Next Steps after Debt Free

[jasonhines]

Not sure this is the correct category for this post but let's see.  Recently paid off all debt except for the 1st and 2nd mortgage.  Now we are trying to figure out our next steps.  We want to get into rental property in the coming years and potentially move from our house in 3 years after our youngest child graduates from high school.  Our 1st is ~255k at 3.99%.  2nd has a remaining balance ~61k at 8.75%.  Yeah that one hurts.  More than likely we finally have some equity in our home again since the recession hit in 08.   We were already paying 1400 a month on the 2nd prior to paying off the other debt.  Paying off the debt freed up 1100 a month.  My 401k contribution is already at 20k for the year and already completed my Roth IRA contribution for the year.   We have roughly 6 months of living expenses saved up.  I'm in a commission based job but live entirely off salary and direct commissions towards debt, savings, investing, etc.

We are trying to figure out some of these items:

• Should we keep contributing to the 401k after tax and complete roth conversions each pay period


• Stop 401k contributions entirely this year and direct that money towards 2nd mortgage.


• Should we direct new cash flow (1100 a month) to savings to prepare for investment property or pay down 2nd mortgage?

Torn between paying down the 2nd mortgage as fast as possible to further free up cash flow and reduce leverage or take all current cash flow and direct it to savings for future investments.

Any suggestions are definitely welcome.

[ENT Doc]

Need more details about these mortgages.  How long until they'd be paid off naturally?  What were the original terms on the mortgages?  Can you refinance?  To what rate?  Who is living there?  Why do you have TWO mortgages?  Contrary to the generic recommendations regarding mortgages, if you're paying off at least the interest on a mortgage (which is what it's designed to do) you're never suffering from the compounding effect of interest.  Which means all you do when you pay off a mortgage sooner is buy positive cash flows in the future at an earlier date.  If you're anywhere close to the end of the amortization table you're not paying much in interest anyway so I wouldn't plow money into it.  If you're renting this is a no-brainer - let someone else pay it off.

[mobilehomegurl]

If you plan on renting out the home (and buying a new home for your family to live in), find out the rents in the area. See if you're cash flow positive after all expenses are accounted for. If not, you may want to look at trying to get a lower interest rate on the second or trying to pay it off completely. Good luck!

[jasonhines]

1st was already refinanced 5 years ago from 7% to 3.99%.  30 year fixed.  Original balance was 285k.  Still 25 years to go on it.  2nd mortgage is a refi from 12% to 8.75% from 2007 but a 20 year.  The original balance was 110k.  10 years to go on it but we have been paying extra for a long time.  Just paying the minimum we will have it paid off in 7 years.  We have 2 mortgages because I was among the many completely financial illiterate who listened to mortgage brokers and split the mortgage in 2 to avoid PMI and a down payment.  We can't touch the 2nd mortgage rates at all since we are probably 90-95% LTV.  Live and learn.

[adventure]

You haven't gained any/enough equity to refi the 2nd mortgage?

Refi that, yikes. If I were you, I'd crush that 2nd until I could either pay it off, or refi it to a reasonable rate. 9% is insane. Insane.

If you more than likely have some equity, use it. If you have cash, use it. If you've been putting cash in the taxable side of retirement, use it. No way you are getting >9%. If you are, let me know, can I jump in?

GREAT WORK getting the 2nd down to 61. Huge progress. Congrats!!

Now crush the rest. How much could you knock out by 12/31/17???

[wideopenspaces]

I think it's hard to give advice based on what you've shared. How close are you to being done with saving for retirement? How many more years will you work? That 9 percent interest is awful so my gut reaction is to say to pay that off ASAP but if you're behind on retirement that should take priority.

If it makes you feel better, I also took out an 80/20 loan in 2005 because we didn't know any better. We were lucky enough to realize the interest rate was crazy high and took out student loans at 4 percent to pay it off. Then when we sold in 2010 we paid back the student loans with the profit we made. Definitely learned a lesson there . . .

[jasonhines]

Probably 15-20 years away from retirement.  Not entirely sure where we can get the 2nd mortgage down to by the end of year since we don't know where commissions will come in at.  At least can get it down to 55k with current cash flow and down to 50k if we stop 401k contributions for rest of the year.

[G]

jasonhines, you kind of head-faked me with the "next steps after debt free" because those would be: 1) Buy a Macallan 25 (or older), 2) drink Macallan 25 (or older) after a very nice family dinner.

I agree with the above comments that there are too many unknowns from what you presented.  Nice job with e-fund.  Is the rest of your financial house in order (other savings/retirement/taxable/insurance, expenses)?  Are you paying for kids' college and if so, do you have a plan for that?

Generally, I would maximize retirement space first for sure (probably tilting 100% equities til those mortgages are paid off/down).  But would use every other dollar to smash that 2nd mortgage.  Depending on your income/expenses/comfort, you might consider using your e-fund to attack the mortgage.  (What kind of rate could you get with a HELOC if you needed to fund an emergency?)

[MichaelB]

I would attack the 2nd mortgage aggressively. Reduce your emergency fund temporarily to 3 months and put that money towards the 2nd. Then, put the extra $1100 per month toward the 2nd as well, and any extra money you make.

How much is in your emergency fund?

[jfoxcpacfp]

I don't think you're in a place to plan for buying investment property. I wouldn't even call your situation debt-free until that 8.75% mortgage is crushed. Absolutely, you should be putting all extra cash flow to paying it off.

Do you have an older family member with money sitting in the bank earning 1% who would like to earn 3% or even 4%? If so, a family loan (with all official paperwork in place) would be an ideal solution for you.

[The White Coat Investor]

This certainly wasn't the post I was expecting to see given the title!

8.75% guaranteed looks pretty attractive to me. I'd either pay that off with a refinance into a better mortgage or with cash flow to start with. In fact, I probably wouldn't buy a house if that was the rate offered to me. Certainly I would have waited until I had a 20% down payment if that was the alternative.

What's the point of an emergency fund if it isn't to avoid borrowing money at 8.75%? You've already had the emergency. Now use the emergency fund to pay for it. No way would I have a 6 month e-fund while owing money at 8.75%. Maybe 1 month.

https://www.whitecoatinvestor.com/your-debt-emergency/

[jasonhines]

Thanks for all of the advice on making our next strategic move. We have decided to aggressively payoff the 2nd mortgage as quickly as possible using e funds, current cash flow and any unexpected earning such as commissions. We have the potential to pay it off entirely by Dec 2018. We will then focus on saving for rental property. It will amazing to finally get rid of that financial blunder and move on to the next stage.