Contemplating a Big Financial Move
I’ve been contemplating a big financial move. Right now, it’s just an idea floating around in my head and I’m thinking out loud on the blog. However, I need to make a final decision soon and take action (if any) by December 31st.
I’ve considered using my savings to pay off my second mortgage. The current balance is just under $50k at a fixed rate of 7.875%.
This makes financial sense to me because:
1. If I pay off the second mortgage, my home value will be right side up again. With only the first mortgage remaining, my LTV will be less than 80%.
2. With an LTV less than 80%, I can refinance out of an ARM that will adjust in June 2011.
3. Although the ARM adjustment is more than 1.5 yrs away, current rates are low and it would be nice to lock in an equally low fixed rate now.
4. If I pay off the second mortgage, my monthly mortgage payment be around $1,000. Maybe lower if I can refinance before rates begin to rise again.
5. If I continue renting the property after all is done, it will generate about $400-500/month profit.
6. If I make the property my home again after all is done (BG graduates HS in June, tenant’s lease is up in Oct), my fixed living expenses will decrease by more than 50%.
7. Mortgage is my only debt. It would be nice to tackle that elephant.
8. Dropping $50k on my debt will reduce my liquid assets, thereby reducing my expected family contribution that affects BG’s college financial aid package.
9. With reduced expenses (or extra profit) and my current income, I can rebuild my emergency fund back to $25k in less than a year – maybe 9 months.
10. I won’t be able to sell the house anytime soon without taking a significant loss, so I should make the best of the cards in my hand.
Any thoughts? Opposing views?
Before I make big decisions (financial or otherwise), I evaluate the benefits and risks. I don’t think too long about it though. When I make a final decision, it’s done and I don’t question myself. I implement immediately and deal with the consequences (if any) later.
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Have you read the Fabulous Financials comment policy lately?
Go for it
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Disclaimer, I’m not a home owner yet. (soon to be) But if I were in your position this is what I would think..
Is there any money set aside for major repairs and all that?. Maybe have a $5,000 buffer just incase something happens before you are able to r:build that emergency fund. That would be my only concern.
You seem to have thought everything out.
I’d say, do it.
I have a separate “rental property” account to cover standard maintenance while my tenant is there. If a minor repair requires more $$, I can cash flow a few thousand dollars, maybe even cashout CDs or sell non-retirement investments if really strapped. For major repairs, the home is 3 yrs old and still under warranty. [-SM]
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you should go for it…
It makes a lot of sense…
I’m so excited for BG it just seems she has blossomed right before our eyes…
If no one has told you SM, you done good girl…
U done good…
The past 2-3 yrs have not been easy for us (typical teenage drama), but she has matured and I see consistent improvement. That’s my girl. [-SM]
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I agree with having funds available for sudden / expensive repairs and it seems that you have planned well for long term expenses such as college.
The added cash flow and ability to rebuild savings relatively quickly are definite pluses for going ahead with this plan.
I would add that I have heard the 80% rule is not as valid now for refinancing and obtaining mortgages as it once was and that the whole process (for some) takes a lot longer to complete than it used to.
Re: 80% rule not valid – that wrench in the plan would surely suck. I’m going to call a few lenders today – mostly credit unions – to get the scoop. [-SM]
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I think you should go for it. It sounds like you’ve thought everything out.
I don’t think that BG’s financial aid package is going to change much though. EFC is a crazy computation. She probably only qualifies for loans right now anyway and you receive those regardless of financial need/status. When I was in school my mother only made around $50,000/year. And I only qualified for loans, no grants….she “supposedly” made too much money…go figure. I’m only speaking about Federal money…not school based aid because that could be different depending on the school.
If the EFC is above $5k, the student will not qualify for federal grants. That’s a given for us. But even if loans are the only option, there are many variables within the loan family to consider. First of all, federal loans are also need based:
- subsidized (preferred, lower interest rate, gov’t pays interest while in school)
- unsubsidized (lower interest rate, interest accrues while in school)
- parent plus (low interest rate, parents pay bill)
According to the calculators I’ve been playing with and the financial aid sessions I’ve attended, she will barely qualify for any federal loans either – maybe the parent plus. If and only if I’m denied a parent plus loan (unlikely), she may qualify for the unsubsidized federal loan only. Otherwise, it’s all private loans, which are disbursed and administered like any other personal loan. So if loans are our final option to round out her entire college funding package, federal (subsidized first, then unsubsidized) backed loans are preferred over any other loan type. Therefore, financial planning is necessary to demonstrate need. And by the way, federal aid is based on your AGI, not income. I’ve been working with a CPA/tax planner all year to help me manage that. [-SM]
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I’d say number 8 is your best reason to “hide” your cash. Also, think of it this way – there is no way you can invest that $50K right now to earn the 7.8% you are paying to the mortgage company. VERY GOOD POINT! [-SM]
But it is a little scary to give up that much of a very liquid asset, I’ll grant you that.
