Update: Pay Mortgage or Pay Student Loans

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easye418
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Update: Pay Mortgage or Pay Student Loans

Post by easye418 »

All,

I know it seems like I post the same thread over and over again. But this is definitely helping me focus in on exactly what needs to be done over the next 12 months and that time is CRUCIAL. Need some advice... I think I have a runway of about 12 months before baby talk gets serious.

But thank you for continued support and patience while I figure this mess out.

Age: Both 26 by end of 2015. Currently 26 me and 25 her.
Salary: $116K Dual Income ($70k me/$46k her)
Tax Brackets: 25%, 0% state TX
Retirement Accounts: $100k in Vanguard Lazy 3 fund (Bene IRA)
$1.2k in new 401K (just started job 5 months ago)
Recently paid off $16K debt, raised contributions from 6% to 15%, company match 3%
I take my RMD and roll it into a tIRA. Well, I "take my income" and roll it into my tIRA
Side income/ Tax refund:
I played around with Taxcaster, I see that we should have somewhere between a $7k or greater tax refund.
I also have $7k-$10k cash coming from side income at the end of the year.
Along with, assets I am liquidating now that could provided $5-$10k cash.
--------------------------------------------------------------------------------------------------------------------------------
Debts:
--------------------------------------------------------------------------------------------------------------------------------
Loan Amount Rate
Student Loan 1 $27,505.30 6.80%
Student Loan 2 $9,204.32 5.16%
Student Loan 3 $23,353.28 ~4%
Student Loan 4 $5,465.58 ~3%
------------------------------------------------------------------------------------------------------------------------------
Mortgage:
Bought Sept 5th, 2014 @ $331K.
Orig Loan:$313,785.00 @ 30 y fixed 4.125%
Current: $308,629.62
PMI: $162/mo :oops:
Mortgage Payment (including PMI, Home Owners Ins) = $1,810.34
Property Tax: $9,000 a year :oops: In a stupid MUD Tax area, adds 1% to my tax bill.
Total Mortgage Payment: ~$2,550.

Current Home value (today, take a while to sell): $360K
Expected Home value (optimistic, 4%-11% appreciation YoY): $375K-$400K
----------------------------------------------------------------------------------------------------------------------------------
When the baby comes, the wife is going to stay at home. We will lose the $47k a year. However, we have 12-24 months of dual income, and we can pound away at either: Student Loans or Principal. The Mortgage Payment is unacheiveable going down to one income @ $2,550.

Assuming $375k sale and $350K net:
Option 1: Beat the ["stuff" --admin LadyGeek] out of Student loans, sell the house and have equity of around $50k to put down on a house.
Option 2: Beat the ["stuff" --admin LadyGeek] out of Mortgage Principal, sell the house and have equity of around $75-$100k to put down on a house.

My ultimate goal: Allow my wife to stop working to raise our child(ren).

Thoughts: I think Option 2 is looking like a better, but not financially as smart idea because if I have $100K to put down on a say $325K house, I will have a $225k mortgage over 30 years. The key here is the new house we are looking at will have a property tax payment of close to $6K, instead of $9k

****New House will be in $325k range, don't tell me to buy a $200k house***
Last edited by easye418 on Fri Sep 11, 2015 8:42 am, edited 3 times in total.
grettman
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by grettman »

If you don't want folks to tell you to by a less expensive house then you really don't want to hear this:

1. Sell your house
2. Pay off the student loans
3. Establish an emergency fund
4. Stock pile cash in prep for the baby
5. Rent a nice cheap place until you have 20% down

If having a nice house soon rather than later is a higher priority than retirement, cut back on contributions up to the employer match.

Problem is you don't make enough income to juggle what seems to be several #1 priorities. Something has to give.
Topic Author
easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

grettman wrote:If you don't want folks to tell you to by a less expensive house then you really don't want to hear this:

1. Sell your house
2. Pay off the student loans
3. Establish an emergency fund
4. Stock pile cash in prep for the baby
5. Rent a nice cheap place until you have 20% down

If having a nice house soon rather than later is a higher priority than retirement, cut back on contributions up to the employer match.

Problem is you don't make enough income to juggle what seems to be several #1 priorities. Something has to give.
Still doesn't answer the question at hand... I will get slaughtered like a pig if I sell my house right now.

Pay the Mortgage Principal or Pay the Student Loan debt?
bigred77
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by bigred77 »

Your current situation comes from buying a house for 331k less than a year ago.

