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Answers (15)
Best Answer
- Pasadenan
- Contributions:21466
Also, when calculating the benefit/risk analysis for paying off the student debt, consider the income tax impact. Interest paid on high education student debt up to $2500 can decrease you taxable income by up to that amount. (line 33 of schedule 1040). Likely at that income for married filing jointly, one is in the 25% federal income tax bracket; meaning that 8% interest rate effectively becomes only 6% for up to the first $2500 of interest each year (with the remainder still being effectively at 8% interest). There may be similar State income tax benefits. (Note, that is NOT on schedule A, so one may still take the standardized deductions and not have to itemize).
I have no clue the loan terms for the student debt and how many years remain, but it appears that even with 20 years remaining, one is still over the tax benefit limit by a factor of 2; meaning the effective interest rate for that debt was about 7%.
Student debt is sometimes factored in differently than other debt by mortgage underwriters, so if one has to have outstanding debt that is not paid off, student debt is probably one of the more preferable ones.
I have no clue the loan terms for the student debt and how many years remain, but it appears that even with 20 years remaining, one is still over the tax benefit limit by a factor of 2; meaning the effective interest rate for that debt was about 7%.
Student debt is sometimes factored in differently than other debt by mortgage underwriters, so if one has to have outstanding debt that is not paid off, student debt is probably one of the more preferable ones.
- Pasadenan
- Contributions:21466
By the way, if someone told you that you had to have a car loan to create a good FICO score, they lied to you. You don't have to pay any interest to build a good FICO score; you just need to make all payments on time or early, and show that you can use credit responsibly. As far as a FICO score is concerned, paying off the car loan the first month is the same as paying it off over 6 years.... Sure; diversity of credit factors into the FICO score; but a couple store cards and a few credit cards that never accrue a balance for interest purposes (paid off each month in full) is about the same diversity as adding a car payment.
Sure, regular mortgage payments (or a paid off mortgage) helps your FICO score even more, but that is kind of a mute point if the entire purpose of building a good FICO score is to qualify for the best mortgage rates for a first housing purchase.
Sure, regular mortgage payments (or a paid off mortgage) helps your FICO score even more, but that is kind of a mute point if the entire purpose of building a good FICO score is to qualify for the best mortgage rates for a first housing purchase.
- Pasadenan
- Contributions:21466
No mention was made regarding how many years are remaining on the existing loan terms...
Obviously it does make some difference when you plug the numbers into your spread sheet to do the calculations. Nor was it mentioned why financing the cars at 10% was considered desirable rather than paying cash, or buying used or buying less car to be able to pay cash.
In general it usually makes the most sense to pay down the highest interest credit first, but there are multiple exceptions, such as more flexible loan terms, or interest rates that are less than the return one is getting on an investment by parking the money elsewhere. And if it is a credit card (which it is not in this case), though it makes sense to pay it down as quick as possible, the longer held cards should be kept open with no balance to maintain a higher FICO score.
The purpose of deficit spending is to increase your financial flexibility; not to make you a slave of the financial institutions. Why one would want to just give away $7k per year in interest to some financial institutions for their profit; I have no idea, especially when the financial institutions regularly offer 0% interest. If you have 3 years left on your car loan, that means you are paying $968 per month in car payments, and that cash flow would be freed up for other things if you just paid that debt off. That $30k in the bank is only making $17.50 per month, so why you don't just pay yourself that 10% interest, I have no idea. If you only have 2 years left on those car payments, that is $1384 per month in car payments that would be freed up if the debt was paid off. Sure, if you have 5 years left on those car payments, you would only be freeing up $637 per month in cash flow, but that would be for all those additional years; $8¼K going straight to interest on the debt, and your net worth would be $8.25k less than if you just paid off the debt and skipped the interest.
And if you presently have rental arrangements that cost substantially less than mortgage payments for the equivalent living space, why would one want to give that up when the Federal Reserve has promised to keep 30 yr fixed mortgage interest rates in the 4% range for at least the next 2 years, and when housing prices in most of the country will not be rising for at least a decade? Sure, if the right bargain comes along that meet all your desires, one wants to be able to jump quickly, but that means not only that one wants at least 20% down payment available plus at least 3% closing costs, plus at least a few months "reserve", but that one also wants a low enough debt to income ratio so that the existing debt payments doesn't impact the qualifications for the desired mortgage loan for the remainder of the purchase price (since it appears obvious that you are not planning on paying cash for the entire house purchase).
