Post # 1
Help me settle a disagreement between Darling Husband 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?
Post # 3
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. 🙂
Post # 4
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.
Post # 5
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.
Post # 6
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.
Post # 7
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…
Post # 8
@MrsSaltWaterTaffy: 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.
Post # 9
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 Darling Husband 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?
Post # 10
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!
Post # 11
Student loans – for all of the reasons the PPs have stated.
Post # 12
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!
Post # 13
@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.
Post # 14
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!
Post # 15
@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.
Post # 16
@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.