Checking in - about to be a home owner

[DaveNineFive]

Hey everybody, I was bouncing around these boards a couple of years ago, but stopped checking in as much after I set my course. Well, a lot has changed, and I'm about to have to make some big decisions again! If anyone has any advice or just comments on our situation, I'd love to hear it.

I just turned 27, and I got married about four months ago (I can now start saying "DW" ). I've been saving aggressively towards a home down payment for five years.

Today I'm just about to put all that saving to good use; we're about to buy a home in Madison, WI for $265,000 with $85,000 down. I expect to finance the rest through a 30 year fixed rate loan (should be around 5%). The house is in good shape - we know we'll need to spend around $6k over 2 years on repairs, and up to $10k if we want to pull the trigger on some improvements, but I think that's all pretty typical.

The plan is to over-pay the mortgage every month; I opted for the 30 year to allow for lower payments if necessary (with the move I'm somewhat concerned with job stability).

As of May our situation should be:
$180,000 owed on a home ($85k in equity)
$40,000 owed on DW's student loans
(this will be the only debt we have)

$21,000 left in cash
$33,000 in 401k (currently contributing at 10%)
$6,500 in Roth IRA (not contributing today)

I expect our combined household income to be in the neighborhood of $150,000 annually, but it could potentially be as low as $100,000 (primarily if DW struggles finding a job).

So what I really need is some guidance on what to do with our investment $$ once we have the house. I'd like to start building a portfolio that provides a stream of income which I can reinvest for now and draw on later. What would you recommend?

• 401k - I currently invest 10%, but my company recently stopped matching contributions and will not resume until Jan 2011 at the earliest.
• Roth IRA - I stopped investing here in favor of house savings. I could certainly resume adding cash.
• Paying off the house - I know I will be doing this to some extent, but how far should I take it?
• Post-tax investment funds - I believe conventional wisdom is to ignore this until one maxes their 401k and Roth, but I'd like to start building a balance in some no-load index funds or something that will provide a revenue stream.
• Other?

Thanks for any advice you guys have to give. It's really satisfying to see the efforts of the past five years pay off, but I need to make sure we get pointed in the right direction now for the next five!

 

[travelover]

Congratulations, Dave. If you haven't poked around the Bogleheads site, I'd recommend it. Lots of folks in your situation there and lots of previously answered questions similar to yours.

Bogleheads Investing Advice and Info

 

[jwkde]

I'm new here and my view might be out of line, but I have never been a big fan of over paying the mortage. I personally believe in keeping the money liquid until such time that you can pay it off completely.

You only become the owner of the hosue when you have zero mortgage

Over paying might increase your equity, but if by some rare chance something bad happens financially, the mortgage company is not going to give you the excess back.

I'd use the over payment amount to build up that emergency fund.

Just my 2 cents but i may be wrong

 

[Bestwifeever]

I have nothing to add (and your life choices to date appear to have worked out great!), but what a great story about a big year--young newlyweds buying a home with a nice down payment. Congratulations!

 

[Nords]

So what I really need is some guidance on what to do with our investment $$ once we have the house. I'd like to start building a portfolio that provides a stream of income which I can reinvest for now and draw on later. What would you recommend?

I'd aggressively max your IRAs and your 401(k) (especially when the match starts again) and start building a taxable investment portfolio. Read about asset allocations, choose one, and get going. "Getting going" is probably more important than "choosing one".

Be flexible on your emergency cash. As a homeowner, it's nice to have a thousand or so on hand for those emergency furnace or plumbing repairs. Maybe you don't worry much about air conditioning in Madison.

Pay as little mortgage as you're required to pay. If you're required to pay PMI or have an escrow account, get rid of them as soon as possible.

Keep up with this plan for five years. At the end of that time (especially if your job looks secure) then you can think about paying down the mortgage.

My guess (demographically) is that in a few years you'll be investing in baby stuff and college funds, not mortgages...

 

[DaveNineFive]

I must admit I'm surprised to see you all agree that over-paying the mortgage isn't the way to go. I guess I may be overly cautious, but I sure like the look of a guaranteed 5% return. But staying liquid is certainly a good idea (not that a 401k and a Roth IRA are much better). And you're right on that kids are going to be entering the picture in the next couple of years.

I'll have to re-think this a bit; maybe keep the mortgage payments to a minimum for a few years and look into some post-tax investing instead. If I go that route, my first inclination would be to pick a couple of index funds, maybe a bond fund as well, and make regular monthly buys. Does that seem like what you guys would go for?

Also, thanks for the referral to bogleheads, travelover! Seems like a great place.

Hey, one random question that you guys might know - now that we're married, can we still have 2 Roth IRA's? (One for each of us?)

 

[REWahoo]

I must admit I'm surprised to see you all agree that over-paying the mortgage isn't the way to go.

There will be time for that later, but not at your current stage in life.

I'll have to re-think this a bit; maybe keep the mortgage payments to a minimum for a few years and look into some post-tax investing instead. If I go that route, my first inclination would be to pick a couple of index funds, maybe a bond fund as well, and make regular monthly buys. Does that seem like what you guys would go for?

Sounds like a pretty good plan. I'd restrict my bond holding to 20-25% of my allocation at your age.

Hey, one random question that you guys might know - now that we're married, can we still have 2 Roth IRA's? (One for each of us?)

Yep.

 

[Bestwifeever]

I believe paying a little extra at the beginning of the mortgage pays off more than later, however--you can always cut back paying the extra.

 

[Nords]

I must admit I'm surprised to see you all agree...

I am too. It's almost certainly an anomaly. Give us a few more posts and we'll be back to normal...

