Seeking advice after unforeseen changes

[foxfirev5]

IMHO you're not too bad off. Payoff what you can and stash away what you can on a regular basis. What has happened is done. Now just keep a positive attitude and move ahead. I would focus on current expenses and pay off the debts. Focus on defense - expenses.

[joeea]

Quote:

Originally Posted by Chris918 Getting the home without 20% down was my biggest mistake. I was young(er) and not informed enough.

If that's your biggest mistake, you are doing great!

We've all made mistakes, particularly when we were young.

Quote:

We can afford to pay off the car in two years, however we cannot do both the PMI and pay the car off in two years.

I would fill the emergency fund first, get rid of the PMI second, pay off the car third. Your mileage may vary.

[SnowballCamper]

The numbers answer (according to my calculus) is

1. Don't give up any employer match in 401k or similar program. Save enough to get the match.

2. Make the biggest payments you can on the car loan. Because it's interest rate is higher, and the asset is depreciating.

3. Then shore up the emergency fund. The mortgage can wait (even with the PMI) because it is likely an appreciating asset in the long term.

4. Now that the emergency fund is in place, get rid of PMI. And refinance to a better fixed rate if you can.

5. Now build up your IRAs / 401k. Don't worry about paying off the mortgage until you're happy with your progress toward retirement. Stock index funds generally earn more than you pay on mortgage interest.

And yeah, not a big problem in the long term...

[joeea]

Quote:

Originally Posted by SnowballCamper 1. Don't give up any employer match in 401k or similar program. Save enough to get the match.

Excellent point! I often forget to mention that one.

[jIMOh]

what is the appreciation of the house?
You could pay down loan to get PMI removed, or refinance if value of house appreciates, and PMI would go away.

Have you modeled both situations in a spreadsheet?

There is a net worth solution- which gives you highest net worth quickly
There is a cash flow solution- which gives you highest free cash flow sooner

what is the goal?
retire earliest?
investment balance for a given age?
free up cash flow?
reduce risk?
reduce debt?

[Chris918]

Quote:

Originally Posted by jIMOh what is the appreciation of the house? You could pay down loan to get PMI removed, or refinance if value of house appreciates, and PMI would go away. Have you modeled both situations in a spreadsheet? There is a net worth solution- which gives you highest net worth quickly There is a cash flow solution- which gives you highest free cash flow sooner what is the goal? retire earliest? investment balance for a given age? free up cash flow? reduce risk? reduce debt?

My goal is to reach financial independence. For me it isn't about necessarily retiring early. Rather it is about having the option to retire if I want to or perhaps choosing a part time or lower paying job that I enjoy more. That and to have an emergency fund that will protect me against unforeseen problems.

[pb4uski]

I never had an emergency fund while working.... but I did have some taxable investments that I could sell if needed. I figured that most emergencies could be covered by our credit card credit limits and then that would give me 20-30 days to figure it out.... as it turns out, we didn't have many big financial emergencies and it all worked out.

The PMI adds about 0.7% to the cost of your mortgage, bringing your effective rate to about 5%.

Unless the 403b has a match I would ignore it for now.... if it has a match then contribute enough to optimize the match. If not, then do some Roth contributions but there is no need to max out.

On the debt, I would probably focus on the car loan and keep an eye on house values and equity towards refinancing at a lower rate with no PMI at some point in the future.

Even if you did 1/3 each... 1/3 to retirement savings (403b to match and/or Roths), 1/3 to additional car loan principal and 1/3 to additional mortgage principal that would probably all work out ok.

Chill.... you are on the first few laps of a long race... and slow and steady wins the race.

P.S. Have you played around at all with Quicken and Quicken Lifetime Planner? I highly recommend doing a plan in QLP and then using Quicken to monitor your progress.

[Cassius King]

Relax, you're doing fine, and are ahead of most at your age. You've gotten excellent advice on what to do next.
The only thing I would offer is not to beat yourself up too much. Unplanned and unforeseen expenditures are going to happen again. Learn to expect them and plan for them. A new roof, new HVAC, etc. These things WILL happen, best be prepared for them both financially and emotionally. Cheers!

[pjigar]

Quote:

Originally Posted by Chris918 Thank you for responding Hawkeye. My credit union does offer slightly better rates than the one I got. The issue seems to be that since I only kept a minor emergency fund in there I don't think I had the balances or the consistency the credit union was looking for. I keep my cash emergency funds in an online saving account to get a much better interest rate. I also asked about refinancing my mortgage, however I wasn't able to get too far since I didn't have a lot of equity and I've only been in my house for 2.5 years.

How much LTV your state requires for home equity line of credit (e.g. Texas need less than 80% LTV to allow home equity loan/line of credit)? If you pay down 20% and/or refinance with more than 20% of equity, do you have enough home equity line accessible to cover your emergency fund? If answer to former question is yes then I would pay down more than 20% on mortgage using the emergency fund and treat the home equity line of credit as my "emergency fund". This is what we have personally done for a number of years while we were thin on cash flow and cash reserves.

Home equity line is best way to keep emergency fund since
a. You can keep it open for long period of time without any cost, and
b. You interest income from emergency fund would be typically lower than your mortgage rate.

And yes, don't beat yourself up. Balance life and saving: don't sacrifice one for another and vice a versa. You are in this for a long haul. Your finances will get better over time as your investment seeds from years ago will start producing cash flow. My financial needle seemed to have had stuck for the first decade since I seriously started saving/investing. But financial picture started to brighten up quite rapidly after the first decade. Compounding really IS magical. You will see the snowball, just hang in there.

[AJ520]

How old is your current mortgage? I would check and see if it makes sense to do a cash out refinance to use the cash the pay off car and get rid of PMI if the house value has gone up... and the other way if the house value has gone up to equal to 25% ish equity( different mortgage company might be different), you can get the house reappraise and get rid of PMI.

And interest rate are very low now..my friend just refinance from 4.25% to 3.6% saving $300 a mont with a $500k mortgage... but cash out refi will have a higher interest rate but will still be better that the car loan.

Good luck!