2nd mortagage

pebbles396December 10, 2004

Hello - I'm about to go see a financial adviser - but thought that I would run this buy you all first since I've been lurking for a while and it seems like there is so much knowledge here.

DH and I bought a house 18 months ago. During this time we remodeled a lot, and hence spent a good chunk of change on our new abode. As a result we don't have all that much in savings despite our level of disposable income.

I'm looking at 2005 and trying to come up with a plan.

We currently have:

Our first mortgage - 5.5% intrest

Our second mortgage - 7% interest (we took an 80:10:10 approach to borrowing for our house)

Educational loans (Car Loan (4% interest) approx 10k owed

Now I'm currently thinking that since we'll be in a position to just nearly pay off our 2nd mortgage (it balloons in 15 years) that would be the best place for us to put our money rather than having tens of thousands of dollars sit in a money market.

We no longer qualify for ROTH-IRA, and I'm contributing 18% to my 401k. DH works contract so he doesn't get 401k currently however he does have several years of 401k that we do stock trading with at a high rate of success.

So it looks good on paper, but with such a large amount of money hanging in the balance here, I'm wondering if anyone else has any great ideas.

Other ideas - pay off majority of the 2nd mortgage,but throw some cash by way of our big loan.

It seems stupid to pay off our car or my educational loans since the rates are just so low.

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The one thing I did not see you mention is a rainy-day fund. Especially if DH is a contractor, it is possible that you'll need some $$ for emergency expenses or a short layover between jobs. If you take your "extra" money and pay off all your bills with it, you won't have much liquidity. Unless you have access to a line of credit of some kind that you can tap.

I agree that I would not be in a world-class rush to pay off the lower-interest loans, but I would not spend my bankroll to completely get rid of the second mortgage at the risk of having to borrow again at some time when you may not be able to do so. Make sure you have 3-6 months of expenses (depending on how far you can cut back, if need be, and how employable both of you are) and then start paying off the second.

    Bookmark   December 10, 2004 at 2:20PM
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You need to have one year's worth of expenses in a safe, secure savings acc't.. An "emergency fund" should be your first priority. And "emergency" doesn't mean it may be spent on "fun" stuff; this is the fund you only touch when the wolves are at the door! Get that account fully funded as quickly as you're able without making yourselves miserable.

Keep saving for your retirement; but maybe you should direct some of what you're salting away to get your home closer to "paid in full". Trust me on this... owning your home outright is a very nice feeling. It also permits you to direct your mortgage payment to savings/investments.

Lose the sencond mortgage as quickly as you're able while you're working on your emergency fund. Are you permitted to "round up" your payments and/or make a 13th. payment? If you are and you direct that money to the principle of the 2nd mortgage you will reduce the amount you owe all the more quickly. If I understand the reason for the second mortgage correctly, it was to come up with the downpayment? (I am VERY conservative financially, so this is not something I readily am able to understand). I see leaner times ahead, so getting out from under a variable rate loan would be my priority.

Is your first mortgage a fixed rate or a variable one? See if you may use the same "rounding up" and 13th. payment to principle on that one, too.

And with respect to the other loans... keep whittling away on them. And round up and pay to principle... boring, boring, boring. AND, it requires determination, dedication, and patience. BUT IT WORKS. You have to pay the amount your borrowed and the interest. Paying to principle every month reduces the amount the interest payment is permitted to accumulate.

Tackle the highest interest rate loans first of all. And then move on the next one... don't permit yourselves to accumulate consumer debt (credit cards!). Live lean now, while you're young and really take the time to make the tough distinction between "want" and "need". There's nothing wrong with either one, but being a slave to "want" is a recipe for financial ruin.

    Bookmark   December 10, 2004 at 5:08PM
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I have been of the opinion that chelone was smart - she just confirmed it.

I'm not quite as conservative as she.

I agree that I think that there are tough times ahead: not only have you guys have been printing too much money, add huge deficits to that and there's developing a crisis in U.S. currency. It's been sliding in relation to many currencies in the world. A while ago a buck would buy more than one Euro: now one Euro will buy more than one buck.