Why would buying a house for 325k next year help your situation dramatically? Plus it will be a less desirable house than what you currently have.

Your going to get eaten alive in transaction costs and friction. I would advise trying to increase your cashfflow by paying off the lowest balance student loans regardless of interest rate. I would be trying to increase your salary at work if you want to have a stay at home wife and still live in a $300k+ house.

Your other options are too have both parents work or sell the house, have your wife stay home, and rent.
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

bigred77 wrote:Your current situation comes from buying a house for 331k less than a year ago.

Why would buying a house for 325k next year help your situation dramatically? Plus it will be a less desirable house than what you currently have.

Your going to get eaten alive in transaction costs and friction. I would advise trying to increase your cashfflow by paying off the lowest balance student loans regardless of interest rate. I would be trying to increase your salary at work if you want to have a stay at home wife and still live in a $300k+ house.

Your other options are too have both parents work or sell the house, have your wife stay home, and rent.
Because we will still be living on $116k (or more with raises) income for another 18-24 months... We are bundling cash away at $3k a month.

$54-$72k cash from income and I have $27k side income coming this year... $81k to $99k in 18-24 months would dramatically help my situation.

That is on top of paying minimums.
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market timer
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by market timer »

I'd prepay the student loans. Then, when your wife leaves her job, you won't have to make the student loan payments for a while. Prepaying the mortgage does nothing to help your cash flow in the short run.

Selling the house seems way too expensive for not much in the way of cost savings. You have enough assets and income, even with a SAHM, to afford your house. Save a bit less for retirement those first few years. Worst case, use the RMDs to help pay the mortgage.
ktd
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by ktd »

I would pay those student loans first.
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

market timer wrote:I'd prepay the student loans. Then, when your wife leaves her job, you won't have to make the student loan payments for a while. Prepaying the mortgage does nothing to help your cash flow in the short run.

Selling the house seems way too expensive for not much in the way of cost savings. You have enough assets and income, even with a SAHM, to afford your house. Save a bit less for retirement those first few years. Worst case, use the RMDs to help pay the mortgage.
The only other thing I can think of is savings for a huge curtail payment and re-fi the mortgage. If I can bring $30-$50k to the table, drop my mortgage into the mid $200's, eliminate PMI and drop my payment $200 bucks. It would bring my payment close to $2,100 bucks. It's that stupid property tax that is absolutely killing me....$750 bucks a month.
Ping Pong
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by Ping Pong »

You could pay off all your student loans, highest interest rate ones first. Then pay down your mortgage principal enough to remove PMI. That should free up a lot of cash flow. You might have to reduce your 401(k) deferrals for awhile to do this in your desired time frame. Then maybe you could keep the house.
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

Ping Pong wrote:You could pay off all your student loans, highest interest rate ones first. Then pay down your mortgage principal enough to remove PMI. That should free up a lot of cash flow. You might have to reduce your 401(k) deferrals for awhile to do this in your desired time frame. Then maybe you could keep the house.
Ping Pong wrote:You could pay off all your student loans, highest interest rate ones first. Then pay down your mortgage principal enough to remove PMI. That should free up a lot of cash flow. You might have to reduce your 401(k) deferrals for awhile to do this in your desired time frame. Then maybe you could keep the house.
It does seem like the smart thing to do. However, it would kill me to reduce my 401k deferrals, I literally just cleared a bunch of space to increase them :(
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market timer
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by market timer »

easye418 wrote:
market timer wrote:I'd prepay the student loans. Then, when your wife leaves her job, you won't have to make the student loan payments for a while. Prepaying the mortgage does nothing to help your cash flow in the short run.

Selling the house seems way too expensive for not much in the way of cost savings. You have enough assets and income, even with a SAHM, to afford your house. Save a bit less for retirement those first few years. Worst case, use the RMDs to help pay the mortgage.
The only other thing I can think of is savings for a huge curtail payment and re-fi the mortgage. If I can bring $30-$50k to the table, drop my mortgage into the mid $200's, eliminate PMI and drop my payment $200 bucks. It would bring my payment close to $2,100 bucks. It's that stupid property tax that is absolutely killing me....$750 bucks a month.
Yeah, a cash-in refi to eliminate PMI might actually be better than paying off the student loans first, in terms of the interest you avoid paying. From a cash flow perspective, paying down the student loans first is best.
CoAndy
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by CoAndy »

Perhaps I missed it but why are you selling your current home after owning it for a year? I thought it was to reduce expenses but I see you are looking at a similar home to purchase.

