Accelerate mortgage drastically?

[graceful]

Bought and closed on the house in November 2009.
Bought a ton of furniture and hosted our first family gathering in December 2009.
Paid off all the credit card bills in January 2010 from all the purchases made for the house and Christmas.
Also made our first electric and oil bill and mortgage payment (with additional payment of $500 towards principal) in January 2010.

So, things are settling down now. And DH throws me a curve ball last night by suggesting that we drastically accelerate our mortgage payments. I had already planned on pre-paying the mortgage with $500 additional each month which would cut the 30 year loan by about 10 years if we are able to keep it up. We had about a surplus of about $300 a month of income over expenses and still some "fat" in the budget, especially since a lot of the budgeted expenses (i.e. transportation) hadn't started yet. (Won't until late summer.)

At first he suggested that we just throw the $35K we had originally budgeted for home furnishings/renovation directly at the mortgage balance since we furnished 85% of the house already. He figured we could hold off on any other purchases until we built up enough reserves again. We spent around $20K in the last 2 months furnishing the house, the cash assets I listed below of $123K are still available because we had inflows from tax return refunds ($3K), consulting fees ($5K) and gifts ($9K) to offset those expenses.

I really didn't feel comfortable with that because it was a psychological "cushion" in addition to our emergency fund. I "moved" the $20K we spent on home furnishings from the home reserves to our emergency funds part of our budget.

We talked about it. Instead, we are compromising and going to add $1000 a month towards our mortgage payments until it "hurts" before cutting back to maybe $500 again. Maybe when the true cost of living full time in the house kicks in. So, at a minimum for at least the next 6-7 months, no problem. After that period, we will re-evaluate. However, we will try to make that extra $1000 payment as long as possible. If our actual expenses go over our income BECAUSE of that additional $1000 a month, we figure it will come from the $20K we "moved" it over to our EF.

Does this even make sense? Or should we do as DH suggests and just throw the entire $35K at the mortgage or maybe just the $20K we used already?

I thought I had all our numbers and budget all worked out and DH decides to re-work everything. I think the thought of having this huge financial burden for the next 30 years is scaring him. By paying an extra $1000 a month, it will be paid off in less than 15 years.

I just don't know if it is sustainable. But if we were to throw extra money at the mortgage, now would be the time to do it when our expenses are lower and when we would save the most in interest...

Is there another option, I hadn't thought of? WWYD based on our numbers below? Thanks.

The following budget is a cut & paste from an earlier post that I had put together BEFORE we purchased our house in November with the red as corrections/additions:

Monthly Income (Gross/Net):
DH: $7,983.30 / $4804.97 (just got raise, will get another one 2/10)
net is now $5003.35 bc no more NYC taxes withheld for DH
ME: $2,700.00/ $2150.00 (I didn't get around to amending my withholdings yet)
Combo:$10,683.30 / $6,954.97 $7153.35

Not counting DH's bonuses that typically range from $5-$10K, my consulting fees that range from $5-$7K, interest ($4K+ in 2008 - will be lot less bc of rates and because we are applying most to DP) and dividend income ($3K+ in 2008). Annual figures.

Deductions from DH's pay already include Med (for him only - kids and I are covered through my company), FSA ($1200/yr), Transit ($130), and 15% to 401K ($276.35/wk).

Est. Monthly Expenses:
House:
Mortgage ($350K) 30 fixed P&I $2000 $1852.23 4.875%
RE Taxes ($13200) $1100 $1112.41
HO Ins $ 100 $93.75
Oil Heat ($118/mth per seller) $ 135 $300more in the winter months
Wood Stove Pellets ($250/ton) $ 25 Stew Leonards has it for $320/ton but we haven't started using the pellet stove yet. Oil use should go down when we do.
Electric ($178/mth per seller) $ 190 193 (estimated level billing)
Pool Maint $ 50
Lawn Maint $ 50
$3650 $3676.39

Household:
Food $ 450
Cable/Internet/Phone $ 125 (will live w/o as long as possible)
Clothes $ 100
Home Furn/Maint $ 200
Gifts/Fun $$ $ 75
$ 950 (Didn't actually get to add this up but it was about right on target. Although food was more $$ over the holidays for parties, it was offset by not having cable/internet/phone service yet)

Transportation:
Train tkt above pay deduction $ 100
Train St. Parking ($380/yr) $ 32
Car Ins ($100 now) $ 200 (will need 2nd car)
Car Maint $ 25
Gas $ 183
$ 540 (Haven't gotten 2nd car or paying for train/parking yet)

Other:
Tithing/Charity $ 710
DVC Maint ($2020) will rent out $ 170
Travel Fund (no travel for few yrs) $ 0
Kid's Activities ($2K) $ 170
Life Ins $ 200
Savings $ 400
$ 1650

Total Expenses: $ 6790 $6816.39

Surplus between I & E $ 164.97 $336.96

Notes:



Will try to fully fund IRA's in April with bonuses.