You may want to establish a HELOC as a “just in case” fall back plan through your credit union, just to know that you can get at that money if you truly needed to.
Good idea to consider, thanks! [-SM]
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Arguments for and againgst I think.
But, I thought you loved living where you are now? I do. [-SM]
Could you really swallow moving back to the house, I got the impression you were not keen on the area? I don’t know. I wasn’t keen on the area for my daughter to attend school. She’s graduating next year. [-SM]
Also why have you got a second mortgage on the property to the tune of 50k? What did you do with the 50K? How much is the first mortgage on the house? yes i’m nosey. I used it to buy the house. [-SM]
50k scary amount of money to drop, like the other posters said you need a sufficient cash reserve, think about whether your job is secure enough to use your liquid assets. My job is very secure. [-SM]
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I think you thought this through brilliantly. The only other check you need is your gut — if it’s telling you to do it (and reading this it sounds like it is), go for it. You did the math and you have a plan — so you’ll be good.
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I was torn until I read Beth’s comment about not being able to earn 7.8% interest on that 50K so better to use it to pay off that debt w/the 7.8% interest that you’re paying on it.
If you are able to use that money and still be comfortable and able to handle any possible emergency (which it sounds like you would be able to do) then I say go for it.
Good luck!!
I won’t be able to handle “any” possible emergency, but I think of it this way. I can handle small ones, no problem. As for the others, I’d do the same thing I would have done when I didn’t have an emergency fund at all. Think, research, plan, and execute. There are no perfect decisions and there will always be risks. But if the risk can be avoided, mitigated, or managed – it’s worth taking the chance. Besides, it’ll only be for less than a year. [-SM]
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You’ve really thought it through.
I think paying off your 2nd mortgage makes a lot of sense, even if it depletes your savings.
I mean there’s only 2 things that stand out to me:
1. You can rebuild your savings in less than a year up to $25k.
2. Mortgage = Debt, and debt sucks. Especially if you can’t unload this house immediately.
Might as well make the most of it.
That is what prompted my thoughts. I said to myself “damn, I’m stuck with this house, so how can I make the most of it?” Of course, the preferred option is to sell, but I can’t. If I could, I’d use the profit to pay for BG’s college expenses. [-SM]
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I totally understand your thought process. I would do it. As stated above, unless you invest long term, you won’t get a 7+ return on the 50k. You are set for emergencies so there’s nothing stopping you. This is my question:
What were your plans for the $50k? I try to have a plan for my savings. When I find myself with a balance that I’ve saved for the sake of saving the first thing I do is look to pay off debt. Including mortgage. The future disposable income can be used to replenish savings or save for the fun stuff.
Sorry my response is a little disjointed – responding from my phone.
That’s ok, I completely understood your comment. The savings were intended to be 50% emergency fund and 50% whatever. As for the “whatever” part, I’ve been responsible my whole life, so I’ve been daydreaming about throwing a wild party or doing something completely out of character after my daughter leaves for college next year. LOL! Just kidding…probably travel, send BG a little change every now and then, or just spend it enjoying life. [-SM]
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I love all these answers! I am learning from your post and from your commentors answers.
All the big financial talking heads are saying reduce debt whereas before they were not. I always thought debt reduction should have been first. However, dopping a whole $50K on something you already have is hard to wrap the mind around but definitely possible when considering the outcome—BG’s college bound dreams and your debt free dreams. It sounds like it all adds up to me. Your job is secure and that will be one less bill to worry about. I am not as knowledgeable as the others but it sounds like you may make out good here.
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It seems as though you have thought about it thouroughly. I think you should do it! It would be such a great feeling to pay that off. Good luck! :)
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I think that you should to it. When I have talked to financial gurus they always tell me to pay off my house as soon as possbile if I want to accumulate wealth. Get locked into a fixed rate mortgage and enjoy the extra cash!
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Dave Ramsey always turns the question around and says if you could, would you borrow $50K against your house to put it in savings? The answer would be No. Puts a little different perspective on it. Go for it. Enjoy the freedom of that hanging over your head.
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I am in total agreeance. I think you should do it. I think that this move will also light a fire under you to finish paying the house off that way if and when you absolutely want to sell it won’t be a problem.