Anyway, I think I would attack the highest interest student loan debt first. I also would reduce 401(k) to the company matching level if needed.
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

CoAndy wrote:Perhaps I missed it but why are you selling your current home after owning it for a year? I thought it was to reduce expenses but I see you are looking at a similar home to purchase.

Anyway, I think I would attack the highest interest student loan debt first. I also would reduce 401(k) to the company matching level if needed.
To take in some of that appreciation while reducing my mortgage.
bigred77
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by bigred77 »

I see your in Texas and property taxes are KILLER here. Its how they make up the difference from not having a state income tax.

If you think you can raise up 100k or so in cash in the next 2 years than yes, I would pay off the student loans first then pay down the mortgage and refinance.

I would absolutely not sell the house though unless you plan to rent or buy something under 250k. You will get killed in transaction costs.
bigred77
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by bigred77 »

Also, just checking here but you have filed your homeowners exemption with your county appraisal district right? It should reduce your property taxes by 20%. I'm amazed how many first time home buyers in Texas I see forget to do this for a few years.
Topic Author
easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

bigred77 wrote:I see your in Texas and property taxes are KILLER here. Its how they make up the difference from not having a state income tax.

If you think you can raise up 100k or so in cash in the next 2 years than yes, I would pay off the student loans first then pay down the mortgage and refinance.

I would absolutely not sell the house though unless you plan to rent or buy something under 250k. You will get killed in transaction costs.
Yes they are! I definitely can raise $100k in two years.
bigred77 wrote:Also, just checking here but you have filed your homeowners exemption with your county appraisal district right? It should reduce your property taxes by 20%. I'm amazed how many first time home buyers in Texas I see forget to do this for a few years.
Yes sir. Does the 20% factor in when I get the bill from them next year? or can will my estimate tax be adjusted already? If its adjusted already, I did not get 20% savings.
bigred77
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by bigred77 »

easye418 wrote:
Yes sir. Does the 20% factor in when I get the bill from them next year? or can will my estimate tax be adjusted already? If its adjusted already, I did not get 20% savings.
We don't receive estimated tax bills in my county so I'm not sure. I get my bill around Dec 1st and I think they give me until Feb 1st to pay it. The exemption should be notated and the total bill should reflect it.

To check i would go to the county appraisal district website and see what the total percentage is (lets call it 3% even). The multiply the appraised value times 3% times 80%. thats roughly what you will owe. If you escrow your payments you can request the mortgage company refund you any overage and adjust your monthly payment to reflect the true tax liability after the homeowners exemption is taken into account. You can only do this after the tax bill is paid.
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

bigred77 wrote:
easye418 wrote:
Yes sir. Does the 20% factor in when I get the bill from them next year? or can will my estimate tax be adjusted already? If its adjusted already, I did not get 20% savings.
We don't receive estimated tax bills in my county so I'm not sure. I get my bill around Dec 1st and I think they give me until Feb 1st to pay it. The exemption should be notated and the total bill should reflect it.

To check i would go to the county appraisal district website and see what the total percentage is (lets call it 3% even). The multiply the appraised value times 3% times 80%. thats roughly what you will owe. If you escrow your payments you can request the mortgage company refund you any overage and adjust your monthly payment to reflect the true tax liability after the homeowners exemption is taken into account. You can only do this after the tax bill is paid.
Thanks for the advice. If this is true, I am over accruing in my escrow and my tax bill will be $7,453 or $621 a month. I have been throwing in $750 a month.
Texanbybirth
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by Texanbybirth »

Those student loans are brutal. You need to slay them first. That is a guaranteed return versus your hope that the TX housing market will continue to boom. You're looking at 12 months if you take the $3k you say y'all are saving each month and the side income. If you can trim your budget then you can probably do it sooner.

Your desire for that price of a house at your current income level is going to require sacrifice. Are you in a high earning potential field like medicine, law, or engineering? Finance? Have you considered selling your current home and moving into an apartment until y'all actually have baby in hand? We did that, and it was the best decision of our marriage. We gave up a little cash on transaction costs, but the peace of mind of being debt free was way more valuable to us (read: me, God bless my wife). I'm a couple years older than you (30 & 29), have a salary similar to yours both combined, my wife stays home, and we just recently bought a $300k house in the suburbs. The year or so in an apartment was a lot of fun for us, and we've come to appreciate the financial peace it brought us now that we're back in a house. All I'm trying to say is that the income loss from a spouse staying at home usually hurts, at least the pocketbook even if it brings good in other ways.

