Since I know y’all are sitting on pins and needles waiting for the details of our second mortgage and our specific situation that has me all a twitter about what step to take once we finish our (non-mortgage) debt snowball (THIS MONTH!)… Here’s the facts:
2nd Mortgage
- Balance: $31,442.09 (as of today)
- Interest Rate: 8.34% (ack)
- Monthly Payments: $283.90
The interest rate on this thing kills me; it’s the highest by far of any of our mortgage debt. And yes, I said any. As in, we have more than one. (Have you been introduced to the thorn in our side our rental property yet?)
According to Dave Ramsey…
From his book, The Total Money Makeover (page 130):
“Generally speaking, if your second mortgage is more than 50 percent of your gross annual income, you should not put it in the Debt Snowball.”
Our second mortgage is less than 50 percent of our gross annual income. So according to Dave Ramsey, we should tackle this second mortgage straightaway. (Instead of waiting and paying it off later with the rest of the mortgage debt.)
Before I go on to explain why I think our specific situation perhaps calls for us to speak non-generally… Let me just mention (before someone asks) that we did look into refinancing. Not only do we not have enough equity in our home, we also don’t have enough time left in the home to justify paying any interest up front. Which brings me to…
The Variables. (Aka, Speaking Non-Generally):
- We are a military family that is scheduled to move Summer of 2011.
- We will probably be putting our house up for sale a little over a year from now.
- While it is entirely possible that we will successfully sell our house and make enough to not only pay off the first and second mortgages and the realtor’s fee as well, I harbor no illusions: We need to be prepared to bring cash to the table at closing. (And that’s not even the worst-case scenario.)
- Moving in and of itself poses new expenses.
- No, we have no idea where we will be moving to.
- Just thought I’d head off that question. Everybody asks; don’t feel bad.
- Although I’m thinking of telling people we’re moving to Iceland, just to see their reaction.
- There is an Air Force base there, didn’t you know.
- (No, mom, I really don’t think that’s likely.)
- I just thought I’d go to number ten to round things out.
So.
Thoughts?
Our Options As I See Them. (Or as The Hubs exclaimed, “This is Multiple Choice? All right!”)
- Tackle the 2nd mortgage straightaway, Dave Ramsey style.
- Build up an emergency fund.
- Start contributing to retirement again.
- Combination of any or all of the above.
Am I forgetting anything?
“Let me… add a wrinkle.” (Name that movie.)
I’m contemplating making a ROTH contribution before April for the 2009 tax year. While tackling our snowball, we stopped making retirement contributions. Very motivating (for me) to pay off that debt as soon as possible… But it’s very tempting to throw some money at it while we have the chance so we don’t lose out on contributions for that whole year altogether.
The Hubs and I were able to discuss chat on skype about this recently. Even though we’ve talked about it before, I keep forgetting what we decide. Or rather, we get interrupted or distracted by something (or someone) else before we really make a decision, and then we forget to go back and talk about it again. (Surely this sounds familiar to some of you.)
So we’re looking at a sort of combination of the options above. I won’t tell you exactly what steps and how much when and what first that we think we’re going to do as of yet… I’m very, very interested in what you all think based on the numbers and our situation that I described.
Opinions? Advice? (Contemplations?) Do share!
Related posts:
{ 9 comments… read them below or add one }
Here’s what I did with our equity loan (that had gone up to 8%) a few years ago. I rolled it all into a 0% credit card and paid as much each month as we possibly could. When the 0% expired, rolled it into another. The payoff went much faster without the 8%.
I don’t know if there are 0% credit card offers out there anymore, but there are definitely some under 2%. Just have to make sure there’s no charge for transferring balances etc.
This was my last step in paying off our debt (except mortgage).
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jolyn Reply:
February 7th, 2010 at 1:26 pm
This just proves that sometimes the apple doesn’t fall far from the tree, and all that. I was thinking of doing a modified version of that exact thing: Figuring out about how much extra I thought we could put toward the 2nd in the time we have left in this house and putting that amount on a 0% offer. Not only w/we save interest on that amount, but that much more of the regular $283.90 payment going toward what was still on the 2nd would go toward principle and not interest.
Dave Ramsey fans would not approve, but this is how we have paid off our last two debts: The remaining consumer debt is our car loan that I paid off using a 0% offer, and we will pay that off in the nick of time before the promotional rate runs out. I think we have proven that we can do this responsibly, no matter What Dave Would Do.
I will only do this if I can get an offer with no transfer fees along with the 0%. Last time I had to ask for the no fees: The guy had to “wade through” our offers in his computer and magically finally found one that I fit my criteria! Just goes to show, having a good “I Love Debt” score can pay off! Heh. We do still get offers in the mail, but I have opted out of many mailings and I haven’t noticed 0% in the new ones… I will probably call the one that currently holds the one we’re about to pay off: Maybe they’ll be anxious to get our business back!
