Strategies

I've written before about how we're declaring war on our debt, student loan debt to be precise, and I have a new idea.

Apart from enrolling in school part time, which would inevitably lead to me not going to the classes, feeling guilty, and not doing as well as I would like, so I'm bagging that idea.

My wife and I actually talked about this idea before, but it slipped into the recesses of my mind recently, and I admittedly was beginning to panic a little about the massive obligation we have hanging over us as a result of the debt. But anyway, that seems to have passes somewhat today when I remembered that we're not renters, we're owners! We bought our house about a year ago, cashing in a bunch of stock, and stretching as far as we could to get a house that we could grow in to a little bit. The stretch included a loan that some people wouldn't be comfortable with. Not the most aggressive loan out there, but a 5/1 ARM, locked for 5 years, and adjustable every year after that. We felt at the time, and in fact still feel, that we may move within the 5 years, and the differential between interest rates made a big difference in what we could afford. But that's a decision that's already been made, and we're not going to revist all of the thinking that went into it.

So, our house is our biggest asset. Even though the bank basically owns it at this point through our mortgage, we get the benefit of any appreciation. So, before you go screaming housing bubble, let me reassure you that we realize that our assumptions may not happen, but we're willing to take the bet that housing prices, at least around here, will appreciate at least modestly for the next five years. For purposes of this exercise, I'm going to assume 5% appreciation, on average, over the next 5 years. Now, my math skills are not as sharp as they were in say, high school, but I think I've got this one roughly under control. So, to the math:

Assuming that our house appreciates 5% per year, and beginning at a house value of $390,000, I figure that at 5% per year, with interest compounded at year end, I come up with a final value at the end of 5 years at roughly $495,000, or $105,000 in appreciation, god willing and the creek don't rise.

Now, for our debt - at the outset we put 10% down on the house, so we had $350,000 mortgage debt. The way our mortgage is structured, by paying just what is due each month we pay about $5,000 off of our principal every year - just based on our current payment, I'm not sure if this amount increases over the life of the loan (I assume that it does). Therefore, at the end of 5 years we would have paid the mortgage to about $325,000.

Value - Debt = Equity, so at the end of 5 years, 495,000 - 325,000 = $170,000, which is the amount we currently owe on student loans. So, when we reach the end of our fixed rate of interest, at which time we would likely refinance our mortgage anyway, we will likely have an option I hadn't thought of before, or had pressed into the crevice of my mind. Depending on interest rates, and our assessment at the time, we could theoretically refinance our house, taking out a percentage of the equity, and applying it to our student loan debt, essentially rolling that debt into our house. That would enable us to write off the interest payments, and possibly refinance at lower rates. It doesn't get rid of the debt, but somehow it makes me feel like we have options, like we don't have to make any drastic moves to pay off our debt immediately, that we have things that are working in our favor. Basically, I feel like we're on the right track, and that's what it's all about for us right now. At least financially. Nice.

Now, this also presents questions and consequences as well. How will taking equity out of our house affect our ability to retire early? We would lose the effect of compounding interest, but would also be able to write off more of the interest. If we want to move, we will have less equity to apply to a future house, and if we stay in the area, would won't be able to move to a bigger house if we want to, so doing this will limit our options in certain ways.

Planning for this option will allow us to keep our current income stream and enjoy the ability to have time away from work to hang out with the kid(s) and each other. A different plan in which we would have to increase work hours in order to make substantially more income takes away from that and is difficult to justify if the reason is money. Planning and making a job/career change should be done for love, not money; meaning that it should be because it is something you want to do, or will lead you to something you want to do. It's a risk, and it doesn't feel right to take such risks from a position of fear, which is where we were before we realized that our assets will help us reach our goals. We just have to think it through.

Tax Report

Short story - we came out even, despite having sold stock to buy our house, and having our income begin to flirt with the AMT, we ended up paying $1k to our old state, getting $14 from our new state, and getting approx $1k from the Feds. I like balance. Makes me have that warm zen feeling.

House Butter and Guns

In Sunday's NY Times Real Estate section is a good article about people investing in buildings around NYC to build up equity for their retirement. The main point I got was that one should never get into a revenue negative deal, although revenue zero is OK. I guess it's OK so long as rents hold steady - that way you're at least paying down your mortgage. I think these types of investments may be somewhat immune to the real estate "bubble" so long as people are in it for the long haul and are willing to deal with upkeep, tenant headaches, and all that for a number of years. Now, if we could just get a foot in the door.

Also in the same section was a small article about holding rental properties in one's IRA - a great idea, but everything I've read says that the headaches involved with complying with IRA guidelines makes owning it outside of your IRA much easier. However, like the article says, if you have a large balance in a ROTH IRA, you could work realestate deals and keep the profits essentially tax free once you start drawing in retirement. Of course, my $3k Roth won't take me too far with this plan, but hey, it's an idea.

In other news - my cousin came home from Iraq this week to cheers and appreciation from everyone in my family. We're so thankful for him and for everyone who has had to fight for us. I guess like it or not, the soldiers fighting are doing it for us and I for one am greatful to them.