Mortgage Refinance/ Cash Out Opinions

In reply to Driven5 :

The banking cartel loves and thanks you. 

Mortgage.

Car payment.

HELOC

This other large debt thing.

No, no red flags there at all.

Dr. Hess said:

In reply to Driven5 :

The banking cartel loves and thanks you. 

 

Mortgage.

Car payment.

HELOC

This other large debt thing.

 

No, no red flags there at all.

 

Not when they're saving at least $31k a year to retirement, and an additional 10% of take home there aren't any red flags. Debt isn't a bad thing any more than a hammer is a bad thing. It is a tool. VCH is using it well. 

Robbie said:

mtn said:

Dr. Hess said:

In reply to volvoclearinghouse :

You still want to party instead of getting your debt problem under control.  Take a year or two off of the 401K/ROTH/+10%, throw that at your debt, then you'll have more to catch up.  Or do whatever you want and have fun.  It's your future.  Several of us here have told you already how freeing not having a mortgage around your neck is. 

His debt problem is under control though, that is what you're apparently missing here. Having debt is not necessarily a problem. For someone like VCH, from what he has told us, it most certainly is NOT a problem. In what world does it make sense to eliminate debt at [assuming] 4% at th expense of earnings in the 401k of 7%?

Bad math there, Doc.

 

EDIT: I forgot to mention the tax advantages of the retirement accounts compared to the mortgage, at least for most people after the last tax law was implemented.

Actually, the tax thing is a bit of a double edged sword in my mind. On one hand yes the reduced taxable income due to paying into a 401k gives a more likely tax advantage than any itemized deductions. And really putting money in your 401k is the double whammy because you get both the reduction in taxable base AND you pay more interest because you are paying off your home more slowly. 

BUT! It is very possible to get so much in your 401k (if you are maxing it every year, for example) that your distributions will put you into a pretty high tax bracket in retirement. So they will get taxed on the back end. 

Paying off your house, however, means you pay the taxes now and don't have as much distributions later to be taxed. So in essence paying your mortgage early is sort of like investing in a Roth (with guaranteed return, less risk/reward for growth, and with no penalties for taking the money out early). And many many many people wish they could put more toward their Roth's...

Edit for an example to illustrate my point:

Say you make 80k and have $12k annually to save. If you worked from 1980 to 2020, and put all 12k into a 401k in the sp500, you'd have 5.8M. You would have saved $2,640 on income taxes each year (assuming current 22% rate), for a total savings of $106k, not bad. But in your first year of retirement, your required minimum distribution will be $212k (5.8m/27.4), which means you will pay $35k or so MORE in income tax than your regular $18k on your $80k salary. So in 3-4 years of retirement the $100k tax savings is erased.

So that person would do well NOT to put all into a 401k, and rather split between 401k and other post tax investments, real estate included.

 A very good point - I have always saved to my 401k using post tax (Roth), which I often fail to realize is not offered to everyone. 

Robbie said:

Edit for an example to illustrate my point:

Say you make 80k and have $12k annually to save. If you worked from 1980 to 2020, and put all 12k into a 401k in the sp500, you'd have 5.8M. You would have saved $2,640 on income taxes each year (assuming current 22% rate), for a total savings of $106k, not bad. But in your first year of retirement, your required minimum distribution will be $212k (5.8m/27.4), which means you will pay $35k or so MORE in income tax than your regular $18k on your $80k salary. So in 3-4 years of retirement the $100k tax savings is erased.

So that person would do well NOT to put all into a 401k, and rather split between 401k and other post tax investments, real estate included.

While you may be right in needing to be watching out for RMD's and pre-tax account accumulation, it's not nearly as dire as you're making it out to be. Let's make your example a little more accurate by back calculating for a 3% wage increase per year, starting at 80k in 2020, and maintaining the same relative 15% percent of retirement contributions each year. While neither of those assumptions are likely to be true, as both likely started even lower in the real world, it's at least getting us into a reasonable ballpark. We'll make the contributions all pre-tax, even though if they were smart savers $6k of that should have been Roth for as long as it has been available. That means starting with an (overstated) income of $24.5k and a $3.7k pre-tax contribution in 1980.  It looks like you were using a ~10% ROI for the S&P, so using that you're only looking at ~$2.4M going into 2020. So if their RMD kicks in at this point (age 72 w/ RMD factor of 25.6) we're talking ~$95k taxable income. While you're correct that the annual pre-tax savings for those 40 years of contributions was the equivalent of $2,640 in 2020 dollars, this persons annual taxes now go up by ~$3,470 each year on their additional $15k of income, not $35k on an extra $132k. 

