Help with some financial planning

Your mortgages and expenses add to $5500/month. Does your wife make 1/3 of the $7300/mo income? If she makes much more than 1/3 of it, you will head toward a negative cash flow when she quits. No one here can predict what the stock market will do short term, only that it will fluctuate. What an individual stock will do is even more risky. I'd have a goal to increase the liquid cash available until you have at least three months' expenses in an emergency fund. Also, I'd stick with the 30 year amortization on the first mortgage, unless you have plans to move short term. Eventually the interest only option will go away and the note will require amortizing for the remaining term. The min payment will let your principal rise $1300/mo, which really scares me. If I read the numbers above correctly, you can save over $1,800/mo until you have the first child. You should do your best to save during that time. If either employer offers matching on the 401k, you should participate to that level. JOE

Cash flow: this is the crux of your concern for at least the next few years or until your youngest kid is 3-4 years old and ready for daycare.

0) pay any credit cards in full each month. If you can't, you're spending too much. 1) pay off as much of the HELOC as fast as you can, and then count on that as a big part of your "emergency fund" (meaning don't run up the balance again unless it's an emergency). If there is any cash left after this, then pay off car loan, student loan (in that order). 2) continue interest-only on the first mortgage as long as you can, so you can do item #1, but at the same time you avoid additional borrowing (negative amortization). 3) stick with the car(s) you have, which should be easy with only one commuting spouse in the future. In your situation try to get a good ten years out of any car before you think of replacing it. 4) sell the Google stock if there is a loss or as soon as gain becomes long-term (one year) and use it also for item (1). 5) make sure you are getting tax deductions for student loan interest, try to have kids near the end of the year to maximize the ratio of tax benefit to personal expenses.

-Mark Bole

"AB" wrote

I am curious as all get-out to know whether the interest rate on this incredibly creative mortgage loan is fixed or adjustable. Any extra fees when you change payment plans?

Holding "mostly Google" stock indicates a lack of stock diversification, which means high risk for both short and long terms. You need to become familiar with asset allocation at some point. You want to start thinking about your financial goals. E.g. pay off the house? Save for when one of you does not work? Pay off other loans? Save for retirement? Identify your short term payments and savings plans by using long term goals. I echo what Joe said, otherwise. I am especially interested in whether you have a

401(k) plan with matching, and if not whether you have started a Roth IRA.

Banks have to have a positive spread between their return on funds (loan rate) and their cost of funds. You have to do better than they do to make it worth your while to borrow their money. (Wanna play???)

If I read you correctly, you have a sizeable HELOC balance. Assuming a

6% rate, that $4,800 a year is on an 80k balance, which you can and should pay off within three years. You're a computer programmer - run the numbers.

It is best to pay off the highest after-tax cost loans first.

Focus on what you are best at - your job and salary. In three years your surplus combined income should be about $2400/mo. and at that point you should have read a few books on investing, such as Benjamin Graham's _Security Analysis_.

You have far too much house for your income. Once your wife starts having children, you are going to have a serious house problem, and may end up losing it. That goes double since you have a job that I would consider to be unstable (computer industry, which has been cutting back and moving off-shore).

Best bet is to put the McMansion up for sale, and move into something where your total monthly payment is about $2000 with a 15 year loan (maybe $2200 max a month).

Paying interest only like you are doing today is a bad plan. You are not paying down the amount of the loan, so you owe just as much today as you did when you bought the house. With house prices taking a nose dive over the past year, you probably owe much more on the house than what it is worth. You have things wound up so tight here that all it takes is one job loss or extended illness to make the thing blow sky high.

-john-

I see $2200 as free cash flow each month. I did not see a breakdown on HELOC vs standard mortgage payment.

rule 1a- pay $2850 each month on mortgage. If this payment is too touch, downsize the house.

rule 1b- spend only what you make (avoid credit card debt).

rule 2- have a plan. It sounds like you have an objective (have kids within 2 years), but no plan. Get the plan down... like 401k, asset allocation, savings rate, debt reduction. Prioritize the plan... not everything can be done at once.

If you ae thinking of kids, you also need to think about life insurance.

Other things to consider- new cars vs used cars, taxes and tax deductions, retirement, reducing workload of wife.

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I don't want to be blunt and "in your face", but you're teetering on being "house poor". You're currently paying over 40% of your take-home on the house -- and getting nowhere fast:

So ... you're paying 40% of your income to "lease" your house from the bank. What's your wife make? I'll assume $2500 of the $7300 -- substitute your own numbers since we don't know 'em.

