My new journey and where to go from here

[pb4uski]

... Any other thoughts or suggestions? ...

Welcome Chris. You've made a great start by paying off all "bad" debt.

I don't see an emergency fund as hugely important if you both have stable jobs in desireable careers and good credit.... a few months of expenses in an online savings account is sufficient. To be honest, DW was a SAHM and we never bothered with an emergency fund but we did have taxable investments... we could have put any emergency on a credit card and then later redeemed some shares in the taxable fund if need be... luckily, we never needed to do that.

If I were you, my immediate priority would be to get rid of that pesky $87.35/month PMI and also 4.25% is a tad high these days... I just did some research for my DD on refinancing and in her area there was a credit union advertising 3.125% with 1 point for 30 year and 2.625% with 1 point for 15 year. Assuming your home is worth $170k then at 80% LTV your max mortgage would be $136k... so you would need to come to closing with ~$11k. YMMV, so consult with credit unions in your area.

You can raise that $11k by dialing your retirement contributions back temporarily to the minmum needed to maximize any match... then you can increase them later.

Beyond that I would not focus on mortgage reduction at all... just autopay the monthly payments and put any excess cash into retirement if you are in the 22% tax bracket or higher or in a taxable account if you are in the 12% tax bracket or lower. You may not know this but qualified dividends and long-term capital gains are tax-free/0% tax rate if you are in the 12% bracket or less and only 15% if you are in the 22% tax bracket or higher.

 

[gwraigty]

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.

In general, I agree. When we were near the OP's age, we did have several thousand sitting in a bank account earning 6% to 8%. Sigh...feeling nostalgic...Things evolved over the years and perspectives changed. In short, as long as one has funds that can be easily accessed, having too much of a lump sum could be considered an opportunity cost.

 

[Chris918]

Welcome Chris. You've made a great start by paying off all "bad" debt.

I don't see an emergency fund as hugely important if you both have stable jobs in desireable careers and good credit.... a few months of expenses in an online savings account is sufficient. To be honest, DW was a SAHM and we never bothered with an emergency fund but we did have taxable investments... we could have put any emergency on a credit card and then later redeemed some shares in the taxable fund if need be... luckily, we never needed to do that.

If I were you, my immediate priority would be to get rid of that pesky $87.35/month PMI and also 4.25% is a tad high these days... I just did some research for my DD on refinancing and in her area there was a credit union advertising 3.125% with 1 point for 30 year and 2.625% with 1 point for 15 year. Assuming your home is worth $170k then at 80% LTV your max mortgage would be $136k... so you would need to come to closing with ~$11k. YMMV, so consult with credit unions in your area.

You can raise that $11k by dialing your retirement contributions back temporarily to the minmum needed to maximize any match... then you can increase them later.

Beyond that I would not focus on mortgage reduction at all... just autopay the monthly payments and put any excess cash into retirement if you are in the 22% tax bracket or higher or in a taxable account if you are in the 12% tax bracket or lower. You may not know this but qualified dividends and long-term capital gains are tax-free/0% tax rate if you are in the 12% bracket or less and only 15% if you are in the 22% tax bracket or higher.

3.125 is insane! That sounds amazing compared to 4.25. As soon as we get the PMI gone you can bet I'll be doing some research. I've been a member of a credit union for quite some time and have fantastic credit. I don't have experience in refinancing anything though. So if I want to refinance and find a rate I like I have to pay closing costs again just like I did when I bought the home?

 

[Vacation4us]

Your doing great. I would definitely refi to lower your rate and get rid of your PMI. If you could afford the payment on a 15 year loan I would highly recommend it. Lower rate, more money toward principal, a set it and forget it loan which will pay off long term.

Investing to the company match ....awesome.

Maxing out Roth contribution next is really important since you have a long time horizon. If the companies offer a Roth 401k even better.

Tax deferred saving to the max would be next on the list.

If you have anything left over save in a taxable account.

An emergency fund is important cause sh*t happens. Having a cushion in the bank is a very secure feeling.

You are way ahead of the game already just save,save, save and one day you’ll wake up and be FIRED.

Welcome to the form.

 

[RunningBum]

3.125 is insane! That sounds amazing compared to 4.25. As soon as we get the PMI gone you can bet I'll be doing some research. I've been a member of a credit union for quite some time and have fantastic credit. I don't have experience in refinancing anything though. So if I want to refinance and find a rate I like I have to pay closing costs again just like I did when I bought the home?

You'll have some closing costs on a re-fi, but not as many. Don't forget that a re-fi will be based on a new appraisal, so you can probably hit 80% with less money. If you can really get it appraised for $171K, you can get a loan of 80% of $171K so your loan amount would be $136K. You owe $144K now, so you'd only have to come up with $8K more, plus closing costs. I'd look into this rather than waiting until you've removed PMI off the current loan, if rates are better.