Remember that this is also all without accounting for job growth over the years getting up to the current wage, nor having taken any measures at all to reduce the taxable retirement income. Is this still an example of why it's good to pay attention and balance pre-tax with post-tax tax-advantaged accounts? Absolutely! But this is really an example that's isn't much above the break even point, and would have just as likely been near our below the threshold in reality.  As such it wouldn't take much tweaking for it to also show that it's very possible to lose out on money by putting 'too much' of the retirement contributions away in after-tax type investments as well.

Dr. Hess said:

In reply to Driven5 :

The banking cartel loves and thanks you. 

 

Mortgage.

Car payment.

HELOC

This other large debt thing.

 

No, no red flags there at all.

 

Sorry if I wasn't clear. Our debts are as follows;

Mortgage on primary residence (based on current appraisal, currently about 40 pct LTV)

Mortgage on rental house (currently at an LTV around 70 pct) + Heloc on that, total monthly payments less than monthly rental income and expenses so + cash flow

Solar loan @ 2.9 pct -EDIT: the monthly payment on this cancels out what our electric bill used to be, and in 9 years will be paid off so free electricity then.

Car loan @ 2.9 pct

That's it. No credit cards, no student loan, heloc on current house is at zero balance.

Enough in retirement savings I could pay all of those loans off and have money left over.

I appreciate your fiscal conservatism and do not take it personally. However, one other aspect was we bought our current house on short sale significantly under market value, knowing it would need work, and we've been living in it for 6 years while slowly fixing it up. We'd like to accelerate the pace of that fix up (which will also help the market value of the house should we need to sell) a bit. We've lived at times with no heat, no water, etc while fixing stuff. It's not like we bought a 4000 sq ft mansion and want to add on a Florida room.

In reply to Dr. Hess :

You are coming off as an ass. If I'm saying that......

In reply to volvoclearinghouse :

Your initial information was rather vague.  You got the best rather vague guidance based on that.  More information will get a better solution.

So, you don't really have a "house," you have a "Work In Progress house."  OK.  That's different.  Leave the rental house alone if it's cash flow positive.  Solar loan, it seems to be neutral, leave it.  Car loan, you shouldn't do that, although 2.9% is not 18.9% like my step son had.  On the primary, how much do you need to get it to a "house" and not a "WIP?"  How much do you have in this "+10%" retirement area that is not locked in by the Feds (i.e., not a 401k, IRA, etc.)?  How about if you took that accessible funds, stopped contributing to the 401k unless there's a match (thing of the past) and IRA, take all that plus the money saved from a refi and use that to fix up your primary?  How short would you be?  Not for the Garage-ma-hall, but nice and livable?  How much extra for the garage, "phase 1," being a slab and structure?  I know I'm building one now and it's looking like about 30 large for a 4 car.  At that point, very carefully HELOC the primary and BUY A NEW HARLEY!!!  Sorry, take the HELOC and if you have to, use it to fund what you need to get the WIP to a Home, then pay the HELOC off as fast as you can with funds not going to the retirement funds, then go back to funding the retirement funds when you're debt free except the home. 

All the rest of spreadsheet games with percentages, tax brackets, assumed ROI, etc., is just "how many angels can dance on the head of a pin."  Real world isn't reflected in that.  Where's your "I have a X% chance of losing my job each year, giving a Y period with no income...."  Too many assumptions to make and you still won't get what "life" can throw at you. 

I'm conservative with Doc.  What if you got sick and couldn't work? 
 

What if your job changed or went away?

Too much Murphy in life.  

If I got sick and couldn't work, I would rather have a big pile of cash and a mortgage than no mortgage and no cash. Paying off your house carries risks just like anything in life. Different risks, but still risks.

I just re-fied my house after only living there 3yrs. Cashed out about $14k and still dropped my payment by $35/month. Used $3,500 of that to upgrade my wife's car to one 6yrs newer and 100k less miles. The rest is currently sitting in my bank account waiting to be used shortly in some business investments with my buddy and my brother, which will increase my annual earnings. My only other debt is $4k that I owe on my truck at 2.5%. I'd say refi to a 20yr and only borrow up to the amount needed to accelerate the home repairs and maybe enough to knock out the rental HELOC depending on the rates, so long as your new mortgage payment does not exceed the current monthly payment.

Robbie said:

Actually, the tax thing is a bit of a double edged sword in my mind. On one hand yes the reduced taxable income due to paying into a 401k gives a more likely tax advantage than any itemized deductions. And really putting money in your 401k is the double whammy because you get both the reduction in taxable base AND you pay more interest because you are paying off your home more slowly. 

BUT! It is very possible to get so much in your 401k (if you are maxing it every year, for example) that your distributions will put you into a pretty high tax bracket in retirement. So they will get taxed on the back end. 