Assets:
Cash: (after DP and closing costs)
EF (10 months) $ 68K + $20 (from Home reserves) = $88K
Cash to purchase 2nd Car $ 20K
Reserve for Home Furn & Impvmt $ 35K (will be using around $2-3K/mth to furnish and improve the house) - $20K (bought furniture but used unaccounted inflow of funds) = $15K
$123K


IRAs & 401K $124K

Invest.Port (Stk & MF) $165K

Zero debt (Well now it is mortgage balance of $349,070)

DH & I both have shares in RE investments we wouldn't count because they will not be sold to raise money.

[jIM_Ohio]

Instead of reacting to decision (of DH), you need to make sure your DH and yourself have the same goals in mind. Step back and establish the 1 single most important goal with your money...

What is your goal?
a) retire as soon as possible
b) have the highest net worth as soon as possible
c) be debt free as soon as possible
d) generate as much passive income as possible
e) be financially independant as soon as possible
f) have X amount of money in the bank as soon as possible
g) pay as little interest or fees as possible
h) make money work as efficiently as possible

Each of these goals will probably suggest some of that $500-$1000 extra per month either goes to investments or mortgage payoff or savings.

The goal should be a happy medium which works towards the GOAL.


Here is my suggestion... I see this
($350K) 30 fixed P&I $2000 $1852.23 4.875%


Nothing in your post talked about job security, and remember that if you lose your jobs, the bank will not care if you paid $12000 extra this year, $12000 extra last year, and $12000 extra the year before, what they care about is getting their current months minimum payment on time.

and I see that your income as a consultant can fluctuate... that is a big risk, and I would hedge that risk by getting about 24 months expenses in the bank.

Of the 24 months expenses, put about 6 mos in cash, and about 18 months invested where you can beat a 4.875% return. A 20-80 mutual fund (20% stocks 80% bonds) should do it.

So I would do something similar to the following:

1) pay $500 extra to mortgage-this was original plan and there is a reason both you and DH agree on this at some point- you have a similar goal in mind (not sure what the goal is, but if you agreed/ discussed it, then this makes sense)
2) send $6000/year ($500/mo) to a cash account which is mortgage backup. Every year you are banking 3 mortgage payments.
3) after you have $12,000 set aside (6 months mortgage payments), open an investing account and contribute $500/mo to that account until it has $36,000 in it ($36,000 is 18 morgage payments.
4) once you have 2 and 3 completed, (3 years down the line?) rethink how to apply the $500/mo.

a) retire as soon as possible
do this by investing the $500/mo into a retirement account
b) have the highest net worth as soon as possible
do this by not paying off mortgage at all and investing all $1000/mo
**c) be debt free as soon as possible
you achieve this goal by investing $500/mo and when investment balance is higher than mortgage balance, cash out enough to payoff mortgage and taxes.

d) generate as much passive income as possible
invest the $500/mo into municpal bonds
e) be financially independant as soon as possible
invest all $1000/mo until your rate of return on investments generates enough money to replace income, then put all $1000/mo towards mortgage
f) have X amount of money in the bank as soon as possible
bank all $1000/mo
g) pay as little interest or fees as possible
put all $1000/mo on the mortgage
h) make money work as efficiently as possible
There is a sweet spot based on rates of return where you invest some and pay down some, then retire the moment the mortgage is paid off. If you want to do this, you need to make some spreadsheets and make some decisions on risk, rates of return, and how reliable you can invest or pay down with $1000/mo.

[Slug]

You're sitting on a 4.875% mortgage. I don't know that you need to throw a lot of money at that if you haven't funded your Roth's. It's not clear, but implied that you're funding 2 2009 Roth IRA's in April 2010. If I were you, I'd be funding 2009 and 2010 immediately. That's $20k. Get that $ in the markets working for you now. You guys are in good shape. Set up some CD ladders in your EF. Then pay down the mortgage after a nice Carribean vacation that appears well-earned.

[LivingAlmostLarge]

I'd definitely fund 2009 and 2010 IRAs, not sure if you qualify for a Roth?

[disneysteve]

15% to 401K ($276.35/wk).

Will try to fully fund IRA's in April with bonuses.

