80/20 Loan - Should I Pay Off the 20%?

dfwmia · #1 (**permalink**) 10-19-2008, 12:56 PM

OK, here's my situation. Bought a home in 2004 for 177k. Things went up and similar homes in neighborhood selling for 195-200k in 2005/2006. Downturn comes and same homes now selling for 180-185k. I've lived in this area of B'ham, AL all my life and I know the neighborhood is stable and plan to stay in the house for at least another 10 years.

I put 5% down which amounted to 14k with closing costs, etc. My loan was a split to avoid PMI.

1st Loan - 5.375% due and payable in full Jun 2011 - Balance $132,500
2nd Loan - Interest Only payable in full Jun 2009 - Balance $25,500

My wife and I are frugal and are savers. No debt other than home, cars paid for. I have 72k cash in a money market account that got 3% last month. The interest rate changes each month but for the past couple of years, it's averaged 3.5. My goal is to have 80k in there by Jun 2009 when Loan 2 comes up and pay it off in full and ride the 5.375% until Jun 2011. During that period, I'll be looking for the best interest rate and will finance it then if it comes up.

We are mid to late 30's, looking for a low stress life doing jobs we enjoy as a type of semi-retirement so my goal is to pay off the house ASAP.

Any suggestions on this plan? I just want to make sure I'm doing the right thing going ahead and paying this 25k off now and then starting on the 132 aggressively afterward.

Thanks all.

dfwmia · #2 (**permalink**) 03-04-2009, 12:22 PM

Just an update for any of you that are interested. This idea above that I was thinking on back in October combined with the current state of our economy got me thinking more and more about what was important for me and my family.

I have decided that I subscribe more to the "Stuff Your Money in the Mattress" or the "A Penny Saved is a Penny Earned" theory of money management that my depression era grandparents taught me. No more playing in the stock market or investing with some super fund 401k.

I did payoff this 20% mortgage so now I'm left with around 130k in mortgage debt on a home worth roughly 185k in market value when doing comparisons on area sales.

My whole goal now is to pay off my home in full at the earliest possible date. My 401k went from 90k to 45k over the past two years. I'm going to sit on it for a while to see what happens, hopefully gaining some of the value back. However, I'm waiting for the right moment to cash in, give the roughly 45% to the government and take what they leave me with and apply every penny to my mortgage.

I'm planning for the worst case scenario but hoping for the best.

Watts · #3 (**permalink**) 03-11-2009, 11:39 AM

If you're preparing for the worst case scenario, you might want to have less of your money in cash. Consider the amount of money being spent by the government and where it's coming from. The money supply in the US has doubled in the first quarter alone. I'd expect to see high inflation before all is said and done.

I'd recommend reducing your cash to 15-20k and invest the rest. I'm not saying put all your money in a 401k or the stock market, you're trying to avoid risk. If you're uncomfortable investing in commodities (like gold or oil), you could always just put part of your money in Euros, or another currency. Also, you can put some in treasuries. There are plenty of other options that will allow you to yield a safe return, and keeping more than a few months of salary in your bank account isn't always necessary.

I'd just be careful not to be too cautious. The difference between 3% and 5% over 15-20 years can be over $80,000 on $70,000 invested. Meanwhile, housing averages 2% a year historically, while inflation averages 3-3.5%.

RobertD · #4 (**permalink**) 03-11-2009, 07:17 PM

I would pay down the second loan. Right now I would be in no rush to invest anywhere, there are a lot of question marks not the least of which are playing out in Detroit, MI. If one or more auto makers go under all bets are off on what will happen next.

There is also a mountain of consumer debt that is more then likely going to come crashing down soon. If the US economy takes any more big hits the rest of the world's economies are going to be hit even worse. Europe, Asia, Latin America, and Africa all rely on the US economy being able to buy goods they are all either directly or indirectly even if they d not think so. The whole world is in deep trouble, so if you do not have to earn big money immediately I would avoid risk as much as possible. In about six months we will all have a better idea what will be happening.

Best of all if there is another deeper crash and many feel there will be your safe investments may just buy you a whole lot more. I would not count on inflation right now we could have a round of deflation if anything else happens or if all the stimulus attempts fail.

Watts · #5 (**permalink**) 03-14-2009, 04:54 AM

I'm going to have to go off topic and ask Rob a question here. How will inflation not be a problem? I've heard that from many people, and I just must not understand the fundamentals. Maybe if I explain where I'm coming from, you can correct me.

Prior to the crash, the dollar was stable, if not edging towards weak. Since then, we have more than doubled (nearly tripled) our money supply. Our average budget prior to the crash was roughly 3 trillion, a figure we spent in the first quarter of 2009 already. We have over $10 trillion of outstanding debt on a $14 trillion a year gdp.

Wouldn't the fundamentals of economics tell us that increasing our money supply to 200% of the previous amount would yield a 50% decline in value unless our economy grew at a rate large enough to compensate. With a shrinking economy, the factors should be compounded.

I have heard an explanation that there was an artificial demand for the dollar created by the global meltdown. Basically, developing nations and national banks bought up dollars as a stable backbone to their currencies. However, once the recession comes to a close, won't the market be completely saturated?

Also, if you'd bet the Euro will be hurt at the same rate, I'd have to ask if Europe is printing at the same rate as we have recently. I can already tell you they haven't, so again, where is the upward pressure?

Maria · #6 (**permalink**) 03-18-2009, 01:12 PM

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