Paying off your house, however, means you pay the taxes now and don't have as much distributions later to be taxed. So in essence paying your mortgage early is sort of like investing in a Roth (with guaranteed return, less risk/reward for growth, and with no penalties for taking the money out early). And many many many people wish they could put more toward their Roth's...

Edit for an example to illustrate my point:

Say you make 80k and have $12k annually to save. If you worked from 1980 to 2020, and put all 12k into a 401k in the sp500, you'd have 5.8M. You would have saved $2,640 on income taxes each year (assuming current 22% rate), for a total savings of $106k, not bad. But in your first year of retirement, your required minimum distribution will be $212k (5.8m/27.4), which means you will pay $35k or so MORE in income tax than your regular $18k on your $80k salary. So in 3-4 years of retirement the $100k tax savings is erased.

So that person would do well NOT to put all into a 401k, and rather split between 401k and other post tax investments, real estate included.

Seems like a Roth conversion (or a ladder done over several years) would give this theoretical investor more choices in how they're invested, and allow them to completely avoid RMDs at the same time? You may not want all of your money sitting in an employer's 401k anyway. Roll that money into a Roth IRA, invest it into whatever you want, and skip the RMDs.

Sorry to be somewhat vague up front, I was raised to not be too open about your own financial circumstances.  So I've intentionally left out exact numbers.  

There's two possible explanations for being cynical/ critical of my plans, based on my experience:

1) You did it a certain way, that worked for you, so clearly you are right and need to validate your own opinion.

2) Everyone on the internet is mortgaged up the hilt and buying 60,000 dollar SUVs and drinking 7 latte's a week and has approximately $2700 saved for retirement, so they need the boot in the ass approach.

In theory, there's a third explanation, that is, you're secretly jealous of others and wish you'd done things differently and you don't want them to do better, but that's a fairly cynical view so I prefer not to espouse it.

My plan for the garage is exactly what Dr. Hess mentioned- a slab, a decent building, nothing fancy.  The main goal is to have a place I can set up my lift and work safely while not crawling around on the ground constantly.  Figure about a 20 x 30 building, that I can expand later as finances allow.  As for the WIP house, we need siding NOW, and have plans to renovate the kitchen and bath as they're fairly dilapidated, but at the moment we have a 5 year old and a soon-to-be 3 year old, so we'll hold off on the home reno until they're a bit older and better able to cope with the main living area being torn up.  We can live with it as-is for a few more years.  

Mrs. VCH and I sat down last night and discussed all this and we're in agreement.  As it turns out, If we take out enough cash from the refi to a) pay off the current loan, b) pay off the rental HELOC, and c) do Phase 1 of the garage, the siding, and finish the in-law suite for our parents, the calculated monthly payment on the new 20 year loan at the lower rate will be within a few dollars of the current monthly payment on the current loan and the rental HELOC.  So, that's a win (lower rate) win (less interest paid in total) win (shorter term loan) neutral (same cash flow).   I think that's the plan.

As for the car loan, in 2018 (at 41 years old) I bought my first ever new car, after having driven nothing but crappy beaters my entire life.  I commute 100 miles a day, and, as it turns out, the new daily makes a fantastic family car for short around-town trips.  It gets 37 mpg, has a warranty, and hasn't required anything of me so far but oil changes, tire rotations, an air filter, and one wheel bearing (covered under warranty).  It was also $16,000, a fairly minimal sum for a 4 door hatchback.  So, no, not going back to driving old beaters daily.  

The 401k and Roth are "locked down", as you say, but the 10% is mine to use as I wish.  We have enough in non-retirement to pay our household expenses for a year, should we need to.  My employer does match on the 401k (up to 3%) and the 10% is a company stock program where I buy stock at a discount, so that's rather beneficial to keep doing as well.  As for job security, I have a Master's in Mechanical Engineering and live in an area where there's more employers in my exact field than I could count.  I'm also currently taking program management classes to expand my skill set beyond engineering.  

In reply to volvoclearinghouse :

I'm in a similar position myself ( well,  except for the second loan ) while the benefit was in the 15 year loan and the payment would be manageable, my experience said these are the years where life happens.  Like you my finances are comfortably set, ( more so now with my wife's new high paying job)  but flexibility becomes more important than saving every last dime.  
Life  happens,   I have no way of knowing if it will be a health matter, a family need, future change.  Unexpected bill, Etc.  but right now I can make a very comfortable payment and add a lot to reduce the principle ( every dime past the required payment goes to reduction of the principle)  or deal with other matters without the need for borrowing. 
  The reality is a very large percentage of the population cannot come up with $400 without borrowing or failing to pay a bill.  
 

This thread is making me realize how bad my car habit and divorce/layoffs in my 30s has wrecked any real chance at a retirement plan beyond, "Die at my desk."