Based on these two things alone, I think your priorities are in need of adjustment.

$276.35 to the 401k does not max it out. It is short by $2,130/year or about $41/week. I would fix that.

You will "try" to fund the IRAs. It certainly isn't due to a lack of funds. If you can afford to overpay the mortgage by $1,000/month, why are you only going to "try" to fund the IRAs. I would max the IRAs FIRST and then consider extra principal payments.

I am not opposed to prepaying the mortgage. I'm prepaying ours. But I only started prepaying after everything else was taken care of, maxed out, paid off, etc.

[graceful]

Thanks for all the responses! Been busy with work, laundry, etc. Will read all and take into consideration.

[graceful]

Based on these two things alone, I think your priorities are in need of adjustment.

$276.35 to the 401k does not max it out. It is short by $2,130/year or about $41/week. I would fix that.

You will "try" to fund the IRAs. It certainly isn't due to a lack of funds. If you can afford to overpay the mortgage by $1,000/month, why are you only going to "try" to fund the IRAs. I would max the IRAs FIRST and then consider extra principal payments.

I am not opposed to prepaying the mortgage. I'm prepaying ours. But I only started prepaying after everything else was taken care of, maxed out, paid off, etc.

When I meant "try" to fund IRAs from bonuses, I meant from outside funds such as bonuses, tax refunds, etc. alone, not from set monthly income. Sorry if I was confusing. At the end of the day, we have never not written a check at the 11th hour (April) to fully fund the IRAs each year, not since I started working.

I WILL need to look into this earlier this year (do taxes earlier). I think I found out DH's income was too high for the ROTH IRA last year when I finally filed returns in October.

As for the 401K deductions, will definitely recheck the numbers. Thanks for the heads up. Went by last year's weekly deductions. He actually already maxed out sometime in early November 2009. I think he had MORE deducted early in 2009 and then readjusted the amount down to 15% for the rest of the year. Or maybe there was a large lump deduction to 401K from a bonus? So, will need to adjust the amount up for 2010.

So, 401K and Roths will DEFINITELY be maxed out regardless of anything else.

[graceful]

I'd definitely fund 2009 and 2010 IRAs, not sure if you qualify for a Roth?

Yeah, I have to check into the limits for the Roth. I think DH went over the limit last year - 2008. But they will be funded up to the limit. I refuse to give up any tax advantage I qualify for.

[disneysteve]

As for the 401K deductions, will definitely recheck the numbers. Thanks for the heads up. Went by last year's weekly deductions.

Yes. The max is $16,500 if you are under 50. That's $317.31/week.

[Beppington]

Wow, loooong OP. I dunno, you may actually be over-thinking this. You can only do so much with any income: Either pay down debt or save/ invest it.

Fund your retirement accounts to the max ... & then you 2 just need to decide & agree on whether you'd rather see the debt # be smaller or the savings # be higher. Since you can't predict the future, I'd hedge by doing something partway in between.

(I admit I didn't read every word of the OP)

[jIM_Ohio]

When I meant "try" to fund IRAs from bonuses, I meant from outside funds such as bonuses, tax refunds, etc. alone, not from set monthly income. Sorry if I was confusing. At the end of the day, we have never not written a check at the 11th hour (April) to fully fund the IRAs each year, not since I started working.

I WILL need to look into this earlier this year (do taxes earlier). I think I found out DH's income was too high for the ROTH IRA last year when I finally filed returns in October.

As for the 401K deductions, will definitely recheck the numbers. Thanks for the heads up. Went by last year's weekly deductions. He actually already maxed out sometime in early November 2009. I think he had MORE deducted early in 2009 and then readjusted the amount down to 15% for the rest of the year. Or maybe there was a large lump deduction to 401K from a bonus? So, will need to adjust the amount up for 2010.

So, 401K and Roths will DEFINITELY be maxed out regardless of anything else.

Reverse your logic...

budget for $500/mo to go to each roth
then use bonuses to pay down the mortgage

going back to my post about keeping cash "on hand", this system works well

when you get a bonus (5k-10k worth) use 5k to prepay principal and keep 5k on hand. Next bonus, do the same (split it 50-50 to mortgage and a liquid account in case you lose job or consulting income takes a hit).

If you have 24 months of consulting income banked, then use all bonuses for mortgage reduction.

If you use this logic, you will have the following

a) fully funded retirement
b) debt payoff relatively quick
c) and probably a paid off mortgage before you retire.

[Beppington]

when you get a bonus (5k-10k worth) use 5k to prepay principal and keep 5k on hand. Next bonus, do the same (split it 50-50 to mortgage and a liquid account in case you lose job or consulting income takes a hit).

