My new journey and where to go from here

[Chris918]

Hello everyone,

This is my first post. My name is Chris and I am turning 27 in about a month. I'm married and coming up on my first anniversary. We bought a house two years ago and both work full time with no plans to have children. I'm definitely the financial partner between the two of us and I'm trying to set up the means for us to retire early and live a happy life that doesn't revolve around work.

I started 6 months ago. Since then I have done a combination of Dave Ramsay strategies and some new strategies on my own.

In the past six months, I have managed to pay off both of the household cars. I have paid off any and all debt we have with the exception of our mortgage. We are now in the process of saving up 6 months worth of expenses in an emergency fund. Beyond that though I'm a little stuck as to where I should go.

I've been having a money battle with myself regarding my next options. I view all debt as bad debt and this points me toward eliminating the mortgage despite it being a monumental task. On some days I think that's ridiculous and convince myself investing will provide much better results. And on other days I convince myself that I should pay down the mortgage to eliminate PMI and then just continue with the loan as usual.

Now the details:
Zillow lists my home's worth at $171,000. Our recent property value statement came in at the beginning of the year showing $161,000, however they don't come in the house and just look at it from the outside I'm guessing. The inside of my house is new and updated and all of the appliances including the HVAC are brand new.

We still owe $144,000. Our initial loan was for $151,900. I'll admit to myself I would've been better off saving for a longer period of time before buying. Our rate is 4.25%, but the PMI adds an additional 87.35 each month. My wife and I both put 15% in ROTH IRAs and she has a state retirement plan and I have a 403b plan at work and I invest enough to get the match. The thought of having no mortgage is alluring, but it would take a while.

What would you do if you were me?
Keep investing at my current rate and try and pay off the mortgage as fast as possible?
Pay down the mortgage to eliminate PMI and then invest as much as possible after that?
Don't bother with paying down the mortgage and just invest as much as I can?
Any other thoughts or suggestions?

My apologies if this is the wrong forum for this. I just wanted to introduce myself and share what I've experienced so far and I'd love some second opinions. Thank you!

 

[RunningBum]

A lot of people on here disagree with Ramsey on how hard-lined he is against debt. There is such a thing as wise debt, and a mortgage is one of them. It doesn't make sense to be house rich and cash poor.

Without spending a lot of time thinking about your situation, I would probably build up the cash in the emergency fund and a fund to pay down your mortgage to get to 80% and lose the PMI. There's not much advantage to paying down the mortgage above 80% so keeping the money outside the mortgage for emergencies makes sense to me.

After that I'd prefer to invest over holding the mortgage. The mortgage provides leverage to let your money grow faster, and gives you other options with the cash if you have the need. There's no real wrong answer if you really wanted to pay off the mortgage though. It's basically a guaranteed 4.25% return (depending on whether you take the mortgage interest tax deduction), which isn't bad.

Edited to add a "welcome to the forum". This is a very appropriate post to make here.

 

[gwraigty]

My first thought is to make sure you have enough money outside of restricted retirement accounts to access in case of, you know, stuff of life. How is your monthly free cash flow?

 

[Chris918]

Thank you replying so quickly. Clearly the thought of no mortgage payment is the attractive part. I was leaning toward paying off the PMI and then increasing my investments. Many people are telling me many different things. People say I'm crazy for thinking I have to pay off my mortgage early haha. Others think I should just invest and not pay any extra on the mortgage. I'm sure people all have their reasoning based on their experiences.

 

[Chris918]

My first thought is to make sure you have enough money outside of restricted retirement accounts to access in case of, you know, stuff of life. How is your monthly free cash flow?

My goal is an emergency fund of $12,000. I'm hovering around $3000 in that fund at the moment. I have an extra $1500 left each month after paying my necessities.

 

[MBAustin]

Good for you! You're on a great path together!

Once the emergency fund is done, I would invest to get 401K matches if available (free money), and then put more towards paying down the mortgage to get rid of the PMI (more free money when you do that). Then focus on building up your investments (both retirement and otherwise).

 

[Chris918]

Good for you! You're on a great path together!

Once the emergency fund is done, I would invest to get 401K matches if available (free money), and then put more towards paying down the mortgage to get rid of the PMI (more free money when you do that). Then focus on building up your investments (both retirement and otherwise).

Thank you! Both my wife and I currently get the maximum match at work so that's one thing done. When that fund is complete, we should have the funds to eliminate PMI within a year or so.

 

[RunningBum]

Clearly the thought of no mortgage payment is the attractive part.

Yes, some people take great comfort in not having a mortgage payment. Others take great comfort in having the funds available to cover it, but invested elsewhere.

IMO focusing on things like "no mortgage" is an emotional approach, and I try to avoid that with my finances. I would encourage you to take an all-around logical approach to your finances and avoid emotional decisions. I'm not saying that paying off the mortgage is wrong, but focusing on not having a mortgage payment over all else is, IMO.

 

[Mdlerth]

Attaboy

Welcome, Chris.

My first suggestion is to discard from your mind the value of your house. Whether it's Zillow's estimate or the taxing authority's appraisal doesn't matter. You need a place to live, and whether the house is worth 200k or 2000k only comes into play if you're going to sell it soon. If not, then forget it and focus on your investable assets.

