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 Post subject: Need help with my financial/home confusion!
PostPosted: Wed Jan 02, 2013 4:23 pm 

Joined: Wed Jan 02, 2013 4:01 pm
Posts: 3
I am at a point in my life where I am confused about what to do with my personal finances, investments, and house. I don’t know if I should sit tight in the home I’m in, spend money on it, or spend the money in investments.

Here’s my financial background: I am 30 and married with one 4 month old newborn. Our household income is around 150K a year and steady.

Assets:
Cash: 60K
401K/Retirement Funds: 85K (13% paycheck annually)
Stocks: 14K
Bonds: 5K

Debts:
Home: $220K left on mortgage with PMI @ 4.65% 30yrs. Our house was purchased 6 years ago for 265K but is now worth around 210K – so we are essential 10K underwater.
CC: $0 (about $500 monthly but always paid).
Car Loans: 28K. 3yr loan @ 0.15% for new 2012 SUV (We financed only because of the rate). Also have a well maintained 2007 Nissan. We expect to drive both for years to come (until they don’t run)
Student Loans: None

I am seeking advice on what to do with the 60K in cash we have saved up. We recently started a family and eventually would like to move out of our current house or finish our basement. But given we are currently “under-water” we are confused if we should sell it as-is, finish the basement and sell it, finish the basement and stay in it for a while, refinance our current mortgage and possibly go from a 30 to a 15 year mortgage, refinance with a cash payment to get rid of PMI, or do nothing on the house and invest the 60K? Thank you for your help it is greatly appreciated by a family.


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 Post subject: Re: Need help with my financial/home confusion!
PostPosted: Fri Jan 04, 2013 8:41 pm 

Joined: Wed Jan 02, 2013 4:01 pm
Posts: 3
Bumping my question, and also adding to it. Given that I am 30 and have decided (I know I'm late) to start contributing to a Roth IRA, what would people recommend between the S&P 500 and Total Stock Market Index? I am shifting some of my 401K contributions to the Roth IRA and after researching have decided to go with Vanguard.

From what I read, long-term there probably won't be much of a difference in gains between the two funds but it looks like most people seem to lean toward the TSMI. I appreciate any answers to my above questions and this additional one.
-Thanks


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 Post subject: Re: Need help with my financial/home confusion!
PostPosted: Fri Jan 04, 2013 10:41 pm 

Joined: Sat Sep 22, 2012 5:19 pm
Posts: 5
Hello FTT and congrats on the new addition to your family!

I will preface my post with the fact that I am 24 and not yet a homeowner, but I have been doing quite a bit of research the past 6 months or so on GRS and other forums. I plan on buying a home in the near future and personal finance has struck an interest with me recently.

I would use just over 40K to get the LTV of your mortgage below 80% so you can refinance to take advantage of the low interest rates available as well as get rid of that pesky PMI. This should reduce your monthly payments and with the extra cash flow you could help fund that Roth IRA, prepay the principal on your mortgage or just stuff it away in an emergency fund.

With the remaining 20K I would leave be as cash in a money market or similar liquid account that is low risk to use as an emergency fund. The golden rule I have seen is 3-6 months of bare bones expenses.

I wouldn't worry too much about that car loan since it sounds like you're going to hold onto the vehicle for a while.

Good luck, you have come to the right place!


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 Post subject: Re: Need help with my financial/home confusion!
PostPosted: Sun Jan 06, 2013 9:39 am 
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Joined: Sun Aug 10, 2008 2:50 pm
Posts: 154
Location: South Florida
I agree with jesselne. Although you can technically get rid of PMI without refinancing (contact your current lender to inquire about their procedures) upon paying down sufficient principal, it may just make more sense to refinance if the terms are advantageous to do so (i.e. lower interest rate versus closing costs).

Moving (particularly with selling a house) is indeed expensive. It's not so bad if you don't actually sell and instead end up renting out your old place ... but that depends on whether you're up for the job of being a landlord. Otherwise staying put is typically wise for your finances ... unless perhaps you find a great deal elsewhere that would cost significantly less than what you're paying now.