That's the kind of hedgin' I'm talkin' about.

[graceful]

Lots of food for thought. I appreciate all the time you obviously spent evaluating my post and responding in a long detailed post. Thank you.

Instead of reacting to decision (of DH), you need to make sure your DH and yourself have the same goals in mind. Step back and establish the 1 single most important goal with your money...

What is your goal? Good question and we will need to put some more thoughts into this.
a) retire as soon as possible
b) have the highest net worth as soon as possible
c) be debt free as soon as possible I think that this may be DH's priority. He has never had any debt which he learned from his parents. I think even their house in NJ was owned outright. I, on the other hand, can appreciate good leverage. So, this is where we differ but I am willing to compromise to what he feels comfortable with.
d) generate as much passive income as possible
e) be financially independant as soon as possible
f) have X amount of money in the bank as soon as possible I admit that I am a cash hoarder. I prefer to have the money in the bank and not see it go down, just up. I am comfortable with what we have liquid now. However, hoping that the balances will go up slowly and steadily and NOT go down, if possible. To me, it is all about cash flow!
g) pay as little interest or fees as possible I think that this is probably where DH & I ARE in agreement.
h) make money work as efficiently as possible

While all the options are important, I think based on what I know about our habits and preferences, the 3 I highlighted are the most important to US. One we both agree on. We are divided on the other 2. Than after these 3, we will have to discuss what is most important to the both of us.

Each of these goals will probably suggest some of that $500-$1000 extra per month either goes to investments or mortgage payoff or savings.

The goal should be a happy medium which works towards the GOAL.


Here is my suggestion... I see this
($350K) 30 fixed P&I $2000 $1852.23 4.875%


Nothing in your post talked about job security, and remember that if you lose your jobs, the bank will not care if you paid $12000 extra this year, $12000 extra last year, and $12000 extra the year before, what they care about is getting their current months minimum payment on time.

Great point and it is one of the reasons that I already pointed out to DH why I DIDN't want to throw a lump sum to the mortgage. Job security is VERY important. Good news is that it is impossible to lose my job - I can't even quit. Bad news is that my income is much lower than DH's.

DH's job is pretty secure. There are lots of people that would get the axe before him. His boss loves him. The chances of DH quitting are probably higher than getting laid off. Not that he would quit, but when the pressures of the job were particularly bad that week, he always liked to "imagine" that it was an option - not anymore though because of the mortgage. However, outside of a gov't job, not much is 100% proof. For example, if something ever happened to his boss, the company may not last w/o him.

In any case, since there is even the remote possibility of DH's job loss, we have already set aside an EF cushion of about 12 months of "normal" living expenses, and about 28 months if we cut it down to "just" the mortgage. Not including the home renovation reserves that would get "repurposed" as EF. During this time, I would still be bringing in my normal income so the EF should last a little longer. In case of a dire, drastic emergency, I will be able to increase my salary temporary and go to our parents for help. But will obviously do as much planning ahead so as to never have to use this backup emergency plan.

and I see that your income as a consultant can fluctuate... that is a big risk, and I would hedge that risk by getting about 24 months expenses in the bank.

Yes, my income as a consultant CAN fluctuate and that is why I don't even COUNT it into our budgeted income. If it comes (and it should), it is all "extra" that supplement building up more cash reserves (did I mention I like seeing my balances go up?) and things like vacations, and IRAs, etc. without having to go into the cash reserves and from the budgeted expenses. We currently do have over 12 months of expenses in the bank and will adding to that slowly. Especially, since we DO get a lot of these fees and bonuses that we don't count on in the budget. The funds we have could actually be stretched out longer than that budgeted 12 months since we will cut back and my current income is pretty much guaranteed.

Of the 24 months expenses, put about 6 mos in cash, and about 18 months invested where you can beat a 4.875% return. A 20-80 mutual fund (20% stocks 80% bonds) should do it.

Will look into your advice. But to be honest, again, I like cold hard cash. I do a lot of CD laddering but of course, the interest is laughable right now. MF, stks & bonds are for investments that I would be willing to take a hit on. We do have them in our retirement funds and for money will will never have to see until retirement.

So I would do something similar to the following:

1) pay $500 extra to mortgage-this was original plan and there is a reason both you and DH agree on this at some point- you have a similar goal in mind (not sure what the goal is, but if you agreed/ discussed it, then this makes sense)
2) send $6000/year ($500/mo) to a cash account which is mortgage backup. Every year you are banking 3 mortgage payments.
3) after you have $12,000 set aside (6 months mortgage payments), open an investing account and contribute $500/mo to that account until it has $36,000 in it ($36,000 is 18 morgage payments.
4) once you have 2 and 3 completed, (3 years down the line?) rethink how to apply the $500/mo.


