Seeking advice after unforeseen changes

[Chris918]

Hello again friends.

I'm back hoping you can help me as you did before. After my last discussions here I had a concrete plan. I felt more motivated than ever before. Alas, I forget that life is often an unpredictable factor and can throw a wrench in plans.

As I explained in my last post, my wife and I had no debt besides our mortgage. While she was out of town her water pump failed and the engine burned up forcing us to get a new car. I got my wife a newer car. I tried to buy a car that was a few years older to avoid as much depreciation as possible. She was very happy with it. I'm happy that she's happy, but I'm very upset that we had to finance. Living without a car payment was amazing and now I feel as if I have backtracked. I know she needed a car, but I can't help but feel like I made a stupid mistake.

I elected not to use my emergency fund since it would've wiped it out entirely. We didn't have enough in it regardless so I figured having the safety net was a better choice. I'm looking for advice on how to proceed.

We have a mortgage with PMI of $87.15/month. The interest rate is 4.25% and we still owe $143,000 of the $160,000 and we now have the car with a 5.64% interest rate for 60 months. I have already set up biweekly payments and increased the payment amount over the lower payment they offered just to try and get it gone as fast as possible.

My original plan was this:
1. Throw everything at the mortgage until PMI is gone.
2. Max out my wife and I's ROTH IRA accounts every year.
3. Contribute my annual 3% raise to my 403b at work.

Now I'm not so sure what to do. I know I should max out my ROTH each year, I know I should get rid of PMI and the car loan, and I also know that my emergency fund probably needs to be larger since it couldn't cover this expense without getting totally drained.

Can anyone help or offer advice? What should I prioritize? I'm more than happy to share additional information or answer questions. Thank you!

 

[HawkeyeNFO]

Can you re-fi the car loan? My credit unions have much better rates than that. Same thing with the mortgage, although the amount of savings might be insignificant for a mortgage of $143k. If you do re-fi the mortgage, I'd pay enough down at closing to get rid of the PMI.

My priorities would be:
1 - get rid of PMI
2 - fully fund IRA
3 - pay down car loan
4 - pay down house

 

[joeea]

Living without a car payment was amazing and now I feel as if I have backtracked. I know she needed a car, but I can't help but feel like I made a stupid mistake.

Don't beat yourself up about it.

I elected not to use my emergency fund since it would've wiped it out entirely. We didn't have enough in it regardless so I figured having the safety net was a better choice. I'm looking for advice on how to proceed.

We have a mortgage with PMI of $87.15/month. The interest rate is 4.25% and we still owe $143,000 of the $160,000 and we now have the car with a 5.64% interest rate for 60 months. I have already set up biweekly payments and increased the payment amount over the lower payment they offered just to try and get it gone as fast as possible.

My original plan was this:
1. Throw everything at the mortgage until PMI is gone.
2. Max out my wife and I's ROTH IRA accounts every year.
3. Contribute my annual 3% raise to my 403b at work.

1. Beef up your emergency fund sufficiently so that you won't feel regret again.
2. Get rid of the PMI
3. Pay off the car loan
4. Do whatever you feel is best at that point. For me, that likely wouldn't involve paying off the mortgage, but clearly your viewpoint is different from mine. I would suggest these first 3 steps before making your ultimate decision.

 

[Chris918]

Can you re-fi the car loan? My credit unions have much better rates than that. Same thing with the mortgage, although the amount of savings might be insignificant for a mortgage of $143k. If you do re-fi the mortgage, I'd pay enough down at closing to get rid of the PMI.

My priorities would be:
1 - get rid of PMI
2 - fully fund IRA
3 - pay down car loan
4 - pay down house

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.

 

[Chris918]

Don't beat yourself up about it.


1. Beef up your emergency fund sufficiently so that you won't feel regret again.
2. Get rid of the PMI
3. Pay off the car loan
4. Do whatever you feel is best at that point. For me, that likely wouldn't involve paying off the mortgage, but clearly your viewpoint is different from mine. I would suggest these first 3 steps before making your ultimate decision.

