QUESTION: Joy in Chicago and her husband are underwater on their house. They want to refinance but can’t. They make $250,000 a year and are working the Baby Steps. They only have $1,000 in their emergency fund. Their mortgage balance is $438,000 and it would take $100,000 to get out from being underwater. Dave has some ideas for Joy.
ANSWER: That means the house is worth about $338,000. You have a tremendous income, so that’s a big part of the equation here. You think it will take you a year to put $100,000 down on this. That would be about $8,500 a month that you throw at this deal.
What if you took a year and two months, and put $17,000 aside before you started? At least have something other than $1,000. Maybe $17,000 is not a fully funded emergency fund, but let’s put a little money aside and then take off on this plan before you start retirement funding. I’m all right with that.
It just sounds like a long time with your income and a mortgage this big to have an emergency fund that’s at $1,000. It’s not really a standard Baby Step 2 situation. You’ll save $17,000 a year in interest, which is pretty substantial. You’ve got to get right-side up because this is a portfolio bank loan.
The good news is that you can clear this up and then put the other mortgage on there and clear that up because you’ve got a fabulous income. Before I embark on that, I’d set $20,000 aside and then get started.
Keep in mind when you do this refinance that you don’t want to do a bunch of refinance costs with as fast as you’re going to be paying the mortgage off. You’ve only got about a three-year window where you’re going to pay that off. You may slow down a little bit because you’re going to kick in Baby Step 4 and Baby Step 5 at that point and then tear into the house. It may be a four-year plan, but you want to be very careful and not take on a bunch of refinance costs.