Need some critical advice on what to do next. Any Dave Ramsey Experts out there?

[brocket]

I'll try to make this as short as possible, but I also want to mention how far my family and I have come since 2009.

I found out about DR when I was researching purchasing a NEW car we needed and came across his video. It got me intrigued, visited the website, and put the baby steps into motion.

Our situation was:

1st mortgage: $655,000
2nd mortgage: $110,000
Credit Cards: $19,000
Car Payments: None
Student Loans: None
Savings: Practically None
Checking: Scraping by
Investments: Extremely Small.
1 Child

So we decided to rent out two levels of our home, as it had a non-conforming MIL, and it used to be a duplex.

In approximately 12 months we put ourselves in this position:

Mortgage #1: 655,000
Mortgage #2: 55,000 changed to 4.15 perfect locked in for 15 years.
Credit Cards: $0
Savings: $64,000
401k: $26,000
Checking: $16,000
Student Loans: $20k(just finished her masters)
1 Car
Monthly car gas bill: $50.00(we live 3 blocks from both of our workplaces.)
2 children.

So we have made quite a comeback, and I am very proud of what we have done in such a short period of time.

Obviously we have enough money for the student loans, so I am considering those GONE.

So now I feel like I have a difficult decision to make, as we let go of our second renter to make room for the expanding family. It really had to be done.

On top of all of this we have had a few issues with the house, and I feel frustrated dealing with the place.

So, now here are some of my questions that I am hoping a DR expert can answer:

#1. Since our money lifestyle has changed, should my housing change to reflect this even if it means a shortsale or foreclosure?

#2. Do I just grin and bear it and pay down my mortgage appropriately with our savings, and extra payments each month?

#3. Do I pay down the HELOC first even though it is locked in at 4.15% for 15 years or do I used the extra money to focus on the 1st mortgage?

If we plan to stay in the house it is vital that I pay our principal down in the next 4 years while our interest rate is low. I wish I could refinance or do a loan mod but it's like pulling teeth with B of A.

#4. Do I walk on the house and save up our money for 12-18 months, which is the typical time for a foreclosurer.


If we were to make large extra payments on our home right now we would have it paid off in 13 years or so, but if we downsized to a less expensive house we could do it in 4, but there are a lot of headaches involved.

I feel like I should be ecstatic about our position, as we made some huge progress, paid off major debt, live in a beautiful area, with zero commute, and one of the best areas in our major city, and my job isn't going anywhere as long as I work hard.

I just want to make a good next decision, and will feel terrible if I start paying off the debt with our extra cash and it essentially just goes bye-bye.

[ladykemma2]

why would you consider foreclosure on the house?

[frugal is fun]

I'm not sure why you would foreclose on the house either. To me it looks like I was start paying off the student loan and just make your regular payments on the house. I don't know why you would work so hard to pay off the first mortgage early if you don't plan on staying there long term.


And congratulations on your comeback! you did a great job!

[brocket]

I see some benefits in keeping the house, but the value according to banks is 620-750k. SO either under water, or close to it.

Due to my family's outlook on debt etc, there is potential opportunity for a lower priced home, and not carry so much house debt.

I don't walk on my debts, but would probably keep the HELOC and buy a home in the $300k range and pay it off ASAP as well as the remainder of the HELOC.

Maybe I am sounding crazy, and that's what I need to hear.

My issue ends up being more around the choice of living in a 600-800k house, versus paying a lesser one off much much faster.

The student loans we will be paying off in a lump sum.

Does anyone have an opinion on what to pay down faster? The mortgage or the HELOC, as the HELOC is a locked in interest rate of 4.15%, could it be argued that it would be a better option keeping this, as the first mortgage will be a much higher interest rate?

Thanks for the kinds words everyone.

Also...

Part of my issue is not understanding truly what a reasonable amount of savings is each month for a person my age. Since people do not talk about money, I sometimes feel I am either over extended or far behind what I should be doing.

Our income is reasonable, but is 2500/mo in savings a lot, or enough? We are using our money to pay down debt and not living for vacations, it's just not the norm, and of course I live in an area that keeps up with the Jones', and even though we could fake our way with everyone else, it's not smart.