Thank you for responding. Do you think it's okay to pay everything toward the house and car loan while putting nothing in investments? I agree that my emergency fund needs to be bigger but it would likely take a year or two to get rid of both the PMI on the house and the car loan. I just want to invest as soon as possible. I'm 26 and have $20,000 in investments but I'd like this to be much higher. I want to contribute more at work too.

 

[HenryD]

Don't beat yourself up about it.

+1. This isn't that bad.

I'd pay off the car as fast as you can, since it seems to be bugging you so much. Can you get it done in a year? I'd reduce the Roth contributions temporarily if necessary. Then I'd get back to maxing the Roths and getting rid of the PMI. Do not worry about anything beyond that until you've reached that goal.

As others have said though, what works best for you is what you should do.

 

[joeea]

Thank you for responding. Do you think it's okay to pay everything toward the house and car loan while putting nothing in investments?

It depends what you mean by "pay everything toward the house". I would pay enough to get rid of the PMI and get rid of the car loan. But I feel fairly strongly about never paying a PMI and never paying a high rate car loan for 5 years. You might feel differently. I might feel differently if the car loan were 0.9% rather than 5.64%.

I agree that my emergency fund needs to be bigger but it would likely take a year or two to get rid of both the PMI on the house and the car loan. I just want to invest as soon as possible.

I understand. But without a sufficient emergency fund, you run the risk of something else unforeseen happening.

Take care of business first. Get that emergency fund truly ready for the next emergency.

 

[Chris918]

It depends what you mean by "pay everything toward the house". I would pay enough to get rid of the PMI and get rid of the car loan. But I feel fairly strongly about never paying a PMI and never paying a high rate car loan. You might feel differently.


I understand. But without a sufficient emergency fund, you run the risk of something else unforeseen happening.

Take care of business first. Get that emergency fund ready for the next emergency.

Why do you not pay down a mortgage to eliminate PMI? Why not pay off a car loan early? I'm interested in your opinions/experiences.

 

[Chris918]

+1. This isn't that bad.

I'd pay off the car as fast as you can, since it seems to be bugging you so much. Can you get it done in a year? I'd reduce the Roth contributions temporarily if necessary. Then I'd get back to maxing the Roths and getting rid of the PMI. Do not worry about anything beyond that until you've reached that goal.

As others have said though, what works best for you is what you should do.

Thanks Henry. I'd say my first priority would definitely be getting a larger emergency fund to prevent this from happening again. After that it's a little foggy. I've been told to pay down a mortgage to get rid of PMI is essential since that's wasted money (it will cost me around $5000 if I let it go away on its own). I of course hear paying off a car loan is also very important (not paying this off early will cost me a max of $2000).

But above that I know investing for the long term will get me to my early retirement. So emergency fund first but after that I'm indecisive

 

[joeea]

Why do you not pay down a mortgage to eliminate PMI? Why not pay off a car loan early? I'm interested in your opinions/experiences.

I'm sorry if this wasn't clear. After funding your emergency fund, do these ASAP:
- pay down your mortgage sufficiently in order to get rid of your PMI (usually down to 80% of the home's appraised value).
- pay off your high-rate 5-year car loan early.

That's what I was trying to say. I would never get a mortgage where I had a PMI in the first place. IMHO, if you cannot afford a mortage with 20% down, you cannot afford the house. And I would never get a high-rate 5-year car loan in the first place. IMHO, if you can't have the car paid off in 2 years with at worst a low-interest loan, you can't afford the car.

 

[Chris918]

Ah yes my apologies. I just misunderstood your post. You are saying you would never do that because you wouldn't put yourself in that position in the first place.

