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Help me settle a disagreement between DH and I.
We don't have any credit card debt, so the only debt we have is our student loans (about $15K each) and our mortgage (about $150K). We'd like to pay both of these debts down faster than the terms of the loan, but we disagree on which to pay first. The interest rates are low for both, both about 5%, give or take less than 1%.
I say we should pay down the student loans first for two reasons. 1) They're smaller debts and we'll be completely finished with them more quickly. 2) While there is a chance we could lose money when we sell our house, and lose the extra money we put into the mortgage, we have to pay our student loans no matter what and we might as well focus on those since they're less market-dependent.
I don't know why he wants to pay off the mortgage first. Maybe he just doesn't like having such a big number we owe. Maybe he wants to get rid of the PMI and lower our payments (I don't think we're close to doing that).
The third option is whether we should just pay the minimum on all of these loans and concentrate instead on saving. Interest rates on savings accounts are so depressingly low now that I kind of feel like we might save more in the long run through paying off our debts. We do need an emergency fund and retirement savings in IRAs, but beyond that, paying down debt ahead of schedule could be a savings strategy, of a kind, right?
What do you think?
Why don't you do a combined loan with the mortgage and student loan and that way it gets paid down together?
Just a thought. :)
Student loans. There is basically no way that you can get rid of them if something were to happen but if worse comes to worst, you can have the home foreclosed on. Are you planning on staying in this home for a long time? If you aren't planning on staying for a while, it might not even be worth paying it down.
IMO, I think you should do all of the above! You need to have an emergency fund, and you need to start saving for retirement, immediately if you're not doing so already. I would put some cash every month toward savings/retirement, then put an equal amount towards paying down both your student loans, and your mortgage. You mentioned having PMI, and paying down your loan so you can get rid of that will save you a lot long term.
I'd say student loans for the same reasoning you used - they'll be done faster. Then you'll only have one big thing to deal with. Also, like @MissAsB: said, you can't get rid of student loans unless you do some sort of government writeoff program (i.e. work for them) and I'd imagine if you had that option you would already have done it. I'm sure he's looking at the house as the "bigger picture" but really, the only one that can FOLLOW you anywhere is the students loans if you don't lose value in your house.
I would focus on whichever has the higher interest rate because that will accrue more fees in the long run. I would vote to take care of the loans and the mortgage rather than put the money away...
@MissAsB: I agree with this...
What do you mean you will lose money if you sell it? Are you underwater? In which case you will lose money no matter how much you have paid into it. (or not be able to sell it unless a short sale is approved)
Also dont forget interest on a mortgage is tax deductible so its not as high as it seems in "real" terms. You get something for it technically.
EDIT- wait is this excess money? Savings... definately.
@ simplifiedbride
OK, I know it's best to do all of the above, but there's only so much left after expenses are taken care of! Let's say DH gets a $1000 bonus at work and we want to "do all of the above." How should we split it up among student loans, mortgage, emergency fund, and retirement savings?
I forgot to mention that you should also try to put some money into savings in case something happens. The amount really depends your own situation, my husband and I don't have a ton of money in emergency savings because his job is pretty secure and we have investments we can sell if needed. Also, try to start funding your retirement as soon as you can!
Student loans - for all of the reasons the PPs have stated.
I agree with you on paying down your student loans first. I was watching a financial advisor on CNN when I was trying to strategize paying down my credit cards; his advice was to pay off the smallest amount first, then use the money you save from that toward paying the higher amount off. Like if you had 3 cards, one with a 200 balance, one with a 1k balance, and the other with a 3k balance, pay off the 200 first. Then, that extra $35 you save each month from not having to pay the $200 card off, you should put toward the card with the 1k balance to pay that down faster. Once you pay that down, take the money you would normally be putting toward that toward the 3k balance to pay that down faster. So it's like a rollover effect. I used it that strategy, and it worked!
@brideatbeach: the interest rates are basically the same. The difference is no greater than 4.5% - 5.5%.
@lefeymw: We don't anticipate losing money when we sell the house at all, and we aren't under water. I'm just saying that the house's value is market-dependent, and you never know how much you're going to sell it for. I just read something about the housing crisis moving to cities where house prices were previously ok. It's not likely, but on the off chance that we might lose money in the sale, I didn't want to put a lot more money into the mortgage than we had to. Also, good point about the mortgage interest tax deduction.
I too would say student loans.