Also I think that having the second paid off will help you see the light at the end of the tunnel as far as finishing your goal of debt freedom. Although house debt is in a sense “good debt”- in actuality no debt is good debt for us. Can you imagine what you will do with no mortgages. The sky is the limit.
Again go for it– it will motivate you to get intense about being completely debt free including the house and still have an emergency fund.
You go girl!
Jay
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I think you don’t need us!
You have clearly thought this through.
All I’ll say is that if I was in your shoes, what you detailed would convince me to do it.
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Because your interest rate is high, I would go for it as long as you have cash reserves for emergencies, continue to fund your retirement, and can help BG if she doesn’t get as much financial aid as expected.
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Since your job is secure and you’ll be able to replenish your savings in under a year, I also say go for it! But save a little for that big party, too :-)
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Like other posters have said, if the equity requirement will allow you to refi at a fixed rate, I would do it. The interest rate is high and the other is going to reset relatively soon and who knows where that will end up. As long as you can cover most “s^$t happens” stuff and your job is very secure..bring it.
Now, my question for you: in your mind, what would make you not do it?
The only thing I can think of (right now) that would make me NOT want to do it is if BG didn’t earn ANY scholarships, we couldn’t get ANY financial aid, and the entire burden of paying for ALL of her college expenses fell squarely on my shoulders.
If that happened, I’d be pissed that I took my most liquid asset and squirreled it away on a friggin house! Instead of paying off a $50k 2nd mortgage at 7.8%, I’d be incurring new debt (counter productive) and paying off a $50k private school loan at no telling what %.
But then again, that risk is also manageable. She’d work and help me carry the load – or – I’d make her go to a community college for the first two years. [-SM]
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I would go for it if I were you. Congrats!
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Do it. I am doing the same thing with paying off some of my properties; my boyfriend is paying off his second mortgage this year. You won’t regret it. Plus as someone who got got less financial aid because her parents were “rich” (not true), it would be great if you could look “poor” while BG is in college. Plus, as others have said, there is nothing out there returning that amount of interest.
And it would be one less bill you have to pay every month. And you could cash flow your property. While a big pile of cash is nice, an income producing property is very sweet too (barring scary tenants like your previous ones) and would replace any interest that you are getting on the money anyway. Plus, if you lose your job, you still have the income from the rental. Passive income? That is true financial freedom.
Hmm…you just gave me another idea in favor of doing this. Why am I laboring over the possibility of an emergency within the 9 months it’ll take to rebuild an emergency fund? Not only is it a low, manageable risk, but it is small, short term thinking – something I try to avoid. Paying off my mortgage IS part of emergency planning, just from a bigger picture and longer term perspective.
Thinking glass half full: it will become an income producing asset – the ultimate goal of achieving and sustaining financial freedom. Thinking glass half empty: in a true emergency, my daughter and I will always have an affordable place to live. And worst case, I could live there and rent out the basement to continue generating passive income.
Thank you for leaving such a thought provoking comment! [-SM]
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God is always with us. In good times and bad. Go for it.
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Hi! Your reasoning here makes perfect sense to me- I would think that you’d be best served paying off that 2nd mortgage BUT if you have any doubt at all, in your mind, in your gut, wherever, what about paying $25K down on the second mortgage? You said yourself that half that $50K is kind of unassigned money anyway, so you’d still have a healthy emergency fund just in case. You could continue to make payments on the 2nd mortgage, now reduced by half, and see a lot more principle reduction month to month since your interest charges will be much lower. You could also make extra payments on the second rather than trying to build back the emergency fund right away.
Regarding the refi, you’re probably going to have a tough time, even at 80% loan to value, given that it’s not owner occupied. Banks are really nervous lending to “investors” right now. I know that’s not really your situation, but that’s how the bank looks at it. You might be better off moving back into it, even short term, when it’s time to refi.
Just my thoughts on the matter. Thanks for sharing with us!
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My mom only made about 25-30k, had no savings and our expected family contribution was HIGH… over 100k in student loans high… I took out the max for federal loans, and the rest were all private with a nasty interest rate.
And I wish I knew about real estate and mortgages, but I’ve no clue. But you’re smart. And it would be fantastic to knock of a second mortgage. :-)
Hmm…with only $30k income and zero assets, I’m sure you received a few federal grants. However, they do have annual limits. Federal backed loans have annual limits too. The limits for both are pretty low – for example, Pell Grant is approx $5k per year – and neither are intended to pay for ALL of your college expenses, especially if you CHOOSE an expensive school. So if your annual education bill is more than the total combined annual limits for federal aid, the balance must be covered by scholarships, work, or in your case, private loans. [-SM]
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Seems to me that you are at peace with the short term risks for the long(er) term gains. A decision like this is as much about peace of mind as it is the numbers.