Also, you might reconsider whether "all debt is bad debt". There are pros and cons to taking a mortgage vs paying cash, buying vs renting, SFH vs duplex vs condo, etc. There are other threads on this forum exploring all those concepts, so I won't try to repeat them here. You might read some of those threads and still come to the all-debt-is-bad conclusion, but I encourage you to gather more perspectives anyway.

Retiring your car loans, getting the full match on employer savings, building an emergency fund, prepaying the home note to eliminate PMI... all excellent. Bottom line is you're 27 and doing all the right things. Without question you will be able to retire much younger than I will.

 

[Chris918]

Yes, some people take great comfort in not having a mortgage payment. Others take great comfort in having the funds available to cover it, but invested elsewhere.

IMO focusing on things like "no mortgage" is an emotional approach, and I try to avoid that with my finances. I would encourage you to take an all-around logical approach to your finances and avoid emotional decisions. I'm not saying that paying off the mortgage is wrong, but focusing on not having a mortgage payment over all else is, IMO.

This is an excellent point. I'll let this sink in and try not to let those thoughts mess with a logical and consistent plan.

 

[gwraigty]

My goal is an emergency fund of $12,000. I'm hovering around $3000 in that fund at the moment. I have an extra $1500 left each month after paying my necessities.

You're in great shape! Make sure that money is earning around 2% (or should I say slightly less now after the rate cut).

 

[pacergal]

Wow, at 27 you two are doing great! Far better than I was at that age.
Since you are both already contributing to Roths and work retirement programs, what if you applied the $1500 left each month as $500 to mortgage and $1000 to emergency fund, then investments?
And don't forget to have some fun along the way!!

 

[Chris918]

Welcome, Chris.

My first suggestion is to discard from your mind the value of your house. Whether it's Zillow's estimate or the taxing authority's appraisal doesn't matter. You need a place to live, and whether the house is worth 200k or 2000k only comes into play if you're going to sell it soon. If not, then forget it and focus on your investable assets.

Also, you might reconsider whether "all debt is bad debt". There are pros and cons to taking a mortgage vs paying cash, buying vs renting, SFH vs duplex vs condo, etc. There are other threads on this forum exploring all those concepts, so I won't try to repeat them here. You might read some of those threads and still come to the all-debt-is-bad conclusion, but I encourage you to gather more perspectives anyway.

Retiring your car loans, getting the full match on employer savings, building an emergency fund, prepaying the home note to eliminate PMI... all excellent. Bottom line is you're 27 and doing all the right things. Without question you will be able to retire much younger than I will.

Ironically I always used to say that before I got my first car. I'd always say it doesn't matter how much it's worth if I have no intention to sell it and I need a car. There just wasn't a point to me worrying about it. Hopefully that mindset will help with this lesson.

Thinking back I've learned so much from when I first bought my home only 2 years ago. Sure there are things I would've done different and hopefully those experiences can help someone else. I think I've always been very worried about too much debt because of my parents. They had a ton of debt and it was bad debt. Credit cards especially. So that's probably where I come from since it caused so much financial turmoil in the home I grew up in. But that was them and this me. I'll look into these different perspectives. For one, I know that a mortgage isn't terrible because my payment won't change but with inflation money loses a little bit of buying power as time goes on but I pay the same thing regardless.

As for my investments and the mortgage, I think I'll plan to get my emergency fund done, then pay the mortgage down to 80% to get rid of PMI, and then I will max out my ROTH IRA and look at other investment options after that. Probably a brokerage account since I can access that before 59.5.

 

[Chris918]

You're in great shape! Make sure that money is earning around 2% (or should I say slightly less now after the rate cut).

The emergency fund is at Ally. I was very happy with the 2.10%. Then it was 2% and now they cut it to 1.9% Bleh XD

 

[Chris918]

Wow, at 27 you two are doing great! Far better than I was at that age.
Since you are both already contributing to Roths and work retirement programs, what if you applied the $1500 left each month as $500 to mortgage and $1000 to emergency fund, then investments?
And don't forget to have some fun along the way!!

Thank you

Yeah this is what my mom told me. She told me to take a split approach and try and do both. That way I could work toward both at a steady and doable pace. By the time the emergency fund is done the PMI would then almost be gone and then that clears the way for maxing out investments.

 

[kgtest]

Emergency plan is key. Good plan. After that, I would try to renegotiate the PMI with your lender. Now that the loan is funded, LTV ratio of below 80% will be required before they remove it. I had to pay for a $495 appraisal and the property had to appraise, but removing that PMI with my lender freed up $181 a month for me. I call PMI Pointless Mortgage Insurance.

Soo, after saving for the emergency fund, step 2 is pay down the mortgage enough so that your LTV will be around 80% or better. My lender required 75% LTV...man I wish I would have put 20% down.

Step 1 should be save in your 401k up to the company match if an option as that will lower your tax liabilities.

It's a fine balance but once PMI is gone, increase your 403(B) and 401k match (if dw does not have 401k look at self directed 401k or IRA).

Then, save like a banshee! Invest often and early.

