what to do with extra income??

**Jluke** · 02-08-2016, 07:10 AM

If possible, refi to a 15-year mortgage.

Are you paying PMI?

If you do not have one already, download an amortization schedule and play around with the numbers and different scenarios. you can save a lot in interest.

That may tell you whether you want to pay extra.

Striking a balance between debt payment, investing, saving, etc is an ongoing process.

Keep your house ready to be sold - improvements, upgrades, etc - as necessary.

**tripods68** · 02-08-2016, 07:19 AM

I'm with Jluke!--Not only you can benefit on 15 year fixed loan, you probably lower your interest rate and cost. I too recently refinanced into a 15 year fixed. Best decision I've ever made! If you still have left over, I'd start putting some towards ROTH/IRA.

**GrowingTheGreen** · 02-08-2016, 07:33 AM

Unless you're paying PMI, just leave the mortgage as it is. 4% is a decent rate.

Your first priority should be maxing your tax-advantaged accounts. Start with your 401k. At least get your employees match. If you're in a higher tax bracket, continue to dump into the 401k until you get into the 15% bracket. If you're in the 15% tax bracket already, get your full 401k match then put the rest in a Roth IRA.

You're only "earning" 4% on money put towards your mortgage. The S&P500 has averaged an annualized 9% from 1/1990 to 1/2016 (with dividends).

**PhilDanley** · 02-08-2016, 08:44 AM

Congrats on having no consumer (non-mortgage) debt! I would max out your 401(k) first. Then start funding your kids' college educations (what does your state have to offer?). Then I'd start paying down the mortgage.

I wouldn't refi, especially if you are looking at selling when you become an empty-nester. You can always make extra principal payments and get the benefit of a 15 year loan without paying thousands to refi.

**snafu** · 02-08-2016, 09:07 AM

I too agree, with Jluke, research details to re-fi to 15 yr. mortgage with your current mortgager, a Credit Union, and possibly electronic provider for the best possible deal [lowest fee, best rate, every quarter point matters, combo]

What are you holding in your employer's 401K @ what fees? Do you take advantage of all employer contribution? Combined, do they use all deductible contribution sums? Next, IRA/ROTH co ordinated to work with 401K with low cost, low fee, DCA [Dollar Cost Averaging] plan. Finally, Do you plan to contribute to DKs college or university costs?

just a thought...Small things matter, check insurance to ensure you are getting the best coverage for price ratio. Do they charge a service fee for monthly payments that could be saved by annual payment? Is deductible appropriate to vehicles? The older the car the less it's KBB value which is maximum.

**autoxer** · 02-08-2016, 11:54 AM

Originally posted by wags1970 View Post

I am only 4 years into a 30 year mortgage and I'm basically paying mostly interest. I am 99% certain that in 8 years (when the youngest of our kids are 18) we will be definitely looking to downsize to a smaller house, so I'm not sure how much that should factor in whether I decide to throw money at the mortgage or not, but we will certainly be selling at that point.

I would say do the math on refinancing, not just assume it is the best option. Refinancing costs money in origination fees, but it is easy to figure out the payback time. The lower interest rate has to make up for the extra fees, before you come out ahead, so figure out what that payback period is and compare it to your 8 year timeline.

Originally posted by wags1970 View Post

Not sure if I should throw extra payments at the mortgage, max my IRA contributions, etc.

How comfortable are you with risk? If you are risk averse then you can keep the 30 year term and pay extra each month. If you are more comfortable with investing, then max out your 401k/ira accounts to reduce taxes and then open a taxable brokerage account to absorb the rest of your income. Both of those options are better than shoving the extra money into a savings account.

**Jluke** · 02-08-2016, 04:45 PM

I ran some numbers for fun...

Targeting July 2024 for the OP to sell the house:

current 30-year mortgage*: loan balance would be 203k, with interest paid of 123k.

15-year, 3%: loan balance would be 130k, with interest paid of 49.6k (plus 44.4k from 30-year already paid prior to re-fi).

15Y Re-fi means: 73k principal difference; almost 30k in interest saved.

Factor in closing costs...

THEN compare it all to what you could possibly save/invest and potentially earn.

*Estimated to be 282k loan at origin.