 

[Chris918]

Your doing great. I would definitely refi to lower your rate and get rid of your PMI. If you could afford the payment on a 15 year loan I would highly recommend it. Lower rate, more money toward principal, a set it and forget it loan which will pay off long term.

Investing to the company match ....awesome.

Maxing out Roth contribution next is really important since you have a long time horizon. If the companies offer a Roth 401k even better.

Tax deferred saving to the max would be next on the list.

If you have anything left over save in a taxable account.

An emergency fund is important cause sh*t happens. Having a cushion in the bank is a very secure feeling.

You are way ahead of the game already just save,save, save and one day you’ll wake up and be FIRED.

Welcome to the form.

Thank you for the warm welcome

 

[Chris918]

You'll have some closing costs on a re-fi, but not as many. Don't forget that a re-fi will be based on a new appraisal, so you can probably hit 80% with less money. If you can really get it appraised for $171K, you can get a loan of 80% of $171K so your loan amount would be $136K. You owe $144K now, so you'd only have to come up with $8K more, plus closing costs. I'd look into this rather than waiting until you've removed PMI off the current loan, if rates are better.

I'll look at all the credit unions in my area and see what I can find. 8k more really isn't that much and refinancing at a lower rate would save me a lot.

 

[ckelly78z]

I read the OP, but not all of the following ones. I would not pay off the mortgage, just add what you can afford until you can achieve 20% equity. At that point, the PMI can be removed (pretty sure you have to ask to have it removed) which will save you $87 a month. Take that $87 a month, and add at least $100 a month to it to be applied to the principal (i'm assuming you have a really low interest rate) until the loan is paid off which will most likely cut 10-15 years from the end of the loan.

When you are eligible, contribute enough to get the full company match in your 401K/403B, after that, invest what you can into Roth IRAs.

 

[HI Bill]

Investing to the company match ....awesome.

Maxing out Roth contribution next is really important since you have a long time horizon. If the companies offer a Roth 401k even better.

Tax deferred saving to the max would be next on the list.

If you have anything left over save in a taxable account.

An emergency fund is important cause sh*t happens. Having a cushion in the bank is a very secure feeling.

You are way ahead of the game already just save,save, save and one day you’ll wake up and be FIRED.

Welcome to the form.

Welcome! You are WAY ahead of me at age 27. I didn't really start saving anything until age 27, and then it was very little. I rented for about 7 years. But still, starting at 32, I bought my first condo, ramped up the savings, paid off the truck, and became serious about ER. With your start, you're well on your way. I second the points above. I would prioritize maxing out the 403(b) first, to just pay less in taxes (you automatically 'earn' a gain that is equivalent to whatever tax rate you're paying). So if you're paying 10% fed taxes, and put away an extra $20K, you're saving $2K in taxes....

Is your spouse working? If not, you can contribute $6K to a spousal IRA, saving another $600 or so in taxes...!

Your mortgage is so low that I agree with others...refinance to eliminate the PMI and obtain a lower rate, and make saving in 403(b) and ROTHs your first and second priority. Good job!

 

[Chris918]

Welcome! You are WAY ahead of me at age 27. I didn't really start saving anything until age 27, and then it was very little. I rented for about 7 years. But still, starting at 32, I bought my first condo, ramped up the savings, paid off the truck, and became serious about ER. With your start, you're well on your way. I second the points above. I would prioritize maxing out the 403(b) first, to just pay less in taxes (you automatically 'earn' a gain that is equivalent to whatever tax rate you're paying). So if you're paying 10% fed taxes, and put away an extra $20K, you're saving $2K in taxes....

Is your spouse working? If not, you can contribute $6K to a spousal IRA, saving another $600 or so in taxes...!

Your mortgage is so low that I agree with others...refinance to eliminate the PMI and obtain a lower rate, and make saving in 403(b) and ROTHs your first and second priority. Good job!

Thanks Bill. Yes my spouse works and gets a match at for her retirement too. I appreciate your advice

 

[CardsFan]

OP, you got some good advice so I'm not going to repeat what others have said. Regarding the mortgage, I would not hurry to pay it off early (aside from the PMI), but I WOULD make it a plan to never extend the terms of of this, or any other future mortgage. If I understand correctly, you have 28 years left on a 30 year mortgage. Target year to pay off, 2047. As you go forward with refi's, sales, and purchases, keep that date in mind and always get terms that support that date.

Many here have carried mortgages into retirement, and there is nothing wrong with that, but if you want to be debt free at retirement, I see this as the least painful way to get there.

JMHO

PS: The simple fact you are thinking about this at 27 makes me think you will get to an early retirement. Good luck and keep reading and posting here.