[mateosbaby]

If you don't have to do a short sale or foreclosure, DON'T! It hurts your credit rating, and then you may not qualify for that next mortgage. And they are VERY picky about qualifications now for any and all loans. Just hang tight there. Pay off those student loans right away, then work the baby steps. You have Step 1 done, you will have step 2 done as soon as you pay off the student loans. Then do step 3, etc. The HELOC is house debt, correct? If so, then it would be step 6. Pay that off before your 1st mortgage, since it's smaller.

Anyway, that's what I would do. And live as simply and cheaply as possible so you can stick as much as possible into that HELOC and mortgage when it comes time.

Good luck, and great job so far!

[a.nonymous]

I'd lean towards something in this line:
1) Get rid of HELOC
2) Pay down mortgage as aggressively as possible
3) THEN, once your current home is breakeven or even ahead equity-wise, consider getting a cheaper house.

It's a good thing that you can and want to move down in houses, but don't let impatience be your guide.

You've mentioned having an opportunity to move down, but don't let a good opportunity make your decisions for you blindly.

Another thing: Isn't the HELOC tied to your current home? Meaning you can't transfer the underlying/security just like that? Not sure how those things work...

[Russ]

I'd lean towards something in this line:
1) Get rid of HELOC
2) Pay down mortgage as aggressively as possible
3) THEN, once your current home is breakeven or even ahead equity-wise, consider getting a cheaper house.

It's a good thing that you can and want to move down in houses, but don't let impatience be your guide.

You've mentioned having an opportunity to move down, but don't let a good opportunity make your decisions for you blindly.

Another thing: Isn't the HELOC tied to your current home? Meaning you can't transfer the underlying/security just like that? Not sure how those things work...

Correct, the HELOC is tied to the equity that WAS in the house, so it can not be transferred unless he takes a personal loan out to pay it off. (not reccommended)

IMO...
Use that huge savings to pay off the HELOC and then go back to your bank or another bank and try to refinance that first mortgage to a locked, fixed rate. Then pay that debt down as fast as possible.

If you can not get a new mortgage, wait until you rebuild some equity and then re-apply or sell when you are not under water.

[TheRootedNomad]

"Is $2500/mon. in savings a lot, or enough?"

This will be different for each and every situation. If I could save $2500 every month it would be like a buy 1 get 1 free sale for me. That would be a over a month of ALL our expenses saved every month. Currently between out 403b, 401k, and HSA we save 29% of our gross each week. Additional we have some other savings for things like home improvements, Christmas, and so forth that we budget money for as well but it's not as routine. From what I've researched of the population in general this is well over average. We however, are making up for some lost time. (We have a comfortable 8 month EF in savings if we both lost our jobs. We allocated to that on a routine basis and upgrade it as we deem neccessarry.)

[cottageliving]

Please do not walk away from your house.

You have worked so hard to get where you are today, and you would regret allowing a house to get foreclosed on or even selling as a short sale.

Anyway, if you move to a "cheaper" house, those values may take even longer to appreciate, you'll have to add commuting costs and time to your budget and daily life. NOT easy with 2 children. And any house will have all sorts of hidden problems and constant maintenance costs -- at least you know what the issues are with the current house.

Just hang in there and keep paying your debt down... you are on the right track.

[frugalwarrior2]

crown financial Ministry.org is a great sight to plug in numbers.
I can't answer for you but I would not ever be comfortable w/ the big a mortgage. I wouldn't be able to just walk away on an obligation either. As far as your job goes,no one is safe or guarenteed. I would hope $64,000 is in a fund making money not a simple savings?? DR says pay off college loans,BEF $2000. (if making over $70,000 which you have to be),3-6 months EF,15% of income to 401k esp. if matching,or roth. Pop over to his sight and grab-Financial Peace revisited. It was $10. over the weekend + shipping. I would get a stable rate for sure!!

[Greebo]

How much of your income is going towards your house payment now? What percent?

[mek42]

What about just doing a traditional sale and accepting a loss? Decide ahead of time what loss is acceptable (and have cash to just pay it). Whatever you do, get rid of the HELOC as soon as possible to have more flexibility about when to move.

There shouldn't be any negative credit consequences for him selling the house for less than is owed as long as cash is provided to make the difference, right? Said cash might need to be placed in an escrow account between accepting the offer and closing.