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One more thing…there is a bill out that helps military families if they have to sell their home at a loss due to a PCS. Here’s something I found after a quick google search that has more info.
http://militaryfinancenetwork.com/2009/03/18/stimulus-plan-helps-military-members-who-lost-money-due-to-pcs/
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Hi! As a fellow mil spouse in similar circumstances also doing the DR program, I say build up the emergency fund. There are always unexpected expenses with moving. SInce you have no clue where you are going, you have to prepare even more. You might need a downpayment on an igloo in Iceland.
And yes, you are right…there is an AF base there. God help those that get stationed there.
After you have about 3-6 months of emergency fund saved up, then I would start saving for retirement again. I wouldn’t worry so much about the 2nd mortgage. Hopefully, it will be summer 2011 before you leave, giving you more time to get some equity built up. Refinancing probably isn’t a good idea because you might end up taking all the equity out on doing the refi without enough time to build it back up.
But that’s just my five cents.
Hope it all works well for you all!
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jolyn Reply:
February 5th, 2010 at 10:19 pm
Thanks, Tonya. I appreciate that. Unfortunately, we do not qualify: the bill supports those affected by BRACs and also those who purchased their home before 2006 (we bought ours in 2007). God-willing, we will sell for at least the amount we paid for it! But then there’s the realtor’s fees, and the closing costs due upfront…
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I am learning so much by just reading the comments. Fortunately for us we found Mary Hunt’s book (debt proof living) at the time when we were considering a second mortgage option. My thought on your situation may sound too simple, but would selling all of your properties to pay off the second mortgage and start over be an option? I might be missing something from your post? Please excuse me if you have already mentioned that is not an option.
We have considered selling our condo and start afresh a while ago except to found out that the rental in our town is much higher than our monthly payment. So we are sitting tight and just do DR’s snowball method and hope to be debt free in two years.
btw, my week 1 cash envelope was a success this week (after three months of doing it), I finally have gained some “self control” on spending with cash!
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jolyn Reply:
February 5th, 2010 at 10:09 pm
No, it’s not too simple! It would probably be good for me to spell out why we don’t just sell everything; I’ve mentioned it here and there, but only in passing, I think.
I last looked into selling the Vegas rental a couple months ago. The market there is inundated with short sales and foreclosures. We would take a loss of at least $20K (from what we still owe) if we sold it now. We can cash flow it, so we’ll wait it out.
We are scheduled to PCS next year, so we’ll certainly be trying to sell this house then! If we didn’t have any plans to be leaving the area, I do think we would be looking into options to get rid of the second mortgage faster, either by moving, or some other drastic measures…
Three months? You give me hope! I’ve had a misstep this month already.
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My two cents…make the Roth contribution, and include that as part of your fully-funded emergency fund. In a real crunch, you could withdraw the contribution portion of your Roth at any time (assuming it hasn’t been lost in a market decline), without penalty.
After establishing the first $5k of your emergency fund in a Roth, continue to build cash savings representing 6 months of expenses in a separate savings/money market account.
After a full emergency fund has been established, make large payments on the 2nd mortgage(s) and pay them off.
Granted, this is probably the most conservative approach because you will obviously pay more in interest over the months it takes to build savings. However, I like to make these types of decisions based on the amount of risk it eliminates from my life, not how much money is saves/makes me.
Thanks to both you and your husband for the service to our country, and for making the sacrifices you make daily to keep our land a free one. Godspeed!
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jolyn Reply:
February 5th, 2010 at 7:19 pm
This is why you are The Frugal Dad.
I had never even thought about using a ROTH in this way. We actually already have a small ROTH, with just a little over $3000 in it. (The exact figure fluctuates daily, of course.) I now realize that we already have something for an “emergency” — whether it be for moving expenses, or for bringing cash to closing if necessary. For my peace of mind, I would like to have roughly $10K altogether for combined moving expenses and the cost of selling the house, if necessary. Since you’ve reminded me of how a ROTH can be used, I am thinking we can throw another couple grand at the ROTH we already have, then save up another $5K in a money market (which we used to have, but depleted when we bought this house and never contributed to again) and then we’ll be good to go for tackling that second mortgage! If by some miracle we profited from selling the house, we could then put that amount toward fully funding the emergency fund…
Now I’ve just rambled my thoughts all stream of consciousness-like, but I’m so glad that you took the time to comment your ideas here! Yes, perhaps saving first and paying debt second is the more conservative approach, but peace of mind is important also. And I think it would be ill-advised for us to ignore the realities of our lifestyle and not prepare for something that very possibly could lead us to reaching for the credit card again. I know. We’ve been there.