I have no clue how much house you "want"; but delayed gratification is usually worth the effort.
Obviously it does make some difference when you plug the numbers into your spread sheet to do the calculations. Nor was it mentioned why financing the cars at 10% was considered desirable rather than paying cash, or buying used or buying less car to be able to pay cash.
In general it usually makes the most sense to pay down the highest interest credit first, but there are multiple exceptions, such as more flexible loan terms, or interest rates that are less than the return one is getting on an investment by parking the money elsewhere. And if it is a credit card (which it is not in this case), though it makes sense to pay it down as quick as possible, the longer held cards should be kept open with no balance to maintain a higher FICO score.
The purpose of deficit spending is to increase your financial flexibility; not to make you a slave of the financial institutions. Why one would want to just give away $7k per year in interest to some financial institutions for their profit; I have no idea, especially when the financial institutions regularly offer 0% interest. If you have 3 years left on your car loan, that means you are paying $968 per month in car payments, and that cash flow would be freed up for other things if you just paid that debt off. That $30k in the bank is only making $17.50 per month, so why you don't just pay yourself that 10% interest, I have no idea. If you only have 2 years left on those car payments, that is $1384 per month in car payments that would be freed up if the debt was paid off. Sure, if you have 5 years left on those car payments, you would only be freeing up $637 per month in cash flow, but that would be for all those additional years; $8¼K going straight to interest on the debt, and your net worth would be $8.25k less than if you just paid off the debt and skipped the interest.
And if you presently have rental arrangements that cost substantially less than mortgage payments for the equivalent living space, why would one want to give that up when the Federal Reserve has promised to keep 30 yr fixed mortgage interest rates in the 4% range for at least the next 2 years, and when housing prices in most of the country will not be rising for at least a decade? Sure, if the right bargain comes along that meet all your desires, one wants to be able to jump quickly, but that means not only that one wants at least 20% down payment available plus at least 3% closing costs, plus at least a few months "reserve", but that one also wants a low enough debt to income ratio so that the existing debt payments doesn't impact the qualifications for the desired mortgage loan for the remainder of the purchase price (since it appears obvious that you are not planning on paying cash for the entire house purchase).
I have no clue how much house you "want"; but delayed gratification is usually worth the effort.
- SteadyState
- Contributions:787
Jonathan Silva makes the following points:
1. "You may not "need" to pay off anything in order to qualify."
This is a non-issue - just because the loan shark is willing to lend you money does NOT make the loan a good financial decision!
2. "Now, you may "want" to pay off some debt. 8-10% could be considered a high interest rate on your debt... but, it beats 19-28%, like you might find on credit cards. Your income is good, and these debts may not be an issue really."
Wow. Of course 8%-10% is better than 19-28%! Duh! But it must have appeared as a brilliant deduction to you?
Moreover, the questioners dept is $80K - this is ~100% of his take home pay after taxes. This is a real issue - both for the lenders who want to get paid and to the questioners who has a sword over his neck till he pays off the debt.
3. "Now... with home interest rates hovering around 4%.. now is the time to buy. "
Of course agents have been saying this since 2007 and it has not worked for the buyers? If you repeat this mantra for the next decade perhaps some day it will be true and you can tell the buyers that year - see I told you so!!!
REAs should not offer financial advice. They are not trained and it shows!!! In general, adding more dept at 4% when you already have dept at 8%-10% is NOT a good idea unless the investment's ROI exceeds the sum of interest payment of your existing debt plus the excess monies paid for your new debt plus the opportunity cost of your down payment.
No one can guarantee the ROI on an investment BUT I can guarantee that the lenders will aggressively collect 8% on the $50K and 10% on the $30K each and every year till it is paid off. As will the bank who lend you the money at 4%!!!!!!
1. "You may not "need" to pay off anything in order to qualify."
