Where to put extra money from refinance

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Hi, 

We recently refinanced from 20 yr loan to a 30 yr loan. The rates were favorable and given our situation it made sense. My plan is take the difference that I saved( ~900) and put 1/3rd towards prepaying the loan and 2/3rd put out to compound interest magic. With the prepay I will pay off(touch wood) in 22.5 years instead of the now 18 years. The extra interest for 4.5 years and relatively small and I need to make 1.2% return on the remaining 2/3rd money to make it worth it. 

Question is where to put the extra 2/3rd. My situation is this. I max out 401K(ROTH). Not eligible for ROTH IRA as every year I am just wee above the limit. The wife just lost her per diem (part time) position but we never depended on her income as it was never stable and she made a bit more than lunch money. She has a private practice that nets some coffee money but nothing else. My initial reaction was to do either Vanguard S&P 500 ETF and then move into the corresponding Admiral fund and let it ride. I would prefer a ROTH option but given my income limit, using the backdoor technique, I would be limited to 5.5k yearly(I think). My goal is moderate risk and at least S&P returns. 

What would you guys suggest here. Much much appreciated....

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GazerOne said:   I max out 401K(ROTH). Not eligible for ROTH IRA as every year I am just wee above the limit.
  
If you put some money into just a plain 401K, you could be a wee bit under then do the Roth IRA.

Why are you maxing Roth-401k and not pre-tax 401k? If you're just over the Roth IRA limit, you aren't making enough to justify forgoing the tax deduction now unless you've already hit the jackpot (with parents, wife, lottery, etc).

Private practice that nets coffee money? Is that some really expensive coffee or does "private practice" apply to more than just law or medicine now?

Back door Roth?

InsuranceGuy said:   Back door Roth?http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

I believe "high yield" savings accounts pay upto 1.05% interest currently. Once this rate goes up over the next 22.5 years you can move the money around to get better return and reach your Target IRR of 1.2%. Could you clarify what you mean by "moderate" risk and why you think getting returns in excess of those of S&P can be achieved without taking on high risk or having an edge over the market?

I'm confused. Did OP say that by prepaying $300 of principal (1/3 of 900), a 30 year loan becomes a 22.5 year loan?

GazerOne said:   We recently refinanced from 20 yr loan to a 30 yr loan. The rates were favorable and given our situation it made sense. My plan is take the difference that I saved( ~900) 
  Maybe my math is fuzzy, but how high of an interest rate or how large a balance did your old loan have such that you reduced the monthly payment by $900?

atikovi said:   
GazerOne said:   We recently refinanced from 20 yr loan to a 30 yr loan. The rates were favorable and given our situation it made sense. My plan is take the difference that I saved( ~900) 
  Maybe my math is fuzzy, but how high of an interest rate or how large a balance did your old loan have such that you reduced the monthly payment by $900?
 

He extended the term by an additional 10 years.  He said that he "saved" $900, but that is a little bit of a misnomer.  He was 2 years into a 20 year loan and is now starting over with a 30 year loan.

OP - what was the interest rate on the original loan, and what is your new rate?  What motivated you to do this, since presumably you could have gotten an even lower interest rate on a new 20 year loan?


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Thanks for all replies. I will try to answer as I best as I can.

1. Original payment was about 2300(I was paying 175 extra per month). New payment is 1400. Old rate was 20@3.625 . New is 30@3.375 . I have <50% of home value outstanding in mortgage. I wanted the flexibility of having cash in hand if needed and not tied to paying a high amount to mortgage, especially with the wife's work situation and me having to support other family members now. I am putting out the same money(2300) out to mortgage + investment, plus if some situation goes south then I can use the extra investment money for those needs.
2. I am maxing out ROTH as I was contributing to regular 401K for the first 11 years of my career. I switched jobs 3 years ago and am doing ROTH so I have some tax diversification(I don't know if this is a sound strategy. I just picked that option and haven't changed/thought about it after that).
3. private practice is related to a medical field. My better half helps patients with diabetes and see patients at home(started out as helping high risk pregnant women who couldn't afford hospitals - she would see them for free at our house). 

If you don't have a Traditional IRA, you could contribute to one (non-deductible) and immediately convert it to a Roth.  There is no tax effect for the conversion, because you have basis in the IRA.  THIS ONLY WORKS IF YOU HAVE NO OTHER MONEY IN TRADITIONAL IRAs.  End result is the same as having made a Roth contribution (which you can't because you're over the income limit).

Assuming your getting better than 4% ROI on your money after taxes, you're better off putting all $900/month into your compounding interest magic machine. If at some point your balance from savings = your mortgage balance, you can pay it off in one lump sum.

There are a bunch of calculators that will show the difference. Here's a really simple one https://www.calcxml.com/calculators/pay-off-debt-or-invest that gives you a thumbs up thumbs down.

GazerOne said:   2. ...I don't know if this is a sound strategy. I just picked that option and haven't changed/thought about it after that.It's not, IMO. Unless you expect to retire with like 10 mil, you should reconsider. Max your pre-tax 401k, which, given the information you provided and already advised above, should also allow you (and your spouse) to max the Roth IRA.



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