But also - considering investing. You could definetly make more than 5% over the long term with stable investments. I know investing scares a lot of people, but if you do stable investments you'll be fine. I'd say split it up. Put some towards the loans and then invest the rest. This way you have it on hand incase an emergency arrises. But more importantly - it'll earn good interest. I put some money into the QLD and SSO, pretty much the most basic stable investments you can make, and my money has increased by 50%. I'm not a stock trader (my fi is haha) but just my 2 cents. Look into it!
@marjojo: I am still confused on the losing money piece
If you have paid 50K on a 100K loan and sell the house for 75K, you still own the bank 25K,
If you sell the house for 25K, you still own the bank 75K...
If you sell it for 125K you owe the bank 50K left on your loan and you make 25K
either way you owe the bank 100K.
the only way you "make" money is if you sell if for more than 100K.
So I am clear, you think its not a large chance, but a chance that you will sell it less than your total loan on the house? and that is where you are afraid you will lose money? You owe the bank no matter how much equity you have in it.
@bunnyfoofoo: Ah yes. Snowballing. It's a great strategy! Google for Dave Ramsey and Snowball for more info.
As for the OP, I'm voting also for student loans. They can't garnish your wages for a house - but you can be darn sure the government will come after you for that money regardless.
How long is the term on the student loans? How's the amortization table look for it? For some reason, my first thought is that paying down the mortgage first will save in the long run since they will not be able to charge you interest on the extra that you've paid, making your payments work more in your favor since it will adjust your principal/interest ratio. Mentally, to get rid of the smaller loan will definitly FEEL better, but that might not work out best when the numbers are crunched. There should be a defnitive answer here, make up a spreadsheet and work out the math for the different senarios to see which yields the least amount of interest payements.
@pinkshoes: it becomes more complicated than that because of tax deductions, potential for fileing for bankrupcy in future, increasing HOE line of credit for emergencies etc... In this case I don't just think its a $ calculation issue (although definately a large factor)
@lefeymw: Tax deductions can be factored into the calculations also. I didn't really consider bankrupcy and HOE line of credit as part of this, but I dont think that it should ever come to that. Sounds like OP has enough of a grip not to get to that point if she has left over for extra payments. (I would always keep a comfortable savings for emergency (for me that is 1 years salary), before making any extra payments on anything too).
@marjojo: You always pay off the smallest debt first. Also with SL interest based on your income bracket you are only allowed to write off a percentage vs 100% of interest on home loan is deductible.
I also say the Student loans for the same reasons others have said. Those loans are the only things that you can't ever get away from. I would also consider putting a small amount each month into an emergency fund.
Don't forget that home loan interest is only deductible if your total itemized deductions are over the standard deduction ($11,400 for a married couple this year). But still, I would pay off the student loans first, assuming you have emergency savings and retirement savings.
Dave Ramsey would tell you to 1. Set aside an emergency fund 2. pay down the smallest things first ( so that would be your student loans) 3. try to put all your extra income into paying down your mortgage 4. Then save save save!!
I would probably save a little bit by making a bigger emergency fund while paying down my mortgage, too, though.
Totally student loans.
Mortgage is a secured debt and therefore is safer. Student loans are not and figure more heavily into your credit score.
Fun fact - My credit score actually gets dinged because I *don't* have a mortgage. True fact.
If you get tax credits for the interest paid for your student loans like you do in Canada, leave them for last.
Depending on where you live, i.e Canada (with the tax credits)or the U.S, I'd say pay your student loans off first. If you plan on living in your house for awhile, this (I think) would be a better decision.
I have a student loan at 5% interest (9000 left, down from 30,000) and a mortgage at 5.78% (198,000 left).
We're currently using my entire salary toward debt repayment ($3200 in extra payments per month above our regular mortgage payment) which we've allocated as $800 to student loans and the remainder to the mortgage. We also pay to RRSPs, and other savings, but from my husband's salary.
For us our mortgage is higher interest, so to us it made sense to pay it off as much as possible. My student loan is federal, and I receive a tax benefit for the interest paid on it in a year, which "reduces" the interest further.
Also, the way our particular mortgage is structured, we have a lot of flexibility to "borrow" money back from our mortgage without penalty/remortgaging, so that something else to take into consideration.
Long story short, I just wanted to provide an example of a situation where it might make sense to pay the mortgage first. To me, the student loan if you're paying it on schedule is "good debt". Money paid toward the principal of your mortgage can save you interest in the current moment, as well as getting it back to reinvest in your next home if you plan to sell.
