What to do.. What to do..

[Mad_Dog603]

Do I pay off the second mortage and get a new car loan.. or buy a new car with cash and keep paying second mortgage..

The numbers are;
Second Mortgage is $40k @ 6% with an approx. $330/month payment
Vehicle to be replaced current value=$10k and owned outright.. the new vehicle would cost additional $20k from savings.. if we took a loan on the $20 we could get it at about $2.5%..

We have saved $50k (this is on hand savings, we have $370k in 401ks) over the past five years and really wanted to pay off the second mortgage for peace of mind/accomplishment feeling.. but this might not be the best financially to do..

The second mortgage does provide a small additional tax break.. but we are currently upside down in value and if we paid it off, we could not get a home equity loan if an emergency arouse.. also in a financial tragedy we heard it is much tougher to foreclose on a home with a second mortage if you keep the second mortgage up to date.. not that this is a primary concern.. but something always to think about..

But we want to get another vehicle before this one starts costing us big in repairs and we lose the great resale value the dealership is willing to give us.. if we put more miles and time on the car.. we will quickly lose value and possibly incur expensive repairs.. the car has cost us nothing but gas/brakes in the past five years.. but is nearing 100k miles.. so we are thinking exhaust.. rotors.. catalytic.. timing belt.. etc.. etc.. etc.. On a side note.. we always buy 1-2 year old cars with under 20k miles that are factory recertified.. (we let someone else depreciate the the first $10k )

Both our credit ratings are over 800 so we can get very good car interest rates on car loans and my wife and I have very stable jobs (22 years for me.. 15 for her..)

We bank about $2.5k a month after expenses.. so even if we dip into the savings nest egg.. we can rebuild it fairly quickly..

We dont want to be a penny wise pound foolish..

So anyone want to chime in on what they think the best route is here?

We are torn..

[disneysteve]

There are always more than two choices. I wouldn't do either of the things you listed. Also very few financial decisions are "all or nothing" deals but that's the way you posed the question.

Is the 50K in savings your entire liquid savings or is that above and beyond your 6-month emergency fund?

Do you have any other debts besides your home?

Are you saving at least 15% of your gross household income for retirement?

Why do you feel you need to spend $30,000 on a used car? There are loads of excellent 2-year-old factory-certified used cards that are not nearly that expensive. I just did a quick search and I can get a 2011 Camry starting under $16,000. What kind of car are you looking at that is nearly twice that much?

And how is spending $30,000 on a newer car more cost-effective than keeping your current car for another 50,000 miles? Even if you spend $2,000/year on repairs, you still come out ahead.

Forget about keeping the mortgage for the tax break. That is such a common misconception. For every dollar you pay in interest, you save a quarter on your taxes. It still costs you 75 cents for every dollar in interest paid. There is no tax break. It doesn't save you money, it costs you money.

You say you are saving $2,500/month. That means you could save up 20K in 8 months and pay cash for a car. If you insist on spending 20K, that's what I would do. Pay off the mortgage and then save up for the car. If you really want the car now, buy it for cash and then use the other 30K of savings to pay down the loan, adding another $2,500/month until it is gone (4 months). That all assumes that the 50K in savings doesn't include your emergency fund. If it does, then we need more info regarding your expenses.

[Mad_Dog603]

Ok.. some more info...

Thanks for the input Steve...
To give you some more info as requested..

No other debt other than the mortgage.. total $2350.. of which $330 is the second..
The $50k includes 6 month reserve..
We are are saving roughly 12% of total in the 401ks..
We have about 20 more years in the game before retirement.. so we expect to keep adding to the 401k $370k total..
Yes there are other cars.. but.. sometimes you want what you want.. we want to replace our Volvo S60 AWD.. very safe care and has held great value.. we always buy two years old.. recertified cars.. in the northeast.. AWD is a requirement for us.. so this adds to the cost..

One thing to add is that our other vehicle is a year older and has $125k.. we would rather keep this vehicle to run into the ground.. the other problem we are thinking of is that we don't want to have two car payments.. so if we get one now and paid.. in several years we can upgrade that vehicle and only have one payment.. so nice right now to not have any car payments..

Personally I am for getting rid of the second.. though my wife thinks we should keep.. thus the discussion..

Again thanks for the input.. all good points you are making..

[disneysteve]

The $50k includes 6 month reserve..

That changes the story. How much is EF and how much is actually available to be spent? I realize you can spend it all then rebuild it but I would do it the other way around. Keep the EF and save up for what you want. And again, it doesn't have to be all of nothing. You could trade in your car for 10K, take 10K from savings and only finance 10K.

we don't want to have two car payments.

You could always save up cash and have zero car payments.

Personally I am for getting rid of the second.. though my wife thinks we should keep.. thus the discussion..

What is your wife's rationale for keeping a 6% mortgage? If you are going to do one of your two choices, it certainly makes more sense to pay off the 6% loan and take on a new 2.5% loan. You would reduce your debt from 40K to 20K and cut your interest rate by more than half.

[Mad_Dog603]

what is my wifes rationale?
Really?
Like I know?!
If I knew what a womans rationale was I would be rich!

[disneysteve]

what is my wifes rationale?
Really?
Like I know?!
If I knew what a womans rationale was I would be rich!

LOL! Seriously, though, why does she feel it is better to keep the high interest debt? It's certainly something the two of you should be discussing as you come up with a plan of attack.