(Btw, good job on saving for retirement so aggressively. You're well on your way there, assuming smart money decisions here on out. :beer )
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

Texanbybirth wrote:Those student loans are brutal. You need to slay them first. That is a guaranteed return versus your hope that the TX housing market will continue to boom. You're looking at 12 months if you take the $3k you say y'all are saving each month and the side income. If you can trim your budget then you can probably do it sooner.

Your desire for that price of a house at your current income level is going to require sacrifice. Are you in a high earning potential field like medicine, law, or engineering? Finance? Have you considered selling your current home and moving into an apartment until y'all actually have baby in hand? We did that, and it was the best decision of our marriage. We gave up a little cash on transaction costs, but the peace of mind of being debt free was way more valuable to us (read: me, God bless my wife). I'm a couple years older than you (30 & 29), have a salary similar to yours both combined, my wife stays home, and we just recently bought a $300k house in the suburbs. The year or so in an apartment was a lot of fun for us, and we've come to appreciate the financial peace it brought us now that we're back in a house. All I'm trying to say is that the income loss from a spouse staying at home usually hurts, at least the pocketbook even if it brings good in other ways.

(Btw, good job on saving for retirement so aggressively. You're well on your way there, assuming smart money decisions here on out. :beer )
MBA/Finance. Only have 3.75 years of experience. Waiting for that 4.5-5 year to move up to the Senior Ranks. Should command $80k+

If my last job didn't screw me over and I had to find another job, I would of had $24k cash in the bank. I had to pay them back since I decided to leave the job. But, this job is a much happier place for me.

Off to battle my student loans! :sharebeer
CPA without a cause
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by CPA without a cause »

do you like your home? is it suitable for raising children, and does it have a good school system? If you answered yes to these 2 questions, I think your best bet is throwing as much extra as you can at the principal and then refinancing in 2 years to get a lower payment.

your going to get destroyed with transaction costs (at least 10% of the sales price) if you sell so soon, and considering the house you want to buy after this one is only marginally lower than your current house I don't see how that will cure your ailments.
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

CPA without a cause wrote:do you like your home? is it suitable for raising children, and does it have a good school system? If you answered yes to these 2 questions, I think your best bet is throwing as much extra as you can at the principal and then refinancing in 2 years to get a lower payment.

your going to get destroyed with transaction costs (at least 10% of the sales price) if you sell so soon, and considering the house you want to buy after this one is only marginally lower than your current house I don't see how that will cure your ailments.
Yes, love the house. It is nearly everything we would want ever.
Yes, It is EXTREMELY suitable for children. (suitable for me for a LONG time 20+ years)
Yes, It has one of the best public school system in North Dallas.

Re-Fi is another option. Thats why I threw that option out there, but everyone seems to think Student Loans is the better options especially for cash flow.
CPA without a cause
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by CPA without a cause »

then why sell it? Yes, from a dollars and cents standpoint, maybe paying off your student loans is your best course of action on paper.

But in reality, if you love your current house and it works for you, the amount of stress and time and risk to sell your current house and buy a new one I don't think is worth it. It's hard to find a good house, but you have decades to work and make money.

Whichever option you choose, I don't think it will make a huge difference on your portfolio balance 40 years from now, so I would do anything you can to stay in the house.
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

CPA without a cause wrote:then why sell it? Yes, from a dollars and cents standpoint, maybe paying off your student loans is your best course of action on paper.

But in reality, if you love your current house and it works for you, the amount of stress and time and risk to sell your current house and buy a new one I don't think is worth it. It's hard to find a good house, but you have decades to work and make money.

Whichever option you choose, I don't think it will make a huge difference on your portfolio balance 40 years from now, so I would do anything you can to stay in the house.
Perfect. Another option I am hearing is pay the 6.8% loans ($27k) and then start hammering the principal for the no cost re-fi. Similiar to your strategy.
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Watty
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by Watty »

easye418 wrote:Current Home value (today, take a while to sell): $360K
Expected Home value (optimistic, 4%-11% appreciation YoY): $375K-$400K
The other house that you are looking at would likely also appreciate by the same percentage so there would be very little net improvement in your situation.

