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[unoriginal]

Here's the situation:

Spouse and I (in our mid-30s) are both starting our 4th years on the tenure-track.  We have a conventional 30yr 1st mortgage, and a 15yr balloon 2nd mortgage, both taken 2 years ago.   No other debt.  We contribute 5% to our 403(b) accounts, employer matches 10% for a total of 15%.  We also contribute $100/month each into our Roth IRAs, which obviously comes nowhere close to maxing those out.  I've been putting about $200/month and extra funds (from summer teaching, for example) into the 2nd mortgage with the plan to retire it before the balloon comes due.  We're also saving a little in a 529 for our older child (aged 8), the poor neglected second child (aged 3) doesn't have a college account yet. 

I'm just not sure this is the right way to go.  Should I forget about paying down the mortgage, and assume I can refinance the balloon amount and the balance of the 1st together in 13 years to a new 15 year mortgage, and instead park all that money into the Roths?  I read all over the place about how the credit card and other high interest, non-deductible debt should go first - we don't have any.  We have a healthy emergency fund, and no plans/desire to add to it.  We have a paid off, 7 year old car, and no plans to replace it.  We are getting the maximum employer contribution to the 403(b).  So what to do with the leftover money?  I'm not TOO worried about the college accounts; assuming at least one of us gets tenure, the kids could go to our college in the worst case scenario.  I am going to open a college account for 2nd child shortly, since I found out today that her daycare expenses just went down $20/week.  Yay for potty training!

[zharkov]

Depending on interest rate, I like the idea of paying off the second mortgage.

About tuition, most decent places have tuition remission for kids, and often are part of a tuition exchange system.  So if either of you are working in higher ed when the kids are in college, tuition could very likely be taken care of.

[aristotelian]

I don't think you should worry about college.  There is always financial aid for that.  I would be more worried about the ballooning mortgage and maxing out your Roth IRAs.

Depending on the amount of the first mortgage, refinancing might not be a good idea -- interest rates have skyrocketed in the last couple of months.  I think you are probably right to target the 2nd mortgage for now.  Hopefully you and your spouse will both get tenure with nice salary bumps so you won't be getting stretched so thin on housing.

[ideagirl]

Should I forget about paying down the mortgage, and assume I can refinance the balloon amount and the balance of the 1st together in 13 years to a new 15 year mortgage, and instead park all that money into the Roths? 

Yikes. Don't assume anything--even if you could refinance, who's to say interest won't be at 15-18%? That's what it was in the 1980s, maybe even the early 90s too.

So I'm with the others: kill that second mortgage. Kill it dead. If it's at a truly good interest rate, just pay it off on schedule. If not, pay it off faster--just make one extra payment a year, putting that entire payment towards principal, and you'll be amazed how much more quickly it gets paid off. (You could also start paying it every two weeks instead of every month--i.e. pay 1/2 a payment two weeks early, and then pay the other half on the due date; that costs you nothing extra, but it makes an appreciable difference in the length and total cost of the loan).

[prytania3]

Chime. Ixnay the second mortgage.

[dismalist]

The interest rate you pay on the balloon must be higher than what you could earn safely with any asset. Therefore, as the others say, pay off the balloon. [I'm doing something similar.]

[inthelab]

Do not count on either financial aid or tuition remission.
Pay down that 2nd and create 529 accounts for the children.
Most of us with kids in college found plenty of rules regarding tuition remission (meaning we don't get any), and found that having even several in college had zero impact on financial aid.

[zharkov]

Do not count on either financial aid or tuition remission.
Pay down that 2nd and create 529 accounts for the children.
Most of us with kids in college found plenty of rules regarding tuition remission (meaning we don't get any), and found that having even several in college had zero impact on financial aid.

That's lousy!  Where I live, the private schools offer free tuition, and they are also part of a tuition exchange set up.  And the state system lets faculty kids attend any unit of the state system tuition free (including the flagship).