**feh** · 02-09-2016, 04:48 AM

Normally, I would tell you to invest it, but at 45 and with 25 years left on your mortgage, I agree with others that you should direct some (most?) of your surplus toward that debt.

Refinancing to a 15 year is a good idea. If you still have money left after that, come back and we'll give you other options.

**GrowingTheGreen** · 02-09-2016, 04:54 AM

It would be helpful for us to know what your current retirement savings are, yearly expenses, and years until retirement.

**wags1970** · 02-09-2016, 11:01 AM

thank you all for those replies. You've given me many things to consider. As for my mortgage, I do NOT pay PMI currently, and I don't think it would be in my best interest to refinance to a 15 year mortgage for a couple of reasons. One, between the closing costs and knowing with certainty in 10 years we will sell, not sure its worth it. Secondly, my second job isn't forever. I will do it as long as I am able or unless something causes me to lose it, but I don't plan on doing that 2nd income for more than a few years at most. So its temporary extra income, however, its a considerable extra income (80k) on top of my regular job. I contribute to standard 401k's at both job, up to the matching amount from the employers. So I could add a bit more to the 401k's I guess, but I don't think it would be enough to get me to a lower tax bracket. Maybe I should look at investing in stocks, just not sure the market is the right time to do that right now, but I'd like to be making some smarter decisions with the surplus income while I have it. thank you

**feh** · 02-09-2016, 11:06 AM

Originally posted by wags1970 View Post

One, between the closing costs and knowing with certainty in 10 years we will sell, not sure its worth it. Secondly, my second job isn't forever.

Can you explain why you feel either of these statements is a reason to not pay down your debt more aggressively?

**tripods68** · 02-09-2016, 12:45 PM

Originally posted by wags1970 View Post

thank you all for those replies. You've given me many things to consider. As for my mortgage, I do NOT pay PMI currently, and I don't think it would be in my best interest to refinance to a 15 year mortgage for a couple of reasons. One, between the closing costs and knowing with certainty in 10 years we will sell, not sure its worth it. Secondly, my second job isn't forever. I will do it as long as I am able or unless something causes me to lose it, but I don't plan on doing that 2nd income for more than a few years at most. So its temporary extra income, however, its a considerable extra income (80k) on top of my regular job. I contribute to standard 401k's at both job, up to the matching amount from the employers. So I could add a bit more to the 401k's I guess, but I don't think it would be enough to get me to a lower tax bracket. Maybe I should look at investing in stocks, just not sure the market is the right time to do that right now, but I'd like to be making some smarter decisions with the surplus income while I have it. thank you

I'm not here to convince you otherwise. The biggest and cost-effective in deploying your extra income is still towards applying extra mortgage payment bar none. So the faster you pay this off, the lesser interest cost incur over time. With the accelerated payment, the impact on your mortgage balance is huge, you end up keeping most of the equity proceeds after closing.

**corn18** · 02-09-2016, 02:08 PM

Originally posted by tripods68 View Post

I'm not here to convince you otherwise. The biggest and cost-effective in deploying your extra income is still towards applying extra mortgage payment bar none. So the faster you pay this off, the lesser interest cost incur over time. With the accelerated payment, the impact on your mortgage balance is huge, you end up keeping most of the equity proceeds after closing.

I have decided not to pay off my mortgage early right now. My mortgage is 3.75% and the effective interest rate after tax deductions is 2.2%. I would prefer the liquidity of having an extra $XX in the bank, market, mattress right now vs. paying off any amount of money leveraged at 2.2%. I will not be in this house 3 years from now (maybe even 1 year from now), so paying an extra $10k to save $220 - $660 is relatively uninteresting to me. Not all loans are bad.

I think the same applies to the OP.

Tom

**wags1970** · 02-09-2016, 02:44 PM

I'm not against paying extra towards the mortgage, but I don't think its a good idea to refinance to a 15 year loan if I plan on selling within 10 years. And I think it would be irresponsible on my part to get a 15 year mortgage where I could only afford it with that 2nd job. I'm not counting on that 2nd job for anything, I'm just trying to take advantage of it while I have it. If I were to lose it, I would not be able to make the payments on a 15 year mortgage. but like I said, if throwing extra money towards the mortgage makes sense and will save me in the long run, I'm not against doing that. just looking to make the best decision. thank you

what to do with extra income??