 

[Chris918]

I'm sorry if this wasn't clear. After funding your emergency fund, do these ASAP:
- pay down your mortgage sufficiently in order to get rid of your PMI (usually down to 80% of the home's appraised value).
- pay off your high-rate 5-year car loan early.

That's what I was trying to say. I would never get a mortgage where I had a PMI in the first place. IMHO, if you cannot afford a mortage with 20% down, you cannot afford the house. And I would never get a high-rate 5-year car loan in the first place. IMHO, if you can't have the car paid off in 2 years with at worst a low-interest loan, you can't afford the car.

You're absolutely correct. As I said I misunderstood your first post so thank you clarifying.

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

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.

 

[Aerides]

Stop beating yourself up. You cannot expect a straight line of progress, especially at your young age. This will be a minor blip in the rearview mirror in a few years.

So.

#1 - relax, this wasn't a mistake, this was a rational decision. you and your wife need decent transport and 99% of the world uses financing for a car, 99.9% of those in your age group.
#2 - I'd shore up that emergency fund first. Because that way this doesn't happen again. Not because you can't float it, but because your appetite for unplanned expenses is zero. stuff happens. more stuff will happen, again. You should have at least 6 months of living expenses saved anyway. Do that first before you start paying down debt.
#3 - Pay down whatever is most keeping you up at night. Whatever will make you enjoy your regular life more to have cleared. It might not be the best thing financially or mathematically, but I think you're forgetting to enjoy life along the way, so pay more attention and money to whatever option gets you there, whether it's the car note or the mortgage.

I would drop a ROTH myself vs. 2 and 3, but keep at least your 401k going to at least the company match or better.

 

[RobbieB]

If you are contributing more than needed for max employer match I would reduce and put towards the PMI elimination. At that time you can refi the mortgage and drop the PMI. Then go after the car loan and increase the retirement accounts.

 

[Chris918]

Stop beating yourself up. You cannot expect a straight line of progress, especially at your young age. This will be a minor blip in the rearview mirror in a few years.

So.

#1 - relax, this wasn't a mistake, this was a rational decision. you and your wife need decent transport and 99% of the world uses financing for a car, 99.9% of those in your age group.
#2 - I'd shore up that emergency fund first. Because that way this doesn't happen again. Not because you can't float it, but because your appetite for unplanned expenses is zero. stuff happens. more stuff will happen, again. You should have at least 6 months of living expenses saved anyway. Do that first before you start paying down debt.
#3 - Pay down whatever is most keeping you up at night. Whatever will make you enjoy your regular life more to have cleared. It might not be the best thing financially or mathematically, but I think you're forgetting to enjoy life along the way, so pay more attention and money to whatever option gets you there, whether it's the car note or the mortgage.

I would drop a ROTH myself vs. 2 and 3, but keep at least your 401k going to at least the company match or better.

Thanks for making me feel better. My plan was definitely getting my emergency fund to 6 months first. I'm at around 2.5-3 months now so definitely a solid start. I'm aware the car was necessary and this is just a silly battle in my head to meet unrealistic expectations. The mortgage doesn't bother me anymore and the car only does because it's new and wasn't planned for. I figured the ROTH IRA accounts would be more important than either of those debts, but many have disagreed and said to get rid of PMI, pay off the loan, and then start investing.

 

[Walt34]

Stop beating yourself up. You cannot expect a straight line of progress, especially at your young age. This will be a minor blip in the rearview mirror in a few years.

What she said, and all the rest of it.

Despite the other's take on it I remember 18% interest rates and paying PMI, which in my case was a good move because it got me into the house, and fixed my payment, in a time when housing prices were rising rapidly. Waiting until I'd had enough to pay 20% would have been a costly mistake in that time and place.

So I'm wary of using the terms "always" and "never" when it comes to borrowing. Sometimes it is the wiser and more prudent course, especially at your age when you have lots of time to recover. As Aerides said you'll barely remember this, and it won't matter in 20 years anyway. Been there, done that.

