Financial milestone reached! Next step?

[laurence]

We've paid off our HELOC! We had rolled all our student loans and other debt into a HELOC on the house, a total of almost 40k, two years ago. Over the last year we got really aggressive (Etrade jacking us around served as part motivation) and paid off the 30k left, sending our last check this week for $3,500. DW is extremely excited that we only have the 1st now with no other debt at all (no car notes, cc bills etc.). Of course, the 1st still has a balance in excess of $250k, so it's still a lot of debt.

Now we face a choice. We want to pad our short term cash a bit, which dipped under 10k for this payoff, but that shouldn't take long. Even with the increase in my 401(k) contributions and her SEP IRA being maxed, we should have around $2k extra every month to contribute to FIRE. Our initial thought is $1,500 extra on the mortgage and $500 into "the market" through whatever we figure is the best vehicle. But perhaps we should flip that number. Despite the crummy numbers from wall street over the last year, isn't the P/E still about average (15, I think?), are stocks really that cheap?

 

[REWahoo]

Good going Laurence! That's a great feeling having that loan paid off.

 

[Rich_by_the_Bay]

I remember the feeling when we got our last loan paid off. Felt like I hit the jackpot (I hadn't, but it felt great).

Why not savor a little of your success now? If you have $2k each month to invest, maybe do that with $1500 and enjoy the extra $500 a month. That will pay for some nice dinners, extra toys for the kids, or just putter it away on a vacation or other enjoyable activity. You earned it, and life is filled with too many uncertainties to put every penny of discretionary income into retirement savings.

In any event, congratulations.

 

[Zoocat]

Congratulations! That is a stupendous achievement for a family these days. You deserve to celebrate.
I'm happy to hear that you want to pad your short term cash a bit. I'd pad it a lot in these precarious economic times!

 

[ziggy29]

Wow. Nice job. I don't hear about too many financial milestones being *reached* these days when it feels like most of us are driving in reverse...

 

[LOL!]

OK, congratulations! Now go out and refinance your home to get the cash out so that you can use it for investing. Mortgage rates are historically low nowadays and so is the stock market. It's time to BUY LOW!

 

[honobob]

OK, congratulations! Now go out and refinance your home to get the cash out so that you can use it for investing. Mortgage rates are historically low nowadays and so is the stock market. It's time to BUY LOW!

What he said.............or buy the house behind you!

 

[Moemg]

Congratulations !

 

[W2R]

Wow, Congratulations, Laurence!

Choices, choices... padding out your emergency fund, investing, saving, or even working on paying off your first mortgage would be an option if that appeals to you.

It seems to me that any of the above would probably be great. If it was me, I would work on paying off the first mortgage. But then, I am firmly in the "pay off the mortgage" camp. Building your emergency fund back up is a great option and should probably come first as you point out.

 

[laurence]

Thanks everyone. I don't want to be just another irrational sheep running away from the market, but 25k a year into index funds seems enough. I think we'll stick with the $1500 and $500 plan.

As far as enjoying it, we plan on it! We've been throwing 3k a month on the 2nd, the other grand is going towards a long vacation to Hawaii next spring. After that we'll be increasing the NW by another thousand a month. I made a deal with DW that we would to an expensive vacation every three years until the house is paid off, then have one every year from then on. Since vacations are her favorite thing, she's motivated towards paying off the mortgage.

 

[Darryl]

Great job Laurence! Improved cash flow is a wonderful thing. Kid's college already handled?

 

[laurence]

Great job Laurence! Improved cash flow is a wonderful thing. Kid's college already handled?

This is where I was born into luck. My parents have covered this for us.

 

[Bestwifeever]

Congratulations to you and your spouse--posts like yours are great to read.

 

[Darryl]

Well that is nifty. If that's where you are, absolutley pound away on that mortgage once it's gone the real fun starts!

 

[copyright1997reloaded]

1. What is the interest rate on your 1st mortgage?
2. Do you have a six month cash-or-cash equivalent reserve, i.e. emergency fund that has enough to fund six months without a job.

#2 would be my most important factor. After that is satisfied, my decision on paying down a mortgage vs. investments would depend partially on #1.

 

[laurence]

We are bringing the fund back up to a comfortable pad ASAP.

Our 1st is 5.125%, pretty low. But at the same time, early payments on it give a better return than bonds ever would. It's why I'm 100% in equities.

 

[Finance Dave]

congrats! as for what to do with the extra, take look at your overall AA and see whether paying the house off or investing more in the market gets you there.

Dave

 

[copyright1997reloaded]

We are bringing the fund back up to a comfortable pad ASAP.

Our 1st is 5.125%, pretty low. But at the same time, early payments on it give a better return than bonds ever would. It's why I'm 100% in equities.

I just made my last mortgage payment, i.e. paid it off (as opposed to just stop making payments . Part of that decision is that I was/am considering RE, and wanted to have the debt off my books. But at a 5.125% rate (before tax deduction), I would have to think a lot harder about it (my rate was 6.875%). (In fact, at 5.125% I'd be tempted to borrow again in order to have debt which I believe will eventually be paid back with debased/devalued $.)

 

[rayvt]

Wow, Congratulations, Laurence!

If it was me, I would work on paying off the first mortgage. But then, I am firmly in the "pay off the mortgage" camp. Building your emergency fund back up is a great option and should probably come first as you point out.

If you truly want to pay off your mortgage soonly, don't make extra principal payment. Rather put that money into a savings account or CD(s) until that balance matches your mortgage balance. Then withdraw the cash and pay off the mortgage completely.

