Ramsey BS6 Clarification on Second Mortgage

[mans442]

Hello all,

We have been following Ramsey's Baby Steps for a while. All debt besides mortages have been paid. We built up an emergency fund of 5 months of expenses. I am putting 9% income in 401K and 6% into Roth 401K. I have three young kids, so I started 529s for them just last week.

I read somewhere on Ramsey's forums that if you have a second mortgage that is 50% or more of your annual income, then it should be treated in BS6 rather than at BS2.

When I started the program, the second mortage balance was at $40,000 and my household income was just under $80K per year.

Currently, the balance is now ~ $38,000 and my household income has increased slightly to $87K per year.

This second mortgage is a fixed interest rate of 8.125%. This mortgage was the result of an 80/15/5% split.

At this point, should I revert back to BS2 to pay off the second mortgage? This would involve taking a portion of cash from savings, stop investments and pull additional cash per month to pay it down.

I undertand there various schools of thought on this, just looking for sensible ideas and advice from personal savings enthusisasts!

Thanks
Jason

[Slug]

I would get to 6 months of expenses and stop saving there. Take the overage and apply it to this, but keep the investing in the 529 plans. That's what I would do. The high interest rate would nag at me.

Have you considered a HELOC? You could use a variable rate HELOC to pay off the $38k and be paying FAR less in interest. Then, aggressively pay down the HELOC before interest rates start rising. You should have a while before it gets anywhere close to 8%.

[jpg7n16]

I like Slug's thought process of trying to refi the 2nd mortgage rate somehow. Rates are pretty low now - maybe you could reduce the loan's rate to the 5-6% level. (if not lower!)

And if you plan on being in the home for an extended period of time, you should do that regardless of what you do with the rest of your cash. Refi both the 1st and 2nd if the savings is enough - but I'd refi to fixed rate.

Then (depending on the rate you get) I may not even bother paying extra. If you can refi around 5.5% or less, then I wouldn't bother paying extra, but rather save for the 529 plans and retirement.

If you cannot refi lower, then keep 3 months minimum in the EF, and stop 529 contributions until the 2nd is paid off.