Maybe to rephrase my advice to the OP, find out about the tuition plans your school offers to faculty kids, and plan accordingly.

[unoriginal]

Wow.  You mean my instincts were right on this one?

The 2nd mortgage is at 7.75%.  We've paid about 25% of it in slightly over 2 years.

Tuition benefits at our school - free tuition at our school (which is why I said that they could go here in the worst case scenario) and part of 2 tuition exchanges.  For the tuition exchanges, I've heard differing opinions on how easy/difficult they are to get.

The spouse is a little hesitant on the 529s - what if we end up not needing the money?  If, for example, we stay here and the kids go here and stay at home, expenses would be quite minimal. Or (much less likely!) what if they get full-ride scholarships somewhere?

So leave the retirement thing alone?  Should I be taking the amount that's going to the Roths right now and put that on the mortgage too?

[inthelab]

The spouse is a little hesitant on the 529s - what if we end up not needing the money?  If, for example, we stay here and the kids go here and stay at home, expenses would be quite minimal. Or (much less likely!) what if they get full-ride scholarships somewhere?

free ride often means free tuition but not free room and board.  hard to tell what the future will bring though.
And will your kids want to go to the limited choices offered? What if one is a muscial prodigy and needs to go to Juilliard or somewhere like that?
Don't max out a 529 plan then but put something in it for books, etc.  All college-related expenses- computer, software, the cool bag to carry the computer in- can be paid for with 529 funds.

[zharkov]

The spouse is a little hesitant on the 529s - what if we end up not needing the money?  If, for example, we stay here and the kids go here and stay at home, expenses would be quite minimal. Or (much less likely!) what if they get full-ride scholarships somewhere?

free ride often means free tuition but not free room and board.  hard to tell what the future will bring though.
And will your kids want to go to the limited choices offered? What if one is a muscial prodigy and needs to go to Juilliard or somewhere like that?
Don't max out a 529 plan then but put something in it for books, etc.  All college-related expenses- computer, software, the cool bag to carry the computer in- can be paid for with 529 funds.

Your logic makes sense, but my assumption has been that my kids will be able to go to my college or one of the tuition exchange members, where all the "likely" degrees are well covered.  No Julliard-bound Alan Greenspans yet, but I think if a kid showed unusual musical ability, say, you'd be able to shift gears when they were 8 or 10.

One of the reasons I work in higher ed, and at the college where I do, is b/c of the tuition programs. Rough calculation, 20K for tuition over 4 years is an 80K benefit per each kid you have.

[dismalist]

The IRA's vs the Balloon: Will the IRA's get you 7.75% annually over the long haul? That might be the  tiniest bit optimistic. If you're not too unhappy bearing a little risk, go with the IRA's. Otherwise pay off the balloon. This is a close call. Me, I'd pay off the balloon.

[inthelab]

Your logic makes sense, but my assumption has been that my kids will be able to go to my college or one of the tuition exchange members, where all the "likely" degrees are well covered.  No Julliard-bound Alan Greenspans yet, but I think if a kid showed unusual musical ability, say, you'd be able to shift gears when they were 8 or 10.

One of the reasons I work in higher ed, and at the college where I do, is b/c of the tuition programs. Rough calculation, 20K for tuition over 4 years is an 80K benefit per each kid you have.

The IRS makes noises from time to time about taxing the tuition benefit.  Keep your ear to the ground.
Being Mr. Inthelab and I both work for a post-bacc uni, we lose the tuition benefit, alas!

To the OP, I still say pay off the 2nd mortgage, then find a tax advisor.  That's the best advice I can give you now.






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[pedanterast]

Once again it bears mentioning that the correct sequence is

1)  Save for retirement and then
2)  Save for your children's education.

Not the other way around.

[zharkov]

Being Mr. Inthelab and I both work for a post-bacc uni, we lose the tuition benefit, alas!

So just to clarify, because you both work for the same university, your kids are not eligible for the tuition benefits?