What to do?

[LivingAlmostLarge]

Okay a friend asked me if it was their fault they were broke right now. Background, they have a 15 year fixed mortgage = 41% of their income. They had a 4 month Emergency Fund, wiped out over these past few months. They are sliding backwards fast.

They said was it the fault of getting a 15 year fixed? Should they have gotten a 30 year fixed?

I suggested it was a combination of things. That it was not only getting a 15 year versus 30 year mortgage, but also how to handle large expenses that can wipe out an EF?

I suggested instead of paying off the mortgage faster, keeping all extra cash in a taxable account. Either MM or invested even, and using that to survive if things should happen.

Then if and when the mortgage = taxable account pull the trigger. Why don't people like to hear that it is the same thing as paying off the mortgage faster?

Is it a mental thing? And how should he manage from wiping out his EF? Was it because his mortgage is 41%? Because he got a 15 year fixed? Or was it because he should have had more cash on hand?

He's a 1 income family with 4 kids if it makes a difference.

[maat55]

The house is way to much of their income. The 15 year loan is good, the house is to high for their income. They should have no more than 30% of their income in house. They will never get traction with 41%. I would sell and get a house they can afford on 15 years at 25% of their income. There is more to life than being slave to your house.

[safari]

I suggest they refinance for 30 years and save the money. The difference in interest rate between 15 years and 30 years fixed is not that great, but their mortgage payment will be a lot lower. They will have the flexibility of paying extra whenever they want instead of being locked into a high monthly payment. This will greatly improve their cash flow.

[jIM_Ohio]

I am doing the 30 year fixed and invest the 15 year payment route, more or less.

[Snave]

I am assuming the 41% is with taxes included. If so, then it is not necessarily the the house that is the problem, but the mortgage and the length. While I agree with maat55 that it would be nice to do a 15 yr at 25% of their income, a 30 year loan would knock them down to about a 28-30% income to house ratio. I am a math guy and plugged in the numbers. While I don't know their property tax rate, here is a rough estimate of what they would save based on what you told us. If they had a 50K salary, then 41% to housing = $1700 month. If they were to finance the loan at 30 years, they would be a little over $1200 a month and that would be about 29% of a 50K income (and a $500 savings). If they make 100K, then 41% = a 15 year loan of $3400. At 30 years, that same loan would be about $2400 a month and that would be 29% of their income.

[maat55]

The fact is is that they are like most of the people who are struggling with their mortgage because they have to much house. Switching to a 30 year will bandaid the problem but not fix it. Their house owns them.

[InDebtInDC]

Certified financial planner. What else can you do? Some people are just too aggressive in their spendings but too conservative in their investments.

[disneysteve]

The fact is is that they are like most of the people who are struggling with their mortgage because they have to much house. Switching to a 30 year will bandaid the problem but not fix it. Their house owns them.

If their mortgage payment eats up 41% of their income, that is a problem. It sounds like they bought too much house. So I agree with maat55 in that regard. But I do think a refi to a 30-year loan would help. It would lower the payment a fair amount, as Snave detailed. Having an extra $500 or more free each month would probably fix the problem, assuming all other spending is under control and there isn't a bunch of other debt we don't know about. They could restock their EF and build their other savings. I wonder, are they saving anything for retirement? How about college for the 4 kids?

[LivingAlmostLarge]

The 30 year year would only drop them to 35% PITI because they have high property taxes. They would only save 5.9% on a 30 year. I did suggest that but they thought it was stupid to extend their loan when they went for a shorter term solution.

[Snave]

30 years is better than losing the house or falling into debt in other ways b/c they have to reach for a cc to cover expenses.

[jIM_Ohio]

The 30 year year would only drop them to 35% PITI because they have high property taxes. They would only save 5.9% on a 30 year. I did suggest that but they thought it was stupid to extend their loan when they went for a shorter term solution.

Take the 30 year payment plan.

Invest the extra $500 or so in a diversified mutual fund. Mortgage can be paid off around year 12-15 without much risk.

If someone loses a job, use the mortgage paydown fund to make the payment on the house.

I would argue this has less risk than 15 yr fixed, and gives them more control over their finances.

[disneysteve]

The 30 year year would only drop them to 35% PITI because they have high property taxes. They would only save 5.9% on a 30 year. I did suggest that but they thought it was stupid to extend their loan when they went for a shorter term solution.

In last month's MONEY, Jean Chatzky went so far as to suggest that some folks who find themselves in serious trouble today should even consider the 40-year loans as a way to dig their way out. It is better than losing your home.

[LivingAlmostLarge]

I did suggest that but they are dave ramsey followers, hence they think the 15 year is the only answer.

[disneysteve]

I did suggest that but they are dave ramsey followers

In that case, I'd forget trying to talk any sense into them.

[Snave]

I agree with Disney Steve. They probably won't listen. I lived in Nashville for years and worked close to "Financial Peace Plaza." There were probably more DR zealots there than anywhere. All you will get is "Well, Dave says..." Look how what Dave says is working out for them now! They can go to a 30 year fixed, put the additional cash away, and if they have a surplus at the end of the year, make an additional payment or two.