 

[Chris918]

OP, you got some good advice so I'm not going to repeat what others have said. Regarding the mortgage, I would not hurry to pay it off early (aside from the PMI), but I WOULD make it a plan to never extend the terms of of this, or any other future mortgage. If I understand correctly, you have 28 years left on a 30 year mortgage. Target year to pay off, 2047. As you go forward with refi's, sales, and purchases, keep that date in mind and always get terms that support that date.

Many here have carried mortgages into retirement, and there is nothing wrong with that, but if you want to be debt free at retirement, I see this as the least painful way to get there.

JMHO

PS: The simple fact you are thinking about this at 27 makes me think you will get to an early retirement. Good luck and keep reading and posting here.

Haha that's the plan. Failure is not an option

 

[SecretlyFI]

You are making so many good decisions, are clearly intelligent and disciplined, that you definitely are going to be very successful and prosper. I agree with the priorities many have offered and to do the re-fi.

As mentioned, when able, saving in taxable will help, not only in the long run to support you pre-59.5 but also to earmark for periodic big purchases like eventual car replacements. Now that you’re out of car debt, you know you never want to go back. A little set aside each month adds up and enables you to write a check when the time comes. It’s a great feeling.

Congratulations on all your accomplishments and a bright future.

 

[pb4uski]

You'll have some closing costs on a re-fi, but not as many. Don't forget that a re-fi will be based on a new appraisal, so you can probably hit 80% with less money. If you can really get it appraised for $171K, you can get a loan of 80% of $171K so your loan amount would be $136K. You owe $144K now, so you'd only have to come up with $8K more, plus closing costs. I'd look into this rather than waiting until you've removed PMI off the current loan, if rates are better.

+1 look into this sooner rather than later to reduce interest cost, eliminate PMI and reduce overall payments. The $8k is just increasing your equity so no cost there.... only cost is points (if any), appraisal and other closing costs and sometimes they will waive or discount some of those to get the origination fee from the lender.

 

[DrRoy]

You are doing well. I like the no PMI option.

 

[Audie Murphy]

I listen to a Podcast called The Money Guy. They did an analysis on a recent show. They compared someone your age paying off the house early (couple A) vs paying off the mortgage on schedule and putting all those additional dollars toward retirement (couple B). Both couples compared in their 40's or 50's. I can’t remember the exact figure but couple B had a much larger nest egg and they both had a paid off house. I am a Dave Ramsey fan but don’t miss out on all that compound interest available to you. The house is not going anywhere. I would get rid of PMI and pay on schedule after that and throw every available dollar toward investment to take advantage of your youth and time.

 

[nobody]

I'm a single guy and when I bought my first house at about your age as well, with no other debt. I maxed out my retirement savings and kept about 30k in a money market. Then I heard about this Dave guy "the paid off home has taken place of the bmw as the status symbol of choice." Wow that hit me hard. Got me thinking about paying off the house, before that it was inconceivable. I kept my 30k as an emergency fund, a years worth of expenses. I also started putting $100 each pay period into my next vehicle fund. I kept my retirement maxed and threw any other money at the house. I also worked a lot of overtime and all of that money went to the house. Five years on that plan I was able to pay off the house, 7 years after buying it. One of those years I was on a field assignment for work and was working 60-90 hours per week, that year I made a lot of progress. Just after paying off the house, the housing market crashed along with the economy. I was at ease, well except for seeing my 401k drop significantly, but it was a great time to put my house payment into the recessed market.

 

[RunningBum]

And then the market recovered and soared, but you had most of your money tied up in your house.

 

[Audie Murphy]

The Money Guy Show (episode in quotes below)

“Should you pay off debt before investing? Here is the real answer.”

Go listen to that show. It will give you a different perspective on your situation.

 

[simple girl]

Agree with the advice to re-fi to get rid of PMI and also get a 15 yr if you can handle the increased payment level. Keep on keepin' on with 401K's and Roths. You are doing fantastic!

After that, when you have enough funds, don't forget to start building a taxable brokerage account. If you want to FIRE before 59.5 you will need this account for funds to help bridge the gap until you can access other accounts (unless you want to tap Roth contributions early). In addition, if the ACA is still around and you decide to play the subsidy game you will have a greater ability to keep MAGI low. However, with your FIRE way off in the future the ACA point may be moot depending on how healthcare changes in the next few decades.

 

[Audie Murphy]

I agree with Simple Girl but on the gap money. You can also plan, once your mortgage is paid off, to continue to pile those payments into a cash bucket/early retirement fund. Depending on your retirement age, you should have plenty of time to stock up on cash later. The best news is that you are already wide awake, financially, and have a very promising future for a very comfy retirement on your terms.

 

[Chris918]

The Money Guy Show (episode in quotes below)

“Should you pay off debt before investing? Here is the real answer.”

Go listen to that show. It will give you a different perspective on your situation.

Just watched this. Thanks for the suggestion! Great content