 

[haha]

I'm new here and my view might be out of line, but I have never been a big fan of over paying the mortage. I personally believe in keeping the money liquid until such time that you can pay it off completely.

You only become the owner of the hosue when you have zero mortgage

Over paying might increase your equity, but if by some rare chance something bad happens financially, the mortgage company is not going to give you the excess back.

I'd use the over payment amount to build up that emergency fund.

Just my 2 cents but i may be wrong

I agree with this. What you are pleding is an entire home; what you have to lose is your equity. There are good resons for staying as light on your feet as you can.

Ha

 

[FinanceDude]

Hey everybody, I was bouncing around these boards a couple of years ago, but stopped checking in as much after I set my course. Well, a lot has changed, and I'm about to have to make some big decisions again! If anyone has any advice or just comments on our situation, I'd love to hear it.

I just turned 27, and I got married about four months ago (I can now start saying "DW" ). I've been saving aggressively towards a home down payment for five years.

Congrats on all the good news.......

Today I'm just about to put all that saving to good use; we're about to buy a home in Madison, WI for $265,000 with $85,000 down. I expect to finance the rest through a 30 year fixed rate loan (should be around 5%). The house is in good shape - we know we'll need to spend around $6k over 2 years on repairs, and up to $10k if we want to pull the trigger on some improvements, but I think that's all pretty typical.

Hello to another Wisconsinite.........I live in the Milwaukee area......

The plan is to over-pay the mortgage every month; I opted for the 30 year to allow for lower payments if necessary (with the move I'm somewhat concerned with job stability).

As of May our situation should be:
$180,000 owed on a home ($85k in equity)
$40,000 owed on DW's student loans
(this will be the only debt we have)

$21,000 left in cash
$33,000 in 401k (currently contributing at 10%)
$6,500 in Roth IRA (not contributing today)

I expect our combined household income to be in the neighborhood of $150,000 annually, but it could potentially be as low as $100,000 (primarily if DW struggles finding a job).

Those are valid concerns. I would definitely leave the $21,000 in aliquid account for now. Home ownership is not cheap, and you never know if additional expenses will pop up on you..........

So what I really need is some guidance on what to do with our investment $$ once we have the house. I'd like to start building a portfolio that provides a stream of income which I can reinvest for now and draw on later. What would you recommend?

• 401k - I currently invest 10%, but my company recently stopped matching contributions and will not resume until Jan 2011 at the earliest.
• Roth IRA - I stopped investing here in favor of house savings. I could certainly resume adding cash.
• Paying off the house - I know I will be doing this to some extent, but how far should I take it?
• Post-tax investment funds - I believe conventional wisdom is to ignore this until one maxes their 401k and Roth, but I'd like to start building a balance in some no-load index funds or something that will provide a revenue stream.
• Other?

Make sure you keep an adequate emergency fund, at least 6 months of total expenses in a liquid account.

As soon as you get settled, and your DW finds a job, look into a HELOC (home Equity Line Of Credit). If either of you lose a job or have some short-term money problems, you can tap the line. Many banks do not have a yearly fee to keep the line open. You might check with a local credit union in Madtown about that.

You will get a lot of differing opinions on how to structure qualified versus non-qualified accounts. There is no right or wrong answer, its what will work for you. My own opinion is this:

1)Roth IRAs are a no-brainer to max out.

2)A joint account at Vangaurd or Fido or somewhere that you invest into low-cost tax efficient funds is a good start.

3)Some on here are not fans, but a 401k is a sort of forced savings. Too bad they took away the match, that's free money. However, I still think there's merit to having some money take out each month and invested into a 401K. You'll never miss the money out of your net check.......

Thanks for any advice you guys have to give. It's really satisfying to see the efforts of the past five years pay off, but I need to make sure we get pointed in the right direction now for the next five!

The fact you are asking questions and learning at a young age is huge.......a lot of folks don't "wake up" until their 40's and 50's........best of luck!

 

[W2R]

I must admit I'm surprised to see you all agree that over-paying the mortgage isn't the way to go.

Assuming that you are debt free other than the mortgage, and have a six month emergency fund, I would say the number one priority is to fully fund your retirement accounts. The number two priority is to pay off your mortgage.

I would suggest that you TRY to do both simultaneously. BestWifeEver is correct, that any money you can put into paying off the mortgage while it is still early in the mortgage, makes a huge, huge difference. The nice thing about paying off your morgage is that if you do it once, you won't ever have to pay rent or mortgage again (unless you buy a more expensive home). If/when you move, you can just sell that house and use the proceeds to pay for virtually all of your next house. Imagine living your whole life without that expense. But fully funding your retirement accounts is your first task.

 

[DaveNineFive]

Thanks again for all the input! I took another look at the finances last night, and I've made some slight changes to the plan. I'm thinking I'll use some of the cash to seed 1 or 2 new investment accounts (a second Roth and hopefully a post-tax account).

That will leave us here in May:
401k: $33k
Roth 1: $6.5k
Roth 2: $3k
Post-tax Investments: $3k (if we decide this is affordable)
Cash: $16k

The plan will be that we'll invest each month in my 401k, the Roth IRAs and then the post-tax account. Beyond that we'll also need to build up the emergency fund.

On the side of all that, we'll also be saving up for home repairs, a car fund, and a vacation fund.

Oh, and I am still going to over-pay the mortgage by $100/month, as even that cuts a few years off the loan if we actually pay it off.

Seems like a good plan to me if the income is there. I'll have to run the budget when I know for sure and see if we can afford the post-tax savings right away. With so many retirement accounts & an emergency fund, we might run out of cash before we max everything