Student loans without a question. That should be the absolute first thing on the agenda. Those puppies aren't going anywhere, and when school is finished they come knocking pretty quickly.
You should pay down the student loans first. It is a smaller debt and you will be able to pay them off a lot faster than you will be able to pay off your mortgage. I don't think many understand how much you have to be willing to put in each and every month to pay off your mortgage faster. Take a look at an online mortgage calculator to see what you need to do, Dave Ramsey has a great one on his website. Only a small portion of your mortgage payment is actually put towards the principal, thus the factor in getting it paid off quicker. Do you have a fixed rate? We currently have no debt and are paying off our mortgage at a rate to have it done in 10 years instead of 30. We are able to do this too bc we paid off my student loans at 17K first. Here is what we have to do to acheive this and we have a similar ratio as you. Our mortgage was approx. 150k and at a 5% fixed rate. We have to pay $700 each month extra towards the principal and just for padding, we make an extra whole mortgage payment just towards the principal once or twice a year. Are you even able to do this? If not, then your mortgage is not going to go any where any faster. You are better putting any extra money you can towards the smaller debt and getting rid of it.
I would have to argue against the grain here. Depending on how far in you are to your student loans, there could be no savings in paying them off quicker as you may have already paid all of the interest. Also, despite the interest on both loans lookng similar, 1% of 150k is significantly more than 1% of 30k so depending on which is lower, you could realize savings based on the interest. Tax deductions is another issue as well as the structure of your mortgage. I think it goes without saying that if you don't currently have a significant savings you should put the extra $$ into savings for now. To me, this question is not as clear cut as some PP make it out to be. Paying off the smallest debt first does not make sense to me in this case. Yes, it seems nice but, carrying a student loan to it's term is not going to hurt you and at least with the mortgage, you'll have equity in the house so, if you need the $ in an emergency you can refinance whereas the student loan is just a debt paid with no asset (besides your education). I say pay the mortgage, especially if you can reduce the principle.
The first thing you should do is to have an emergency fund. If you don't have that yet, you need to start saving for it immediately. Once you have that cushion, then start paying down your student loans first. Though interest on your student loans are also tax deductible, they certainly aren't going anywhere. Getting them off of your plate first will help to pave the way of you paying off your mortgage (the bigger loan) next. It will definitely take you longer to pay off your mortgage than it will to pay off your student loans, so get the smaller debt out of the way first, then tackle the larger debt.
I think you should pay down your student loans first. But you could maybe compromise and put a little extra down on your mortgage too? We recently added $50.00 to our twice-monthly payments and it's basically doubled the amount that is going towards the principle.
The stock market averages an 8% return over the long run. It is generally a good rule of thumb that if the interest rates on your debt are less than 8%, you should consider putting any extra money into long-term savings instead of paying down debt. Consider putting it in an IRA, so the money accrues tax free and is not taxed if you withdraw it after retirement age.
This advice came directly from our financial planner.
I must have missed something in your posts. While I still stand by my post, I did not realize that you guys did not have an emergency savings. Everyone needs to have some sort of savings, because the what ifs do occur! When you least expect it too.
First I would get a sizeable amount in an e-fund and then look toward putting extra elsewhere. I see student loans as a good loan, an investment in yourself. They also may be discharged upon the borrower's death, which is morbid, but something to think about.
I'm with Slicey19.
@marjojo: Pay down the Mortage to get rid of the PMI and then switch to the student loans-after you build up 6 months salary in savings.
I agree with the emergency fund. The rule of thumb used to be 3 months of your salary, but financial advisors are now suggesting 6-9 months because of the economy. Here are my recommendations ranked in order.
1. Pay down private student loans.
2. If your house is in a depressed market, get the mortgage down, especially if your mortgage isn't a fixed rate. It will give you bargaining power if you re-finance in the future.
3. Pay down unsubsidized federal loans. (if your loans aren't consolidated, check into this).
4. Pay down subsidized loans.
If you don't have an emergency fund, this should be your top priority. After you've created an emergency fund, pay down the student loans.
why can't you do both? Just spit it between the two? I don't see why you have to pick one? That's what I'd do. I'd first put money towards emergency savings, then once that's 6-8 months full I'd put toward retirement then split between debts. I may be wrong but seems logical to me - assuming you said the interest rates were the same.
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