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In my opinion, you should go for it. And once a financial decision is made and acted, one should not question it. Think as much you need, before you decide.
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This sounds like a good opportunity and I think I’d do it. your EFC is computed every year, so if you don’t feel comfortable doing it before you get her aid package, there is always next year.
Also you mentioned BG won’t (or will barely) qualify for federal loans — are you sure? Unsubsidized Stafford loans are not based on financial need. She should qualify, though they are capped at some moderately low amount, and the rate is currently nothing to get excited about: 6.8% fixed?
In fact you could probably get a lower (but variable, usually tied to the LIBOR or something) rate on a private student loan right now if YOU are willing to cosign for her. Whether or not that is a good idea is your choice (I’d lean toward no?), but it is an option.
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I initially thought it was a great idea, but my “scared of the unknown” just kicked in so I am proposing another option, either way I know you will handle your business, you always have:). Why don’t you put 45K on the 2nd mortgage and then pay the remaining 5k over the next 2 months? I am just a little worried about something happening in January. Either way I am excited for you to dump that 2nd mortgage, if had 50k to pay on my debts I would be doing the “happy dance” all night.
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If you have at least another $50,000 left in savings AFTER you pay down the 2nd mortgage, yes pay it down.
If not, NO WAY IN HECK! Cash is so important right now.
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Is the $50,000 in addition to your emergency fund? And, as some people asked, do you have money set aside for repairs/emergencies?
If so, I think it’s a great idea to get rid of that second debt. Especially if you’re looking at an adjusting rate starting about a year and a half from now. That said, since the ARM isn’t going to fluctuate until 2011, you have some time to make sure you have enough padding to not be starting from scratch again once you’ve paid off the second mortgage.
Otherwise, I’d say pay off the most of it — say $30,000 — and start making extra big payments that will kill the rest of the loan (if possible) in the next 12-14 months. Then you can get rid of that debt in time to refinance before the ARM starts doing its thing.
Frankly, even if you go for just throwing all the cash at that debt, I think you’ll be fine. Obviously, anything can happen. But my guess is that paying down the debt will turn out to be the best move.
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I think you should do it. You’ve already contemplated the why and how and you also have a follow-up plan. It will only take you about 9 months to build your savings back, I think it’s a great idea to knock it out. Especially since you only have mortgage debt.
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I like this idea, especially since you are very resourceful as it is and if worse case scenario happens (likely not) you can take care of it (since you have a background of resourcefulness and getting through adversity).
Sure, little risky in the short term due to lack of liquidity. But easy to build back up (for you).
Plus you immediately ‘make’ 7.95% on that money due to interest savings…
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Well it sounds like a good idea to me as long as the source of the savings doesn’t penalize you for pulling out that money.
Sincerely,
Go
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Reread your post as if you were a reader of your blog rather than the author.
Clearly, you have already made this decision.
Never doubt yourself!
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I would wait until BG’s college funding is said and done to implement the mortgage payoff, but it sounds good. I doubt that liquid cash would matter in the calculation because they look at the house equity and your retirement funds, anyway.
A few months more on that mortgage is no big deal, right?
Liquid cash is THE most important element, next to the family’s AGI because it is an asset that is easily transferable to fund college expenses. And FAFSA does NOT include home equity (primary residence) OR retirement funds in the EFC calculation. However, the negative home equity on a rental would probably help us out. [-SM]
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Cash is King! Put a little more each month towards the second and keep the cash
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I worked for A….( excuse me – clear my throat – a large financial outfit) and what got their panties in a bunch in the end was lack of liquidity. Nothing gives you more comfort and freedom than knowing you have access to quick cash on your own terms when you need it and want it. I don’t think you ever want to be in a position where you have to borrow cash until you liquidate your assets. The real question for me would be ” how much emergency cash do I need”? But I have a feeling you already made your decision – right?
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I’m in dang near the exact situation as you but I only have a first mortgage on my rental and the balance was $118K until I dropped $18K of my savings on it. Realiza this $18K was only part of my liquid savings but it’s still alot of money to the single mother of a just turned 17 year old daughter. My main reason is because I want to start purchasing income producing assets as it talk about in Rich Dad Poor Dad. So if I were you I would at pay off the 2nd, build your account back up and then focus on paying the mortgage off completely.
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have u thought about buying a rental property?
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