Is the $36,000 on TOP of the $88,000, we have already set aside for this?

a) retire as soon as possible
do this by investing the $500/mo into a retirement account
b) have the highest net worth as soon as possible
do this by not paying off mortgage at all and investing all $1000/mo
**c) be debt free as soon as possible
you achieve this goal by investing $500/mo and when investment balance is higher than mortgage balance, cash out enough to payoff mortgage and taxes. Assuming that the return is higher than 4.875% for someone who is heavily in cash. I actually don't have a problem following this advice and channeling $$ to investments first. It's DH that "may" have a psychological block to it. But we will discuss.

d) generate as much passive income as possible
invest the $500/mo into municpal bonds
e) be financially independant as soon as possible
invest all $1000/mo until your rate of return on investments generates enough money to replace income, then put all $1000/mo towards mortgage
f) have X amount of money in the bank as soon as possible
bank all $1000/mo
g) pay as little interest or fees as possible
put all $1000/mo on the mortgage
h) make money work as efficiently as possible
There is a sweet spot based on rates of return where you invest some and pay down some, then retire the moment the mortgage is paid off. If you want to do this, you need to make some spreadsheets and make some decisions on risk, rates of return, and how reliable you can invest or pay down with $1000/mo.

Thanks for the input. It will certainly help foster any discussions, DH and I have about the future.

I think we have tentatively decided to add $1000 to the mortgage for the next 6 months (or less or more) WHILE we make some longer term decisions. Once we come up with a longer term plan, we will re-allocated the funds if necessary.

[graceful]

Wow, loooong OP. I dunno, you may actually be over-thinking this. You can only do so much with any income: Either pay down debt or save/ invest it.

Fund your retirement accounts to the max ... & then you 2 just need to decide & agree on whether you'd rather see the debt # be smaller or the savings # be higher. Since you can't predict the future, I'd hedge by doing something partway in between.

(I admit I didn't read every word of the OP)

Yeah, definitely over thinking everything. Thanks for being my sounding board, everyone.

Reverse your logic...

budget for $500/mo to go to each roth
then use bonuses to pay down the mortgage

going back to my post about keeping cash "on hand", this system works well

when you get a bonus (5k-10k worth) use 5k to prepay principal and keep 5k on hand. Next bonus, do the same (split it 50-50 to mortgage and a liquid account in case you lose job or consulting income takes a hit).

If you have 24 months of consulting income banked, then use all bonuses for mortgage reduction.

If you use this logic, you will have the following

a) fully funded retirement
b) debt payoff relatively quick
c) and probably a paid off mortgage before you retire.

You are right, I probably just have to re-work my logic.

It's just easier for ME to budget for certain items than others.

Seems like the bonuses, fees etc. always seem to come in just when the IRAs need to be funded. I do wait until April to fund them because since our incomes fluctuate so much, I always have to do a dry run on the tax return to see what IRA - Traditional or Roth would work and how much - and if we are outside the limits. I think I messed up on this calculation for the first time last year.

[jIM_Ohio]

Yeah, definitely over thinking everything. Thanks for being my sounding board, everyone.



You are right, I probably just have to re-work my logic.

It's just easier for ME to budget for certain items than others.

Seems like the bonuses, fees etc. always seem to come in just when the IRAs need to be funded. I do wait until April to fund them because since our incomes fluctuate so much, I always have to do a dry run on the tax return to see what IRA - Traditional or Roth would work and how much - and if we are outside the limits. I think I messed up on this calculation for the first time last year.

If you reply inside of a quote, it is tougher to reply to you...

this reply is quick, there is another coming with more detail.

I budget $500/mo for the IRAs because there are usually 2 months we need the extra $1000 per person for something.

Might be xmas gifts
might be a homeowners association bill (due 1X per year)
might be a vacation

If you budget $500/mo for IRAs, turn them off the 1-2 months you have a fee due (for example). In addition you can fund a Roth all year, and if income was too high come tax time, you can file a re characterization before tax day April 15. Because even if you cannot do a Roth, you can still do a traditional... so no new money or old money or fees are due, you just need to tell the IRS you changed the Roth to a traditional deposit when you file your taxes.

I have re-characterized a few times before (twice I think) when I tried doing a conversion and did not pass the income test either time. It is one form and easy to fill out.