You've been buying a lot of imports - but your dollar isn't going as far, now.

And a fairly substantial number of your jobs have shifted abroad.

Not only that, the large corporations don't like the inconvenience of rules and duties at borders - and they've been working on erasing them by building free trade systems.

joyful guy

    Bookmark   December 10, 2004 at 5:47PM
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Anyone's that's contributing 18 percent of their income to a 401k and has thousands of dollars in savings is making some good financial decisions to have gotten there. All I could do is echo the advice not to throw all the cash into paying off the second mortgage, even though "on paper" that looks good since you're no doubt paying more in interest on it than you're receiving on the money markets. Cash on hand gives you a tremendous amount of flexibility, and that's one thing that far too few people have.

    Bookmark   December 11, 2004 at 2:46PM
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How is it that you no longer qualify for a Roth IRA? Do you mean you are paid up for the year?

    Bookmark   December 13, 2004 at 11:42AM
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ROTH IRa has income requirements. I no longer qualify b/c my income level doesn't allow that type of an option.

Financial guy said go with the 2nd mortgage, and that actually I may have a few options (we'll litterally be like $100 within making the boat on this other one - i forget what it's called though).

The only thing I'm nervous about is the full year of expensises on hand. I guess this is a hard one to swallow, and I was thinking 6 months was plenty.

I do all our payments via auto deduct, so automatically I chip in some extra on all our payments. This goes directly to the principal b/c on everything except the 1st mortgage we don't have an escrow that it could get 'stuck' in.

Thanks so much for everyone's advice. Sometimes I think that I just need to hear it from a few different places.

I'm also going to be a big conservative. Pay like 75% of the 2nd mortage off. (Just to confirm, when we purchased our house we already had another house, we didn't want to buy based on contingency and as a result just took a 2nd mortgage to cover 10% downpayment - b/c frankly 10% cash down was already a good chunk down). The second mortage makes the interest a tax deducation rather than PMI which is just money down the drain. It's really probably close to a wash - however I would have to refi to get rid of PMI and with the 2nd mortgage origination fees were very low and could be handled more efficiently).

    Bookmark   December 15, 2004 at 3:40PM
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I think that it's a good idea to have some cash on hand. You will know what your anticipated needs may be, as to whether you'd need 6 months' or a year's worth of income available easily.

My car died on the freeway a couple of weeks ago and I am pleased that I have money on hand so that I can pay cash for a replacement - that I'm to get on Friday (Wednesday now).

I suggest that, if you have any interest at all in the subect, you learn how money works. It's an interesting hobby - that pays well.

My son has never been much interested in the use of money (partly becasue he never had any) but ...

... now he's interested, because his mother, owning her home, car, almost new motor home, etc., ...

... died last summer.

No beneficiaries that I know of but him and his sister.

Sort of hard to deal in high school issues when you've never gone beyond grade 2, it seems to me.

ole joyful

    Bookmark   December 15, 2004 at 7:18PM
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Are you sure about the ROTH IRA? Since contributions to a ROTH are made AFTER the taxes have been paid on the income, it would make sense to me that they would be available to any and all comers.

Those wishing to contribute to a traditional IRA (those that permit a tax deduction because they defer the taxes owed on the income "saved" and permit the amount to be deducted from your gross salary) would, of course, be limited by a cap on salary.

I think you ought to check this with your accountant; given the "rules" it doesn't seem fair to deny anyone the permitted contribution IF they've already paid the taxes!

    Bookmark   December 15, 2004 at 10:17PM
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There are definitely income caps on the Roth. I have looked into it for myself a few times. I wish I'd done one when I made less money.

Here is a link that might be useful: Roth Info

    Bookmark   December 17, 2004 at 11:26AM
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Good link, Robin... it was never an issue for us. Our accountant refers to the extra $500 permitted people over 50 as the "Geezer Provision"... :)

    Bookmark   December 17, 2004 at 5:20PM
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