After she quits, you'll be at over 60% of your take-home being spent on your house:

3000/(7300-2500) = .625 = 62.5%

You're now paying 62.5% of your income on a house you will never own because you're paying the interest only option.

You are borderline "house poor" at the moment. There will be no question about it once you lose your wife's income. In addition, you'll have more expenses when the kids come along.

My rule of thumb (which nobody here likes) is between

1 and 2 times annual income on a house loan. That puts an upper limit of about $175K on the house you can truly afford with your income. A thirty year fixed, at today's rates, on 175K works out to a bit over $1,000 a month for your mortgage -- and that should be the upper bound.

Then again, I'm over conservative with respect to mortgages on a primary residence -- and folks don't like to hear my numbers.

You asked for help ... here's my advise: Sell the house and get into something you can actually afford. The rest will be gravy once you've done that.

.

Sgt one of the things I enjoy about your posts is that I don't have to consult a dictionary to understand what you mean. I suspect other readers enjoy that simple, direct approach too.

-HW "Skip" Weldon Columbia, SC

In fact, with a traditional 30-year fixed rate mortgage, most of the payment for quite a few years is essentially "interest-only", so don't sweat this particular item.

Others also have suggested selling the house -- I disagree. Paying a

5-6% real estate sales commission plus other closing and moving costs is probably the worst thing the OP could do at this point (talk about an unnecessary expense!). What's done is done -- it can be well within the OP's means to keep the house, establish an emergency reserve (via paid-down HELOC), and still afford to have kids, if not in two years then maybe 3 or 4.

If they are truly in an "oversized house" (something we do not know, since we do not know their location nor the employment outlook for same), then why not rent out a room?

If nothing else, maybe potential grandparents will kick in if they think the pitter-patter of little feet is imminent... ;-)

-Mark Bole

A house is often the largest financial transaction that one makes during a lifetime. Don't sweat it is the financial equivalent of the ostrich burying his head in the sand. On the contrary, this is the one deal that simply has to be right or you can mess up a lifetime of finances.

And in a few years when it gets repo's, we can again say that what is done is done.

And what are they going to do for retirement? Fight the neighborhood dogs and cats to get the scraps out the dumpsters? There are a lot of variables here, and having one so far out of whack can and does have a lifetime of consequences.

It isn't the oversized house, it is the oversized price. They bought twice too much house, and now they are drowning in it.

So, what as that girl's name from Utah...Elizabeth Smart? In this day and age, you cannot let someone else live in your house, especially if you have small kids. You never know when someone is going to go tapioca anymore.

That is great advice...let the parents, people who were responsible and skimped and saved their entire life so they could afford to retire, and have them raid their only money to pay for the irresponsibility of the children. That must be the new Amerikan Way. I'd rather see live kick them in the assets a bit, and hope that they learn the lesson well the first time.

-john-

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Depends on the interest rate and a whole bunch of other things we don't know.

If they owe "much more" on the house than it is worth, how exactly are they going to come up with the real estate sales commission, closing costs, and difference between net sales price and amount owed on mortgage, not to mention the cost of moving to a new place that is still within commuting distance of their jobs?

-Mark Bole

We have all the information that we need to know that it is a bad deal. Doing interest only is simply renting a house, you get all the downside responsibility and none of the upside advantages of ownership. It is not a wealth-building technique. In comparison, buying a reasonable house and paying it off in 15 years is a wealth building strategy.

If you want to be wealthy, you need to do the things that wealthy people do. If you want to be poor, you do what poor people do. Wealthy people rarely use interest only loans. Interest only loans are almost exclusively used by broke people to buy more house than they could otherwise afford. If you go interest only, you are setting yourself up to be broken an in debt for a lifetime. Like the former first lady used to say, just say no.

-john-

Let me add, a $250K, 6% mort, amortized over 30 years is just under $1500/mo. Same rate, interest only, is $1250. If one's budget is so tight that they cannot afford this difference, the $250 to principal, they are in over their heads. JOE

In my opinion, spending a full paycheck on shelter is totally out of whack. You should spend no more than 1/2 a paycheck, 1/3 is even better. In the situation above, one paycheck each month goes to a building, which leaves on one paycheck a month for living expenses, entertainment, and savings for the future. One of these ends up short changed, and the person is living in a high risk situation. An interruption in the pay check flow means the house goes away.

That might have worked out OK in the 1970's. Today, you cannot count on a career path. In the industry that I am in, I have seen average wages cut in half since 2000 as jobs are given to folks from India who will work for pennies on the dollar. I have seen whole entire areas of the engineering field move to Malayasia.

