Update:High interest ARM extra payment vs. 401K...yes another one

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INTJVirgo
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Update:High interest ARM extra payment vs. 401K...yes another one

Post by INTJVirgo » Mon Jun 10, 2019 9:26 am

Newbie here...I know this topic has been discussed ad nauseum but any help would be appreciated

14 years into a 30 year ARM 5.25% balance 91K
Age 44
Taxable 75K Roth 85K IRA/401K 97K
Cash Emergency Fund: 3 months (don’t like to keep much in cash, will tap Roth or Taxable if necessary)
Salary 50K

Currently: Maxing out HSA, Maxing out Roth, on track to contribute about 10K to 401K

I have an extra $230/mo. in my budget. Since my mortgage interest rate is on the high end (at least from my perspective) I have been using that to make extra principal payments each month. Would I be better off putting that surplus in my 401k? (no match, we have a pension)

Update: I've been approved for a 10-year fixed 3.5% refinance from a local credit union! Thanks to everyone for their suggestions and a little kick in the butt to make a much needed change!
Last edited by INTJVirgo on Wed Jun 12, 2019 8:44 am, edited 2 times in total.

Silk McCue
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by Silk McCue » Mon Jun 10, 2019 10:50 am

Welcome to Bogleheads!

My recommendation is to refinance into a fixed 10 (ideal) or 15 year loan. There are very favorable rates out there. You just need to research the best options. Make certain to look at Third Federal.

Cheers

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ruralavalon
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by ruralavalon » Mon Jun 10, 2019 2:35 pm

Welcome to the forum :) .
INTJVirgo wrote:
Mon Jun 10, 2019 9:26 am
Newbie here...I know this topic has been discussed ad nauseum but any help would be appreciated

14 years into a 30 year ARM 5.25% balance 91K
Age 44
Taxable 75K Roth 85K IRA/401K 97K
Cash Emergency Fund: 3 months (don’t like to keep much in cash, will tap Roth or Taxable if necessary)
Salary 50K

Currently: Maxing out HSA, Maxing out Roth, on track to contribute about 10K to 401K

I have an extra $230/mo. in my budget. Since my mortgage interest rate is on the high end (at least from my perspective) I have been using that to make extra principal payments each month. Would I be better off putting that surplus in my 401k? (no match, we have a pension)
First see if you can refinance to a fixed rate mortgage at a more reasonable interest rate.

If not put the extra $230 per month on the mortgage principal.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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grabiner
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by grabiner » Mon Jun 10, 2019 6:43 pm

Paying down that loan is a risk-free 5.25% return, and it is a short-term return because the loan refinances itself every year. That is a much better return than you can earn in your 401(k) or IRA. Therefore, I would recommend making extra payments against that loan if you can't refinance it, in preference to unmatched 401(k) or IRA contributions.

And in your situation, I would suggest selling the taxable account to pay off the mortgage (unless you are saving it for some future purchase such as a car). Once the mortgage is gone, the money which was going to the mortgage payments can be turned into extra 401(k) contributions, so that you will get years of tax-deferred growth. In addition, you won't need as much of an emergency fund with one less bill to pay.
Wiki David Grabiner

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INTJVirgo
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by INTJVirgo » Mon Jun 10, 2019 7:19 pm

Thanks everyone for the replies. You have confirmed what I've been thinking about trying to refinance. It sounds like 5.25% has reached your threshold for not taking additional advantage of my 401K/investing. I am curious about the suggestion to sell my taxable investments. I still wouldn't have enough to pay off my mortgage and I'm not sure right now would be the right time to sell. Any other thoughts on that?

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grabiner
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by grabiner » Mon Jun 10, 2019 7:37 pm

INTJVirgo wrote:
Mon Jun 10, 2019 7:19 pm
Thanks everyone for the replies. You have confirmed what I've been thinking about trying to refinance. It sounds like 5.25% has reached your threshold for not taking additional advantage of my 401K/investing. I am curious about the suggestion to sell my taxable investments. I still wouldn't have enough to pay off my mortgage and I'm not sure right now would be the right time to sell. Any other thoughts on that?
If you sell your taxable stocks, you can keep your stock market exposure by moving money in your IRA or 401(k) from bonds to stock. This deals with the issue of changing your asset allocation.

However, if you will owe capital-gains tax, that may not be worth doing, as you have to add the tax cost. In that case, only sell the taxable stocks with relatively small gain.

