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CASE 2

Mortgage showdown among hard choices for 30-somethings

October 19, 2008

For Angie and Jason, keeping the house is Job 1. And like many homeowners these days, they face a daunting challenge. When the interest obligation on their adjustable-rate mortgage resets next year, their monthly house payment could rise to as much as $5,348 from $3,450, based on today's rates.

With the value of their house down nearly 10% since they bought it, refinancing will be difficult. If they can't refinance into a fixed-rate loan, they should try to negotiate a new loan with their lender, who may be willing to cooperate to avoid yet another foreclosure. If that fails and they end up with the bigger mortgage payment, they should scour their household budget for ways to cut costs.

They need to invest their brokerage account fairly conservatively so it can provide a backstop in case they're in danger of missing a monthly house payment. (It's probably premature to consider trading down to a smaller house -- and mortgage payment -- at this point and might not make financial sense anyway given the current turmoil in the housing market.)

Once the mortgage situation stabilizes, the couple's priority should be paying off their credit cards, then setting up low-cost 529 college savings accounts for their kids. (Gagne recommends plans offered by the state of Utah that combine good investment choices with low costs.)

If possible, they should continue contributing to their 401(k) plans (allocation: 65% stocks, 15% hard assets, 20% bonds), even if it means ratcheting back their children's educational expectations. It provides a valuable tax break, and getting a jump on retirement saving is essential.

Ideally, Angie and Jason should each up their contributions $5,500 a year to the legal maximum, but that's probably not realistic given the challenges they face on the home front.

Angie and Jason

Angie, 36, and Jason, 38, are married with two children, ages 4 and 6. Angie sells Internet advertising, and Jason is an independent film producer. They own a three-bedroom house in Culver City.

Assets

* 401(k) plans: $30,000

* Bank savings account: $8,000

* IRAs: $15,000

* Brokerage accounts: $75,000

* House: $800,000, down from $875,000 purchase price in 2003

Debt

* Mortgage (5.75% interest-only ARM; rate adjusts starting next year): $700,000

* Balance on home equity line of credit (5.8%): $25,000

* Credit cards (12%): $10,000

* Two auto loans (5.9%): $25,000

Annual combined income

$165,000

Annual savings

* 401(k) plans: $10,000 each

* Brokerage account: $10,000

Objectives

* Deal with higher mortgage payments

* Get a handle on spending

* Save for kids' education

* Develop long-term investment and retirement strategy

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