Years ago, a person was in their peak earning years from age 50 to age 65 as they got seniority and was at the top of the pay scales. Today, once you hit 50, you are most likely ejected as cannon fodder so they can hire some drippy-nosed 23 year old who is going to be far less costly to provide health insurance to. That is why there are Subway stores on every block in every city of the US these days-- there are so many older men who are out of work and cannot find a job to save their lives that they have to buy a franchise in order to get an entry level job.

Buying a house where survival depends on getting raises and promotions at work is a plan for disaster these days. The only safe thing to do for your family is to buy what you can afford, and move up after you can afford to do so.

For someone who is established and financially well behaved, a 3x income home price is not out of line. What is being discussed is a

2x mortgage. If you earn $100K, a $200K house is reasonable if you have nothing down. But if you have $100K equity in your old house, then the $300K house is reasonable.

-john-

Aren't you jumping to conclusions? Nowhere does it say how often he got paid, so you don't know for certain that he received only one other check per month. Additionally, you conveniently forgot that his wife also had a job, so, even if he did, in fact, get paid twice monthly, there was other income in the household. John, you so easily assume everyone else is financially irresponsible and that just isn't fair to the vast majority of posters to this newsgroup.

Elizabeth Richardson

What do you say to people who have the cash flow to afford a mortgage, but do to past credit problems can't get approved for anything but interest only... These people are fixing their credit so in a few years they'll be able to refinance into a better mortgage. Seems unfair to suggest problems in the past should keep someone (even a family man/woman) from owning a home and sharing in the "american dream"

Just my 2 cents, Shhhh

Yes, I did jump to a conclusion. One has to. There isn't enough time and space on this page to say everything about one person's life, and I cannot force people to write all the details that one would like to have. So, knowing that most poeple in the US that get a regular paycheck get one every other week, or one a month, so when he said "one of his paychecks", I knew that there was at least 2, and I was willing to bet my on-line reputation that was exactly 2. Sometimes you have to be willing to risk it all when the odds are in your favor.

I don't put too much emphasis on a wife's income unless the poster writes that it is substantial. All too often, what I see is a woman who hardly turns a profit after paying for daycare, a car to drive to work, extra work clothes, and gas and insurance for that car. Then many women choose to take time off for children, or have child responsibility and have to leave work often to pick up sick kids from school. Again, if you have to count on that to make ends meet, then I suggest that you are playing the wrong game.

Actually, a few postings back, I saw you write something that struck me as something that I could have written. You are just a little nicer than I am. I don't tend to coddle anyone, and I am not going to lie to anyone or give them a pat on the back for doing something that I think is dumb. I don't so much think that folks are irresponsible. Rather, I think many younger folks lack life experience and don't realize the long term risks. And I think that too many people are so wrapped up in their day to day lives that they don't stop to think about what they are doing long term. But I think one could make a good argument for irresponsible if you look at all the zero down loans, the astoundingly high foreclosure rate, the vast amount of credit card debt, the evaporation of home equity used to by consumer goods, the tiny amount that most people have saved for retirement, and on and on and on.

-john-

Thanks for looking it up. That was a somewhat special case. The poster in that case had a 1% income ($175K), and had liquid cash in excess of his mortgage, and at that time (and since then), both the market and CD's are returning equal to or higher than his interest rate. In that case, he could invest the money, look for upside, but if worse came to worse, he could pull the money and pay off the mortgage. Few people have that kind of non-qualified funds sitting around like that.

I am going to give in. Yes, there are occasionally times when an interest only loan makes sense. But that is not how the vast majority are being used. Just on Friday, the US Government had to issue a warning to lenders that most interest only loans that have been issued recently were given to people that could not afford them. If you avoid them altogether, you will be right 99% of the time.

If a person moves often, they should rent. Renting is a great deal right now. It doesn't make sense to pay closing fees on the way in, and real estate commission on the way out to get in and out of a home. Renting eliminates all those costs, and adds a great deal of flexibility.

-john-

I am all in favor of you sharing in the American Dream. But if you have bad credit, buying a home is just as likely to become a nightmare. You would be far better off renting for a few years. That would let you rebuild your credit so you can get an inexpensive traditional loan. It would also let you live for less, so you can save up a much larger down payment. That way, once you do buy a house, it is a slam dunk good deal, and you will not end up back in foreclosure soon, or have that balloon explode on you.

-john-