Selling your entire taxable account would not quite pay off the mortgage, but adding that and both regular and extra payments would clear the mortgage in about a year, which would give essentially the same benefit (except that you wait a year to be able to reduce your emergency fund.)
Wiki David Grabiner

MotoTrojan
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by MotoTrojan » Mon Jun 10, 2019 7:40 pm

INTJVirgo wrote:
Mon Jun 10, 2019 7:19 pm
Thanks everyone for the replies. You have confirmed what I've been thinking about trying to refinance. It sounds like 5.25% has reached your threshold for not taking additional advantage of my 401K/investing. I am curious about the suggestion to sell my taxable investments. I still wouldn't have enough to pay off my mortgage and I'm not sure right now would be the right time to sell. Any other thoughts on that?
Capital gains tax is a consideration but that aside, paying anything towards this mortgage is an after-tax 5.25% risk-free return. 5.25% after-tax is an incredible return alone, so it would be worth it.

Having said all that, I would also/instead just refinance to a 3-4% fixed loan. Any fees should be quickly made up for.

bradpevans
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by bradpevans » Mon Jun 10, 2019 7:43 pm

grabiner wrote:
Mon Jun 10, 2019 6:43 pm
Paying down that loan is a risk-free 5.25% return, and it is a short-term return because the loan refinances itself every year. That is a much better return than you can earn in your 401(k) or IRA.
<snip>
While I fully agree that the mortgage is a guaranteed return, I'm not sure I agree with the next part re the return in your 401K. The 401 does carry risk of course

mortfree
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by mortfree » Mon Jun 10, 2019 8:08 pm

Taxable: 75k
Retirement: 182k

Home Equity: x - 91k?

I would refinance to a 10 or 15-year mortgage.

Depending on that last part and how your current net worth breaks down, I would guess you should increase the 401k contributions.

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whodidntante
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by whodidntante » Mon Jun 10, 2019 8:25 pm

Your rate is scandalous. Today is Monday. I would check mortgage rates and closing costs at every local credit union tomorrow, and check online lenders and national banks tomorrow night. Then I would apply for a new loan on Wednesday.

Then max your 401k. :happy

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Watty
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by Watty » Mon Jun 10, 2019 8:40 pm

It sounds like your current mortage payment is around $750 a month and you have an additional $230 a month that you could use to pay on the mortage. Combined that is $980 a month.

There are all sorts of options about how to approach this and there are lots of ways to improve your situation. Here is one that has not been mentioned that you might consider and it may or may not be something you would want to do.

1) Contact your lender and ask if they will "recast your mortage"(Google this) if you make a large prepayment. They are not required to do this but they often will for a processing fee of a few hundred dollars. The way this works is that if you pay down the balance by 66%(or whatever) your required monthly mortage payment is reduced by the same percentage. For example a $750 payment would go down to to $250. The interest rate and length of the loan stay the same. This is different than just making a prepayment which would not change your required mortage payment each month. Having the lower monthly payment would be important in case of a layoff or something like that.

2) If the lender will do the recast then you could use the funds in your taxable account to pay down the mortage by $60K. This would leave you $15K in the taxable accounts for emergencies and a loan balance of $31k. If you are able to keep paying $980 a month you could have that paid off in less than three years. If you are not able to refinance the mortage at a good rate you would still be paying 5.25% but that would only be on $31K for a few years.

There is nothing magic about that but it would be something to consider

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INTJVirgo
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by INTJVirgo » Mon Jun 10, 2019 8:42 pm

@mortfree, my home is worth around 225K, if it matters I'm not planning on moving. I'm definitely going to look at some refinancing rates. It sounds like the best option as I don't want to pay capital gains taxes and still not have enough to pay it off right away.
Last edited by INTJVirgo on Mon Jun 10, 2019 8:56 pm, edited 1 time in total.

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INTJVirgo
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by INTJVirgo » Mon Jun 10, 2019 8:48 pm

Watty wrote:
Mon Jun 10, 2019 8:40 pm
It sounds like your current mortage payment is around $750 a month and you have an additional $230 a month that you could use to pay on the mortage. Combined that is $980 a month.

There are all sorts of options about how to approach this and there are lots of ways to improve your situation. Here is one that has not been mentioned that you might consider and it may or may not be something you would want to do.

1) Contact your lender and ask if they will "recast your mortage"(Google this) if you make a large prepayment. They are not required to do this but they often will for a processing fee of a few hundred dollars. The way this works is that if you pay down the balance by 66%(or whatever) your required monthly mortage payment is reduced by the same percentage. For example a $750 payment would go down to to $250. The interest rate and length of the loan stay the same. This is different than just making a prepayment which would not change your required mortage payment each month. Having the lower monthly payment would be important in case of a layoff or something like that.