In reply to z31maniac :

It's like planting a tree. The best time to do it was 20 years ago. But starting today is better than waiting until tomorrow.

Somebody in your career could probably make up a lot of ground relatively quickly with controlled spending and aggressive saving rates.

Apologies to the OP for sidetracking. It seems like you've got a reasonable plan worked out.

In reply to volvoclearinghouse :

I don't know what you should do. I have some of the same mental dilemmas, first world problems are tough. 

In reply to z31maniac :

I don't know... are you happy?  There is more to life than money.  While money can make misery more tolerable at times, it doesn't make it go away.

In reply to STM317 and Driven5:

Both valid arguments. If the salary was more than 80k and the savings closer to the 401k limits, the problem gets worse. Here's my question - capital gains is a 15% tax. 

Doing a Roth conversion or ladder means that you are paying more than 15% (if you make 80k+ in that year), and if you are forced to take out more than 80k in RMD then you are paying more than 15% on that money.

So why don't you just use regular post tax investment accounts after you are pretty certain you have 80k/year in retirement from your 401k? The idea is to try to stay under the 22% bracket as much as possible.

In reply to z31maniac :

Don't feel alone. Most people approach retirement with little or nothing saved. We feel guilty about choices and living style, but the truth is all too often it's just stuff. 
I've a very close friend ( Navy buddy, best man at my weddings, I was best man at his) who was frugal all his life. Stuffing his 401 and IRA with the max every year.  His wife got breast  cancer and it drained every cent and then he borrowed against his home.  

While it is never too late and if your past a certain age  you can put extra in those accounts.  Recovery from issues that happened and reduced income in your last years before retirement often prevent you from retiring as you planned.  
 

z31maniac said:

This thread is making me realize how bad my car habit and divorce/layoffs in my 30s has wrecked any real chance at a retirement plan beyond, "Die at my desk."

While I can't speak to the divorce or layoffs, my car habit in my 20's and 30's definitely put a dent in my savings.  At one point I had close to 40 vehicles on my property.  In my life I've bought over 100.  Now, most of those were <$1000, bought as "projects" or "for parts", but still. that was at least $50,000 essentially wasted on a frivolous car hobby.  Not to mention the costs of buying, transporting, and keeping them (even though most never got registered).  

Having a partner who understands my car hobby but is also a check on me going out and just buying whatever I fancy has really helped me focus my energies.  Having kids has helped me budget both time and money.  I'm down under 20 cars for the first time in over 12 years and plan on keeping that pretty stable, or shrinking it a bit more.  Of those 20, around half are legitimate parts cars (Volvo 122s) I'd have no qualms with parting with should someone else need them.  

Point is, everyone berkeleys up somewhere.  And as others have said, life happens.  People aren't defined by their mistakes or bad fortune but by how they respond to them.  

In reply to Robbie :

A Roth account still has tax advantages over a taxable account. Withdrawing contributions is never taxed, and after age 59.5 earnings aren't taxed either assuming the account has been active for 5 years or more. Earnings in a taxable account would be subject to LTCG anytime they're withdrawn as far as I know.

You might also want to do a Roth conversion after leaving a company if you can get better investment options and/or lower fees on your own than what's offered in the company plan.

I'd also make sure to contribute up to the maximum company match (if any) no matter what the balance of the 401k is. Something like $3-5k/yr in free money earning interest on your behalf goes a long way towards offsetting any tax difference between paying 22% or more income tax on a Roth conversion and the 15% LTCG rate. And it does that while decreasing your taxable income.

In reply to Robbie :

Roth: Taxed once on contributions at ordinary income tax rate. Growth is tax free.

Taxable Account: Taxed twice. Once on contributions at ordinary income tax rate, just like Roth, and again on growth at long term capital gains tax rate.

Thus even paying a higher tax rate on the contributions to a Roth, it still comes out ahead after all is said and done.

In reply to Driven5 :

I agree with you 100%. Issues arise with that logic if you need the money before age 60. I've spent some considerable time a while back mapping all this out, I'll post it up in a separate thread to get everyone's feedback to make sure I have my understanding correct.

In reply to Robbie :

Yes, but a Roth conversion more than 5 years old is treated like a contribution whose initial funds can be pulled at any time there after without penalty, while still avoiding the secondary taxation that afflicts taxable accounts.

volvoclearinghouse said:

Mrs. VCH and I sat down last night and discussed all this and we're in agreement.

That's all that matters. Your finances are your business. I understand why you want to bounce it around here, but realistically you are in a pretty solid place, and it's working for you. You have a plan where everyone wins a little, gets what will make them happier in life, works for your budget, and you both discussed it like adults, formed a plan, and agree on it. 
 

it's 100% irrelevant if it is what anyone else would do in the same situation.