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Archive for July, 2009

Mid July Update

July 17th, 2009 at 07:32 am

What a month. We have started buying new furniture for the house and some small renovations (crown molding, lights, paint, etc.). It has been pricier then I thought, but we are not going into credit card debt or taking out a home equity loan. We are basically just cash flowing it. All the spare money in the budget that went to car payments, credit cards, and medical bills is going towards the house.

Hopefully in January of next year, I'll be back up to a full work week. This will allow me to have some extra money to pay down the mortgage or invest. So I think I'll just write out my thought process.

From a mathematical side, my payments are set in stone for the next 15 years and I am being charged 4.5% interest. There is no risk of my payments going up. If I were to invest in a risk free invest like cds or money markets, I might get 2% now.

Why am I only looking at cds and money markets? I am basically looking at riskless investments that are highly liquid. Why? My reasoning is that the mortgage is riskless liability. There is no risk of FNMA or the bank calling the loan and the payments are set in the contract, so I am attempting to compare apples to apples.

So, right now I believe I would be better off taking the extra money come January and paying off the mortgage. Now, if I look at the mass amount of debt the Fed is incurring and the monetizing of the debt, I do believe that the future inflation will be higher and the fed will need to raise rates.

If cds rise above 4.5%, I would be better off putting money in cds. Yes, I am not looking at taxes. I believe at the end of the day that taxes would negate themselves. I would save taxes on the mortgage interest but pay of the CD interest.

So, if interest rates on cds climbed to over 4.5%, I would probably switch to investing in cds.

With that said, there is another element of this. Not having a house payment will free up a large amount of cash flow on a monthly basis. And just getting rid of that nut is rather appealing.

So I would probably add a premium to my above statement. In other words, I would probably invest in cds if the interest rate was 5% or higher. Logically, it may not make sense, but I believe that I would have to earn a higher return to justify the higher financial stress I would feel with the mortgage.

Those are my thoughts at this time.

Goals Review - June

July 1st, 2009 at 07:51 am

So I made my first payment on my new mortgage. I was used to putting $480 to principle a month. This month I put $1,376 towards principle. It was actually $50 more then the interest payment. Just think that I am now paying more principle then interest. What a great feeling.

I estimate that 9/2010 I will have caught up with my old amortization schedule, where the principal on the mortgage would be about $330k. So under the old 30 year, I would pay about $9k off the mortgage over 14 months. In the new mortgage, I will be paying off over $21k.

It just nice to see this pay down accelerating, feeling that I am making progress.

As for my other goals. I plan on completing my 401(k) contributions in August. I have about $4,000 in contributions left.

I am getting a little anxious to finally start contributing and setting up 529 plans for my sons. Granted, they are young (4 and 1), but these really need to get started. $18k may be a little too much to bite off this year. But, it's good to have goals that you need to stretch for.

So, if you are following the Dave Ramsey plan, I would be on step 4 planning on attacking step 5.

As for step 6, paying off the mortgage, I keep going back and forth. If I had a 6% 30 year mortgage, I would probably try paying that off quicker. But a 15 year at 4.5%.... I'll have the house paid off by the time the kids hit college, and 4.5% is really more like a 3% loan because the tax write off with the interest. It is getting to the point where you could argue that you could outperform the mortgage for very little risk.

On the other hand, getting rid of that monthly nut does reduce a lot of stress (not that I have a lot of financial stress) and frees up a lot of cash flow. It would allow me to start looking into opportunities that really interest me without regard to income.

Right now, I am kind of stuck where I may not be in my dream job but it does pay some hefty bills. So, when I look for jobs, income is first enjoyment is second.

But for that reason, I am leaning towards paying off the house early. Of course, I still have time. I don't plan on coming to a decision until the 529s are fully funded. Just mulling it over in the old mind.

Don't forget, we are half way through the year. Are you still on top of your goals for 2009? What are you planning to accomplish in the next 6 months?