 

[joeea]

My name is Chris and I am turning 27 in about a month.

I view all debt as bad debt and this points me toward eliminating the mortgage despite it being a monumental task. On some days I think that's ridiculous and convince myself investing will provide much better results. And on other days I convince myself that I should pay down the mortgage to eliminate PMI and then just continue with the loan as usual.

What would you do if you were me?
Keep investing at my current rate and try and pay off the mortgage as fast as possible?
Pay down the mortgage to eliminate PMI and then invest as much as possible after that?
Don't bother with paying down the mortgage and just invest as much as I can?
Any other thoughts or suggestions?

If you truly view all debt as bad debt, then you should get yourself out of debt completely, and use cash for all future purchases.

I'm not you, since I don't view all debt as bad debt. Having a mortgage doesn't keep me awake nights. I made sure I never had a PMI.

At your age, the best thing you and your spouse can do is to maximize your incomes. In the long run that will serve you best.

 

[Chris918]

Emergency plan is key. Good plan. After that, I would try to renegotiate the PMI with your lender. Now that the loan is funded, LTV ratio of below 80% will be required before they remove it. I had to pay for a $495 appraisal and the property had to appraise, but removing that PMI with my lender freed up $181 a month for me. I call PMI Pointless Mortgage Insurance.

Soo, after saving for the emergency fund, step 2 is pay down the mortgage enough so that your LTV will be around 80% or better. My lender required 75% LTV...man I wish I would have put 20% down.

Step 1 should be save in your 401k up to the company match if an option as that will lower your tax liabilities.

It's a fine balance but once PMI is gone, increase your 403(B) and 401k match (if dw does not have 401k look at self directed 401k or IRA).

Then, save like a banshee! Invest often and early.

Hello and thanks for your input. Just one question. Do you believe I should be investing in my ROTH constantly regardless of where I'm at with these two goals or do you think I should put all extra funds toward these goals first since my wife and I are already investing at work?

 

[Chris918]

And if anyone else would like to chime in, after my emergency fund is done and the PMI is gone I plan to max out my ROTH IRA each year. I'll still have money left over though. Should I increase my 403b contribution at work since that comes with some tax benefits or should I invest in my brokerage account at Vanguard? I know vanguard is lower in fees but I don't get any tax benefits of course. My work is switching to Fidelity so I don't entirely know what the fees will be for them yet.

 

[gwraigty]

Do you believe I should be investing in my ROTH constantly regardless of where I'm at with these two goals or do you think I should put all extra funds toward these goals first since my wife and I are already investing at work?

Invest in the Roths constantly, when you can, because of the annual contribution limit. You can't make up next year for what you don't contribute this year.

 

[Chris918]

Invest in the Roths constantly, when you can, because of the annual contribution limit. You can't make up next year for what you don't contribute this year.

Will do and I appreciate your help. Thanks!

 

[RunningBum]

Hello and thanks for your input. Just one question. Do you believe I should be investing in my ROTH constantly regardless of where I'm at with these two goals or do you think I should put all extra funds toward these goals first since my wife and I are already investing at work?

Personally I'm not a big fan of a dedicated emergency fund, but I realize I'm probably in the minority on that so take this for what it's worth.

You can withdraw Roth contributions at any time without penalty. Why not use that for at least some of your emergency funds? If you really have an emergency, you can take them, but if you don't, it grows tax free.

Now, if you've got the capacity to both max out your Roth and save more outside of tax-deferred, I wouldn't use the Roth as an emergency fund since it's best to leave it to grow tax free. But it never bothered me to invest that money elsewhere. It depends on how stable your job is, and how likely you see an emergency to be to decide how liquid your emergency fund needs to be.

 

[Chris918]

Personally I'm not a big fan of a dedicated emergency fund, but I realize I'm probably in the minority on that so take this for what it's worth.

You can withdraw Roth contributions at any time without penalty. Why not use that for at least some of your emergency funds? If you really have an emergency, you can take them, but if you don't, it grows tax free.

Now, if you've got the capacity to both max out your Roth and save more outside of tax-deferred, I wouldn't use the Roth as an emergency fund since it's best to leave it to grow tax free. But it never bothered me to invest that money elsewhere. It depends on how stable your job is, and how likely you see an emergency to be to decide how liquid your emergency fund needs to be.

I never thought about it that way. I can't imagine anything that would require the amount of money that I originally intended to save in the fund. Come to think of it I think 3 months worth of expenses would be enough especially because I can't think of a scenario where both my wife and I both lose our jobs.

 

[RobbieB]

I would let appreciation take care of the PMI, but you will need to pay for appraisal.

Yes, the 6 months of cash stashed is good. And then start the dollar cost averaging investing thing.

I wouldn't worry about the mortgage either, you are young.

 

[Chris918]

I would let appreciation take care of the PMI, but you will need to pay for appraisal.

Yes, the 6 months of cash stashed is good. And then start the dollar cost averaging investing thing.

I wouldn't worry about the mortgage either, you are young.

The issue is I don't know how long it would take to appreciate in order to get rid of PMI. It costs me an extra $1050 a year and I get nothing out of it.