on your giving after you made a point of mentioning it in your post. You and your wife must be near the 99th percentile income for 26yo married couples ($130k/yr) yet your giving ($4800/yr) is less than 4% a year. I’d recommend that you take a page out of FMF’s book and start bumping up your giving (time, talent AND treasures). I don’t think that you’ll regret it because there’s a lot more to life than mortgage burning parties and huge nest eggs.

1. max out retirement contributions
2. continue making payments on the mortgage and then refinance for 15 years.
once you have refinanced, you can speed up your payment schedule and still be debt free relatively quickly, all without giving up 3 years of retirement savings during a down market!
Preferred Financial Services

I agree as well. In my mind, there is no need to rush paying off the mortgage completely in 3 years, as it is a great way to leverage OPM (other people's money), as Kiyosaki puts it. Other better uses of the extra cash would be to build up your IRA and 401k.

Since you don't get matching on the 401(k), I'd make sure to max out a Roth IRA for each of you before contributing to the 401(k).

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