2) If the lender will do the recast then you could use the funds in your taxable account to pay down the mortage by $60K. This would leave you $15K in the taxable accounts for emergencies and a loan balance of $31k. If you are able to keep paying $980 a month you could have that paid off in less than three years. If you are not able to refinance the mortage at a good rate you would still be paying 5.25% but that would only be on $31K for a few years.

There is nothing magic about that but it would be something to consider
Yes my payment is $737/mo. Thanks for this idea I will look into this as well.

mortfree
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by mortfree » Mon Jun 10, 2019 8:59 pm

INTJVirgo wrote:
Mon Jun 10, 2019 8:42 pm
mortfree my home is worth around 225K, if it matters I'm not planning on moving. I'm definitely going to look at some refinancing rates. It sounds like the best option as I don't want to pay capital gains taxes and still not have enough to pay it off right away.
So your net worth is $391000 on paper.

Taxable represents 19%
Retirement represents 47%
House represents 34%

You are not house rich which is good.

For perspective on the refi my credit union is offering:
15y for 3.375%
10y for 3.25%

For my old house, Back in 2013 I did a refinance on 94k. Someone pointed out there could be issues with your sub-100k mortgage, which could be true.
Last edited by mortfree on Mon Jun 10, 2019 9:03 pm, edited 1 time in total.

MotoTrojan
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by MotoTrojan » Mon Jun 10, 2019 9:00 pm

bradpevans wrote:
Mon Jun 10, 2019 7:43 pm
grabiner wrote:
Mon Jun 10, 2019 6:43 pm
Paying down that loan is a risk-free 5.25% return, and it is a short-term return because the loan refinances itself every year. That is a much better return than you can earn in your 401(k) or IRA.
<snip>
While I fully agree that the mortgage is a guaranteed return, I'm not sure I agree with the next part re the return in your 401K. The 401 does carry risk of course
If you’re holding bonds in your 401k the statement holds.

icefr
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by icefr » Mon Jun 10, 2019 9:00 pm

Refinancing would be ideal, but it might be tricky to find a lender that will do so at a reasonable cost when your mortgage balance is under $100,000. Worth a try if you can find one though.

I wouldn’t pay a fee to recast this mortgage since that essentially happens once a year when the rate adjusts anyway.

Topic Author
INTJVirgo
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by INTJVirgo » Mon Jun 10, 2019 9:19 pm

I wasn't aware of the potential issue with refinancing a balance under 100K. I will call around and see what can be done. I hold about 5% bonds in my 401K but around 10% in bonds overall.

nolesrule
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by nolesrule » Tue Jun 11, 2019 4:31 pm

It might be worth looking into a cash-out refinance to lower the rate if the balance is too low. And then put the money back into the new mortgage.

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INTJVirgo
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by INTJVirgo » Wed Jun 12, 2019 8:22 am

Update: I've been approved for a 10-year fixed 3.5% refinance from a local credit union! Thanks to everyone for their suggestions and a little kick in the butt to make a much needed change!

Silk McCue
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by Silk McCue » Wed Jun 12, 2019 8:32 am

INTJVirgo wrote:
Wed Jun 12, 2019 8:22 am
Update: I've been approved for a 10-year fixed 3.5% refinance from a local credit union! Thanks to everyone for their suggestions and a little kick in the butt to make a much needed change!
Congrats on pulling the trigger! Glad folks could help you.

Cheers

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ruralavalon
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by ruralavalon » Wed Jun 12, 2019 8:35 am

INTJVirgo wrote:
Wed Jun 12, 2019 8:22 am
Update: I've been approved for a 10-year fixed 3.5% refinance from a local credit union! Thanks to everyone for their suggestions and a little kick in the butt to make a much needed change!
Congratulations, that is an excellent move in my opinion.

Contribute extra $320 per month to your 401k.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Watty
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Re: High interest ARM extra payment vs. 401K...yes another one

Post by Watty » Wed Jun 12, 2019 8:51 am

INTJVirgo wrote:
Wed Jun 12, 2019 8:22 am
Update: I've been approved for a 10-year fixed 3.5% refinance from a local credit union! Thanks to everyone for their suggestions and a little kick in the butt to make a much needed change!
Congratulations, out of curiosity what are your loan costs for the appraisal, fees, etc. ?

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INTJVirgo
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Re: Update:High interest ARM extra payment vs. 401K...yes another one

Post by INTJVirgo » Wed Jun 12, 2019 8:58 am

@Watty $299 inclusive of origination fees, appraisal, title services (they do them in-house), etc. through Union Savings Bank. They are the highest volume lender in my area.

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