Getting debt-free is just the first step: Ultimately, we want to live debt-free! (and credit-free, too!)
Maybe this should have just been a post?
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If you can qualify for a low down payment loan (assume w/ VA you can do this?) when you have to buy another house, then I would make sure to have maybe $5K in an emergency fund for the closing/true emergencies/moving. Most people would have to worry about getting qualified for a loan these days if they had to move – even with excellent credit and decent income jobs you HAVE to have 20% down, based on a coworker’s experience.
My next priority would be retirement except that the interest rate is so high on the second mortgage and it is obviously weighing you down mentally too. Therefore, I would throw everything (after the emergency fund funding) you can at that and be done with it!
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Budgets are the New Black Reply:
February 5th, 2010 at 1:23 pm
Sherry,
I have now drunk so much Dave Ramsey kool-aid that I don’t think we have any business buying a house again unless we have at least 20% to put down! We’ll likely be renting next place we go…
Otherwise, I’m leaning along your lines: emergency/moving/selling house fund; then tackle as much on the 2nd as we can…
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JoAnne Reply:
February 5th, 2010 at 6:07 pm
I beg to differ on the Have to have 20% down to buy a home. As of right now for an FHA loan you have to have 3.5% down payment. I would pay off as much of your 2nd mortgage as you feel comfortable with every month. Remember you are paying 8.34% interest rate. So if you pay on that it is like making 8.34% interest on your money. The savings account that you have your emergency fund in is not making even close to that much. Once you sell your house then your payoff will be less and you will put that money back in your wallet, or emergency fund. I think it is best what DR says, pay off your second mortgage and pay it off fast. Of course I think putting $5,000 in the Roth IRA is a great idea! Whatever you decide you are on a great path!
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jolyn Reply:
February 5th, 2010 at 7:38 pm
JoAnne,
I wasn’t trying to say we have to have 20% down, just that we should.
And you’re right: whatever we pay down on the 2nd is like paying ourselves (or at least sparing ourselves) 8.34% interest! So however much of that we can get rid of, we can’t lose!
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I have no great insight either way, except to say that DR rocks! I’ve finally convinced my husband to take baby steps with regard to our budget/debt. Your comment about Iceland brought back memories, though. I’m a USAF brat myself, and my dad spent the last several years of his career at the same base in OH where y’all are stationed. In fact, when he retired from the Air Force, he went to work for a government contractor doing the same job–just changed clothes and went to the same office and everything! One year before he retired from the military, he got orders that he was to be sent remote (as in, no family) to that AF Base in Iceland. Fortunately for him (and us too!), he had friends who had friends in high places and the orders were cancelled. We stayed in Ohio and my parents still live in the same house they built in 1978.
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Budgets are the New Black Reply:
February 5th, 2010 at 1:21 pm
I’ve actually heard from people who loved being stationed in Iceland! But boo on being separated from your family; I’d rather go altogether. But I just threw that out there to be random. Small world, eh?
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Do I get points for the movie quote……Parenthood!
Here’s my thoughts on the mortgage situation, assuming (you know what they say about assuming…..) that you will be moving next summer……
1) If you are going to snowball the 2nd mortgage, what percentage of it will be gone by the time you would move? If it is less than 50%, I wouldn’t do it. Especially since there is a good chance that it would be gone in less than 2 yrs anyway.
2) As a side note….if you think you would need to bring cash to the table….maybe putting it in a “house closing” fund would be better.
3) Retirement….that is a sticking point in our house. We have stopped our contributions as well, which I hate. Part of me says, no one is going to fund your retirement!! SAVE SAVE SAVE! Part of me says, you have time to do it, emergency fund is a better way.
4) The wishy washy conservative side of me says….put part in retirement, part toward mortgage (maybe a 60/40 split).
(I am a big help. huh??????)
OK….taking a stand. I vote retirement, unless you can pay off more than 50% of the mortgage. Then do the mortgage.
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Budgets are the New Black Reply:
February 5th, 2010 at 1:19 pm
Totally got points! I’m impressed! (Love that movie!)
1) That’s the thing: Definitely less than 50%. Especially after bulking up…
2) I guess I’m looking at “emergency fund” as having different hats: moving fund; selling house fund…
I do hate the interest rate on the 2nd mortgage…
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Yeah, you forgot to mention that the AF honors its word about like Darth Vader anymore, and they could conceivably move us this summer. How’s that for a wrinkle?
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Budgets are the New Black Reply:
February 5th, 2010 at 1:16 pm
As Ann Coulter always wanted to say to the late Ted Kennedy, “I’ll drive off that bridge when we come to it, Senator.”
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