Remember that if things go pear-shaped and you get foreclosed, you lose ALL your equity. So keep your cash in your name until you can pay it off all at once.

True story: I once made an investment by rescuing a lady who owed only $5000 (yes, five thousand) on her $75,000 house, but had an accident and could no longer work, and was unable to make her mortgage payment.

 

[W2R]

If you truly want to pay off your mortgage soonly, don't make extra principal payment. Rather put that money into a savings account or CD(s) until that balance matches your mortgage balance. Then withdraw the cash and pay off the mortgage completely.

I am SO GLAD that I did not follow the above advice, myself. I paid off a $128K mortgage in four years by means of extra payments to the principal (irregular, in my case - - whenever I had anything I sent it in).

Had I applied rayvt's method, instead of having a $0 balance and a release of lien in hand and a mortgage burning party ...

...after the same amount of time I would have still owed $15,070.08 or 11.8% of my original mortgage. And I wouldn't have had all that extra money at the beginning of each month until I paid it off.

Now if the interest rate on your savings account is higher than your mortgage rate, I could see it. My savings account has disgustingly low interest.

 

[GoodSense]

I think your balanced approach makes a lot of sense. I am in the camp of putting less (but some) in home equity and more in the market. For some reason, I really like to have money being fluid and putting a lot into principal seems to tie it down to much. Also, your mortgage rate is so low that I can't imagine over a long horizon the investment return would be that low.

Congratulations! Steady investment wins the game, and you're in great shape.

 

[rayvt]

So, you paid an average of $2666/mo extra. That's a big hunk of change. Congrats.

But my point still stands. Anytime along the way, the sh*t may have hit your fan, and you could have risked foreclosure---through no fault of your own. All it takes is one hit-and-run red-light runner, or one gravel truck with bad brakes. In that case you could have lost your house and all your equity.
FWIW, that is exactly what happened to my neighbor 3 houses down. Uninsured illegal-alien driver ran a redlight and smacked into him on his way to work. Time in the hospital, time in rehab, unable to fully recover, lost his job, couldn't get another job due to head injury, eventually couldn't keep up the house payments. The good new (for him!) is that they somehow managed to get a 125% LTV equity loan. So even though they lost the house they still had some money left over.

Or maybe you might have come across a need for a chunk of quick cash---like perhaps buying up a bunch of cheap vacant lots where the house had washed away when the levee broke.

The advice of "put the extra into savings until the savings balance equals the mortgage balance" does have a slight extra cost--the difference in the interest rates. But that's the price of insurance. Remember that the purpose of insurance is to protect you against a low-probability event.

BTW, your numbers don't seem to add up. I ran them through a savings calculator, and $2666/mo at 2% compounded grows to $133K in 4 years. That's $5K more that your payoff, but you said it would have been $10K less. That's a $15k difference. You did say that your payments were lumpy, but even so I can't see it being that large of a difference.

Hmmmmm, an interest rate difference of 3% (6% mtg and 3% interest) is $3840/yr or $15,360 in 4 years. Mybe that's how you got $15,070?

Regards & congrats!

 

[bbbamI]

Congrats Laurence! Isn't it great having "extra" money around?

(btw, we paid our mortgage off early with the "extra" money we had, but you're not an old phart like me...ymmv)

 

[laurence]

So, you paid an average of $2666/mo extra. That's a big hunk of change. Congrats.

But my point still stands. Anytime along the way, the sh*t may have hit your fan, and you could have risked foreclosure---through no fault of your own. All it takes is one hit-and-run red-light runner, or one gravel truck with bad brakes. In that case you could have lost your house and all your equity.
FWIW, that is exactly what happened to my neighbor 3 houses down. Uninsured illegal-alien driver ran a redlight and smacked into him on his way to work. Time in the hospital, time in rehab, unable to fully recover, lost his job, couldn't get another job due to head injury, eventually couldn't keep up the house payments. The good new (for him!) is that they somehow managed to get a 125% LTV equity loan. So even though they lost the house they still had some money left over.

Or maybe you might have come across a need for a chunk of quick cash---like perhaps buying up a bunch of cheap vacant lots where the house had washed away when the levee broke.

The advice of "put the extra into savings until the savings balance equals the mortgage balance" does have a slight extra cost--the difference in the interest rates. But that's the price of insurance. Remember that the purpose of insurance is to protect you against a low-probability event.

BTW, your numbers don't seem to add up. I ran them through a savings calculator, and $2666/mo at 2% compounded grows to $133K in 4 years. That's $5K more that your payoff, but you said it would have been $10K less. That's a $15k difference. You did say that your payments were lumpy, but even so I can't see it being that large of a difference.

Hmmmmm, an interest rate difference of 3% (6% mtg and 3% interest) is $3840/yr or $15,360 in 4 years. Mybe that's how you got $15,070?

Regards & congrats!

I have 100k of disability, if that's what you are reffering to. If you mean if I get killed, my life insurance will set DW pretty much for life (hopefully she still thinks I'm worth more alive than dead!). In 2 to 3 years we may have enough in my 401k and reduced the mortgage balance enough that in an emergency we could self direct and buy the house with the 401k (actually, I'd have to buy the value, not just the mortgage balance I think, so that may not work).

We will have a pad of six months living expenses, but we'll also have many funds to draw upon if it gets that bad. I will chew on this.

 

[bright eyed]

Congrats LWill! Must feel great! It sounds like you two work very well together to meet your financial & life goals. The vacation sounds like an appropriate reward!