If you're investing in only one fund, I would probably go with total market over S&P 500 as I am a strong proponent of diversification ... and, with the former, you get more exposure. You don't have to limit yourself to one fund; however, I understand that most people don't have the time or inclination to do the necessary research to plan out an asset allocation strategy ... plus the choices can seem overwhelming. At least with Vanguard you will have low expense ratios across the board so I'm not too concerned there ... although you should be aware that they exist and that there are ways to mitigate those fees (such as upgrading to Admiral shares once you reach a certain balance threshold within each fund). When you're just starting out investing, the main point is that you are doing it ... and you should heartily congratulate yourself. When the dollars climb into maybe the five-digit mark in your Roth IRA, that might prompt you to pay more attention to adding other funds into the mix. Also I encourage you to look at the broad spectrum of your investments. You already have money in your employer-sponsored retirement plan ... so step back and look at the whole picture by incorporating that and your Roth IRA as a single overall investment portfolio. For example: if you're already heavily invested in a U.S. large-cap or S&P 500 style fund in your employer-sponsored retirement plan, I would tell you to avoid that type of fund in your Roth IRA because you don't want to put all your eggs in one basket. A lot of experts recommend spreading out between domestic equities (U.S. stocks such as S&P 500), international equities (foreign stocks), and bonds. That's just a basic outline and you'll hear a bunch of different opinions on the matter.


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 Post subject: Re: Need help with my financial/home confusion!
PostPosted: Tue Jan 08, 2013 12:31 pm 

Joined: Tue Jan 08, 2013 12:09 pm
Posts: 9
I really like what Jesselne said.

Why not pay down on the house? Even with investments - it's highly unlikely right now that you'll get above 4.65% in the market.

So you could knock out some of the debt and save on interest.


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 Post subject: Re: Need help with my financial/home confusion!
PostPosted: Tue Jan 08, 2013 4:32 pm 
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Joined: Wed Sep 23, 2009 9:01 am
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If you will be moving in a few years there is no point in getting a 15 year mortgage. My first thought was to suggest you pay down the principal to get rid of PMI. Refinancing is probably a good option even if you have to bring a good chunk of your cash to the table to pay down to eliminate PMI. PMI is just plain evil! Your interest rate is a little high and you can probably do better but, also given that you will be moving, I would not pay any points or fees if you can avoid it.


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 Post subject: Re: Need help with my financial/home confusion!
PostPosted: Tue Jan 08, 2013 4:58 pm 

Joined: Wed Nov 07, 2012 6:21 am
Posts: 149
Personally, I would recommend switching from bonds to high dividend yielding utilities. Utilities are known to be safe with low risk.

If you use "Value Line" (http://www.valueline.com/), you can find a whole bunch of utility stocks with a safety rating of "1". Take the top 10 dividend yielding of these companies and invest in them. This might have a slightly negative impact on the yield you are experiencing with bonds, but the upside is that you can gain value through the stock prices going up (and they do tend to go up). It's a better overall investment than bonds for this reason, while maintaining safety.

Secondly, like others have said here, you have to ask what you want. How much does the PMI cost? And what could you potentially be making on the 60k? Also, because it is someone else's decision whether the PMI is still necessary, you would need to get a commitment from them saying that it would be removed if the loan was paid down before considering that option seriously.

If you want, I could make you a portfolio based on value investing. I have another thread here where the one portfolio that I have made for this forum is currently up against VTI, which many here believe in far more than my ability to make a portfolio. You can check out my forum, prostockpicks.proboards.com, for more examples. I'll make you a portfolio for free if you want.


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 Post subject: Re: Need help with my financial/home confusion!
PostPosted: Wed Jan 09, 2013 1:26 pm 

Joined: Wed Jan 02, 2013 4:01 pm
Posts: 3
These are all great suggestions. Thank you all for the great information, I will try and summarize my answer into one further follow-up.

My current 30 yr mtg is 4.65%, and refinancing but staying with a 30 yr would only get me down to maybe 3.75% on a good day. Going to the 15 would get me down to 2.75%. So with that in mind, I don't see refinancing and staying with a 30 year as a real option. I am now starting to think it makes most sense to just stick to my current mortgage and make extra payments to pay down faster and get rid of PMI.

For my investments question, after reading all your posts I went and looked more closely at my 401K (actually 2 - I haven't rolled over an old 401K yet) and they are heavily invested into the S&P 500. This leaves me to believe it does make more sense to put my Roth IRA money into the Total Stock Market Index.

Here's what I'm thinking my strategy will be for 2013 with the 60K in cash I currently have - hopefully this seems like a good option based on all the comments.
1) Put 5K into my 2012 Roth IRA / vtsmx. At some point put another 6.5K into it for 2013
2) Start making $300/$400 extra payments each month toward my mortgage to pay it down faster/build equity faster
3) Finish the basement in my house with extra 20-30K (This would give me an extra 4th bedroom and bring the house sq/ft to about 2400. We just had a baby so we could use the extra room).
4) Slowly invest any extra cash leftover from the above into individual stocks/mutual funds while still providing a good cushion for the future.

Would it be wise to make a lump sum payment on my mortgage to get it below the PMI amount needed? I assume I can do this? Thanks again!


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