This is a non-issue - just because the loan shark is willing to lend you money does NOT make the loan a good financial decision!
2. "Now, you may "want" to pay off some debt. 8-10% could be considered a high interest rate on your debt... but, it beats 19-28%, like you might find on credit cards. Your income is good, and these debts may not be an issue really."
Wow. Of course 8%-10% is better than 19-28%! Duh! But it must have appeared as a brilliant deduction to you?
Moreover, the questioners dept is $80K - this is ~100% of his take home pay after taxes. This is a real issue - both for the lenders who want to get paid and to the questioners who has a sword over his neck till he pays off the debt.
3. "Now... with home interest rates hovering around 4%.. now is the time to buy. "
Of course agents have been saying this since 2007 and it has not worked for the buyers? If you repeat this mantra for the next decade perhaps some day it will be true and you can tell the buyers that year - see I told you so!!!
REAs should not offer financial advice. They are not trained and it shows!!! In general, adding more dept at 4% when you already have dept at 8%-10% is NOT a good idea unless the investment's ROI exceeds the sum of interest payment of your existing debt plus the excess monies paid for your new debt plus the opportunity cost of your down payment.
No one can guarantee the ROI on an investment BUT I can guarantee that the lenders will aggressively collect 8% on the $50K and 10% on the $30K each and every year till it is paid off. As will the bank who lend you the money at 4%!!!!!!
- Jonathan Silva, "Jonathan Silva"
- Contributions:12
A lot has been said here already, but, I may add a couple of ideas. One thing to do is talk to a mortgage lender and determine what you qualify for. You may not "need" to pay off anything in order to qualify. Now, you may "want" to pay off some debt. 8-10% could be considered a high interest rate on your debt... but, it beats 19-28%, like you might find on credit cards. Your income is good, and these debts may not be an issue really. Now... with home interest rates hovering around 4%.. now is the time to buy. Also, to consider is the drop in values for homes in your area. I am not real familiar with Texas real estate, but I would encourage you to check into what the values have done over time, and if now seems like a low point. Your money is now earning maybe 1% in a cd or money market or savings, and if you could pay that debt off, you would be ahead! You sound like good savers.. I would make sure you leave yourself in a position to continue that practice as well.
Jonathan
Jonathan
- SteadyState
- Contributions:787
Let's see:
Your situation:
1. $50K in student loans at 8% (i.e., $4K/year or $333/month)
2. $30K in car loan at 10% (i.e., $3K/year or $250/month)
Your solution:
Buy a home at ~4%. (I.e., increase your debt even more...)
Why would this be in your financial interest?
Let's assume you pay $X per year in rent; your home costs $Y per year
This can work only if the your home increases in value by at least $7K + (Y - X) each year. This is possible but unlikely - you may have a better chance of winning the lotto depending on your area.
Your situation:
1. $50K in student loans at 8% (i.e., $4K/year or $333/month)
2. $30K in car loan at 10% (i.e., $3K/year or $250/month)
Your solution:
Buy a home at ~4%. (I.e., increase your debt even more...)
Why would this be in your financial interest?
Let's assume you pay $X per year in rent; your home costs $Y per year
This can work only if the your home increases in value by at least $7K + (Y - X) each year. This is possible but unlikely - you may have a better chance of winning the lotto depending on your area.
- Maria Avellaneda, "MAvellaneda"
- Contributions:278
Sorry about typos, I'm not good at typing. For some reason coudl not edit. My apologies.
- Maria Avellaneda, "MAvellaneda"
- Contributions:278
I agree with Pat vehicles first , for several reasons. Being that pays higher interest . Second i will pay as much of your students loans. How much depends on saveral matters, do you have a reserve fund other than the 60k. Do you have other dbts you haven't mentioned such as ccards. Rent is not cheap and there are advantages to own your home, but you should not become house poor. Were did you get the 60? If you have been saving, it was not the best move to save such a big amount when you have such amount of debt. Analyse you overall situation carefully and plan for unexpected situations.