Like most, I wouldn't want my wife driving around in a POS unreliable car and if it takes making payments to get her into something reliable, then that's what I'd do. And I have done that. It is NOT a stupid mistake. It is being a responsible adult.

As to which to try to pay off first, do whatever makes you the most comfortable. Twenty or thirty years from now I doubt it will matter much if at all. There is no "one size fits all" in this and everyone has their own priorities. What IS important is that you recognize the cost of debt and you're taking concrete steps to get rid of it. The ones who don't do that are the ones who spend their entire lives as slaves to the credit industry.

Frankly, I think you're doing a fine job no matter which one you pay off first.

 

[Chris918]

What she said, and all the rest of it.

Despite the other's take on it I remember 18% interest rates and paying PMI, which in my case was a good move because it got me into the house, and fixed my payment, in a time when housing prices were rising rapidly. Waiting until I'd had enough to pay 20% would have been a costly mistake in that time and place.

So I'm wary of using the terms "always" and "never" when it comes to borrowing. Sometimes it is the wiser and more prudent course, especially at your age when you have lots of time to recover. As Aerides said you'll barely remember this, and it won't matter in 20 years anyway. Been there, done that.

Like most, I wouldn't want my wife driving around in a POS unreliable car and if it takes making payments to get her into something reliable, then that's what I'd do. And I have done that. It is NOT a stupid mistake. It is being a responsible adult.

As to which to try to pay off first, do whatever makes you the most comfortable. Twenty or thirty years from now I doubt it will matter much if at all. There is no "one size fits all" in this and everyone has their own priorities. What IS important is that you recognize the cost of debt and you're taking concrete steps to get rid of it. The ones who don't do that are the ones who spend their entire lives as slaves to the credit industry.

Frankly, I think you're doing a fine job no matter which one you pay off first.

Thank you for your input. Do you recommend focusing purely on the debt and not investing until it's gone or is that a mistake?

 

[UnrealizedPotential]

Chris, I think you will be fine. You're young so you have time to learn from any mistakes you make. Just tackle one thing at a time and then move onto the next issue. If you do that, you will be in a much better position for the future and you will also be less likely to make those same mistakes. Good luck!

 

[Walt34]

Thank you for your input. Do you recommend focusing purely on the debt and not investing until it's gone or is that a mistake?

Since there is no "right" answer I'd probably throw a little bit at everything, if not every month, then on alternate months or some scheme like that. It's easy to get all wrapped around the axle on details like that, when the goal is simply to get out of debt. So I'd probably put some funds for retirement/investing at least on some months, and then the next pay extra toward one of the debts another month, and go on like that.

But really, in my opinion (which is worth what you paid for it) it doesn't matter all that much. What matters is that you're making concrete, if slow, progress every month. What WOULD be a mistake is throwing up your hands in exasperation and frustration at minutiae and do nothing.

I'm reminded of the story of one guy trying to talk a friend into going back to school to further his career. The one says "What's the point? If I go to school it'll take me ten years to get my degree and I'll be forty years old". His friend says "In ten years how old will you be if you don't go to school?"

He says "I'll be forty. How come it's the same?"

Likewise, in ten years all this will be behind you and the exact path you took to get there won't matter much. But the objectives will have been accomplished and that is what DOES matter.

 

[Bestwifeever]

DS bought his first house with a small down payment and PMI when he and his young fam moved to a new city. He refinanced a year later and the new appraisal had the house worth a lot more, so a. Lower interest rate and b. Bye bye PMI. So look into that. Guaranteed Rate has 3.5 percent and zero points for 30 year mortgages https://www.rate.com/mortgage-rates — just an example but play around online for refinancing possibilities.

And if having a car loan is the worst thing that ever happens to you, you are a lucky lucky man. IMO let it go, enjoy being in a position to be able to afford payments, kiss your wife, and appreciate all that you have. Life goes by fast.

 

[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]

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.

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]

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?