Get With The Plan: May 31, 2009

53109Meagan and Mike could be poster children for debt-free living.

“We recently paid off our second mortgage for $18,500, and have paid off all car and student loans years before they were due. We pay our full credit card bills every month,” said Meagan, 28. “My husband and I are trying to save for a larger house and for a rainy day.”

The couple stashes away between $2,000 and $3,000 per month, depending on Meagan’s commission.

They’d like to buy a larger home before their adjustable-rate mortgage adjusts in three years, and they’d like to start a family around the same time. Retirement is their long-term goal.

Meagan and Mike, whose names have been changed, have so far set aside $27,109 in 401(k) plans, $5,081 in IRAs, $34,433 in a money market and $3,500 in checking.

The Star-Ledger asked Michael Pirrello, a certified financial planner with Mill Ridge Wealth Management in Chester, to help Meagan and Mike develop a plan to help them reach their goals.

“They are the exception to the norm in this difficult economy,” Pirrello says. “They are fiercely committed to living within their means and very debt-averse. They are building a foundation for a strong financial future.”

On a new and larger home purchase, Pirrello says Meagan and Mike may qualify for a larger
mortgage because of their cash flow, lack of consumer debt and strong credit rating. Taking on a larger mortgage may not be in vogue these days, but for Meagan and Mike, the state of the real estate market and the interest rate environment may mean the time is right.

Pirrello says interest rates for mortgages are at historically low levels and there is reason to think inflationary pressures will cause interest rates to potentially increase significantly over the next two to five years or so.

“With that backdrop, the opportunity to lock into a historically low 30-year, fixed mortgage under 5 percent on that larger home they desire is certainly worth considering,” he says.

Pirrello says the real estate market is also on their side. Today, a 10 percent increase in real estate values will reflect a $29,000 increase in value on their current home, but also a $43,000 increase in value on a $430,000 trade-up property.

“They will continually be at a value disadvantage as values increase, so finding that trade-up home now, prior to a positive real estate market move, may make sense,” Pirrello says. “They should not hesitate to begin looking now, and if they find that trade-up dream home that fits within their budget, it may make sense to move sooner than later.”

He says assuming a sales price of $290,000 on their current home and 4 percent real estate transaction costs, they can net $86,000. That would represent a 20 percent down payment on a $430,000 home.

A 30-year fixed mortgage of $344,000 at 4.875 percent will represent a mortgage payment of $1,820 per month, and with taxes and insurance, they’d still be within their cash flow.

Before starting a family, Pirrello says there are financial considerations, such as the cost of raising children, education savings and additional life insurance coverage. That’s in addition to the larger mortgage.

“Life insurance will serve as an income replacement to potentially pay off a mortgage or fund college educations if necessary,” he says. “Mike currently does not have any coverage and Meagan has limited coverage tied to her employer. Young and healthy is the perfect time to lock in on low insurance premiums.”