- hpvanc
- Contributions:2579
Don't forget to plan for emergency fund. Regardless of how much income you have, you are already servicing a substantial amount of debt, and adding a mortgage will increase your debt and increase your required monthly outlay under all but the smallest mortgage amounts. You need to have that emergency fund in case there is an interruption in your income, you have to make a major car repair, after you buy a house a major unexpected expense comes up, or the opportunity for a once in a lifetime opportunity comes up.
Maybe you have already factored in an emergency fund, and will still have one if you use the 60K, but if you have not already factored in an emergency fund do so. Then make the financial decision on how best to use the remainder to maximize your financial overall (not just housing) financial position.
Maybe you have already factored in an emergency fund, and will still have one if you use the 60K, but if you have not already factored in an emergency fund do so. Then make the financial decision on how best to use the remainder to maximize your financial overall (not just housing) financial position.
- SoCal_Engr
- Contributions:5670
It's disconcerting to me that the REAs can tell the OP "exactly" what they should do, while the rest of us are forming responses in the form of general information that the OP can use to make their own informed decisions.
It's not rocket science, and consumers need to be able/allowed to make these decisions on their own.
It's not rocket science, and consumers need to be able/allowed to make these decisions on their own.
- Damon Williamson, "RealtorDamon PRO"
- Contributions:165
What price range of home would be the first question anyone answering this should ask. Once I know that I can tell you exactly what to do financially. It would also help to know the payment of the car and the payment of the student loans.
- Pat Pribisko, "Pat Pribisko"
- Contributions:1426
This is what I would do if I were in your situation. I would pay off the vehicle debt in full. With the remaining $30,000, I would pay the student loans down with $10,000, leaving $20,000 of student loans remaining. The remaining $20,000 I would use as a down payment on a home. Again, this is only my personal opinion.
- SoCal_Engr
- Contributions:5670
I have to agree with Wetdawgs. What I read was...
We currently have $80K in debt and $60K in cash. Should we use the $60K to pay down the debt, or to take on more debt?
I am sure that there may be a middle ground (i.e., maybe use $30K to pay off the vehicles and then review your remaing options), but that really depends on the terms of your current loans.
The best way to really decide what you should do is to put together a financial plan. Since you have existing debt and cash-on-hand, how you service those debts would be a part of that financial plan. For example, what kind of cash-flow impact would be realized by paying off the $50K debt? the $30K debt? If you use the cash-on-hand to pay off an existing debt, how does that impact your timeline for making a house purchase? How long before you could save enough money (based on the increased monthly cash flow) to realistically consider purchasing?
As you can see, having a financial plan helps to put all decisions into a "big picture" context, which is really a must to make sound decisions.
We currently have $80K in debt and $60K in cash. Should we use the $60K to pay down the debt, or to take on more debt?
I am sure that there may be a middle ground (i.e., maybe use $30K to pay off the vehicles and then review your remaing options), but that really depends on the terms of your current loans.
The best way to really decide what you should do is to put together a financial plan. Since you have existing debt and cash-on-hand, how you service those debts would be a part of that financial plan. For example, what kind of cash-flow impact would be realized by paying off the $50K debt? the $30K debt? If you use the cash-on-hand to pay off an existing debt, how does that impact your timeline for making a house purchase? How long before you could save enough money (based on the increased monthly cash flow) to realistically consider purchasing?
As you can see, having a financial plan helps to put all decisions into a "big picture" context, which is really a must to make sound decisions.
- trulytru
- Contributions:2
cost of living in our area is extremely low...our debt-to-income ratio before a house payment is right at 6% with the car and student loan payments...we have ample room for steak at least 3 or 4 nights per week! ;)
- wetdawgs
- Contributions:26854
I would sit down with a number of calculators. You have quite a debt load with $80 k in debt, so your flexibility in obtaining a mortgage will be affected. What percentage of your monthly income are you using to pay the student loan and auto loan debt?
I'm a frugal fuddy duddy, so would pay off the bulk of the loans first because I don't like to be stretched thin and eat beans and rice all the time (enough of that in grad school).
I'm a frugal fuddy duddy, so would pay off the bulk of the loans first because I don't like to be stretched thin and eat beans and rice all the time (enough of that in grad school).
which do we pay first?
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