I didn't take the time to look it up, but doesn't the housing in Texas typically get slammed when the price of oil drops by more then 50%? I would not count on much price appreciation.
The key here is the new house we are looking at will have a property tax payment of close to $6K, instead of $9k
That would be a savings of $3,000 a year but since you can likely itemize it on your taxes the after tax savings will be more like $2,500.

With a real estate agents commission and all the costs of buying and selling a house that can add up to be almost 10% of the cost of the house or about $30K+. The math is a bit more complicated but that is at least a 12 year payback ($30K/$2,500 = 12). Am I missing something? That does not make a lot of sense to me.

Lowering your mortgage balance by $50K would only lower your monthly payment by couple of hundred dollars a month.

Getting rid of the PMI is a good choice but you could do that with your current house. I don't see a lot of financial advantages to moving to a house that is only slightly less expensive.
easye418 wrote:I played around with Taxcaster, I see that we should have somewhere between a $7k or greater tax refund.
Lower your payroll withholding's. :oops:
easye418 wrote:Retirement Accounts: $100k in Vanguard Lazy 3 fund (Bene IRA)
Once your wife stops working then you will be way down in the 15% federal tax bracket so be sure to run the numbers on that.

At that point you could make extra withdrawals from the inherited IRA up to the top of the 15% tax bracket and use that money to pay off your student loans. Adjusted for taxes your net worth would stay the same.

Once they are paid off you could use some of the freed up cash flow to make more 401K and Roth contributions.
easye418 wrote:Current: $308,629.62
.....
Current Home value (today, take a while to sell): $360K
80% of $360K is $288,000 so you are only about $30K away from being able to refinance so one option would be would be to free up that money somehow so that you could do a refinance without PMI and at at lower interest rate.

One option would be the PenFed 15/15 ARM that is now at 3.125%

https://www.penfed.org/mortgage-rates-all/

It would be locked for the first 15 years and if you are still in the house then your situation may be much different and the loan balance would be much lower then.

I didn't try to crunch the numbers but even if you had to pay $10K in taxes to withdraw $40K from the inherited IRA in order to refinance then the payback would be pretty quick with the saved interest and PMI.
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grabiner
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by grabiner »

Your issue seems to be the monthly payment. If you can pay down the mortgage so that you have 80% equity, you can refinance to a new mortgage, which will have a lower payment (because you now owe less money) and will avoid the PMI. If your house is actually worth $360K, your goal is $288K, which would be a paydown of just $20K; you might have to try more than one lender and hope to get the necessary appraisal.

If you aren't as close to 80% LTV as you think, then getting rid of the student loans is a better idea for cash flow. If you can pay off Loan 1, you will not only get a 6.8% return on your payment, but you will eliminate its payments and have more money to put elsewhere.

And I agree with other posters that changing homes doesn't make sense unless you need to move for some other reason. If you sell a home and buy another home of the same value, you lose about 10% of the purchase price to real-estate agents, transfer taxes, mortgage fees, and movers.
Wiki David Grabiner
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

Watty wrote:
easye418 wrote:Current Home value (today, take a while to sell): $360K
Expected Home value (optimistic, 4%-11% appreciation YoY): $375K-$400K
The other house that you are looking at would likely also appreciate by the same percentage so there would be very little net improvement in your situation.

I didn't take the time to look it up, but doesn't the housing in Texas typically get slammed when the price of oil drops by more then 50%? I would not count on much price appreciation.
The key here is the new house we are looking at will have a property tax payment of close to $6K, instead of $9k
That would be a savings of $3,000 a year but since you can likely itemize it on your taxes the after tax savings will be more like $2,500.

With a real estate agents commission and all the costs of buying and selling a house that can add up to be almost 10% of the cost of the house or about $30K+. The math is a bit more complicated but that is at least a 12 year payback ($30K/$2,500 = 12). Am I missing something? That does not make a lot of sense to me.

Lowering your mortgage balance by $50K would only lower your monthly payment by couple of hundred dollars a month.

Getting rid of the PMI is a good choice but you could do that with your current house. I don't see a lot of financial advantages to moving to a house that is only slightly less expensive.
easye418 wrote:I played around with Taxcaster, I see that we should have somewhere between a $7k or greater tax refund.
Lower your payroll withholding's. :oops:
easye418 wrote:Retirement Accounts: $100k in Vanguard Lazy 3 fund (Bene IRA)
Once your wife stops working then you will be way down in the 15% federal tax bracket so be sure to run the numbers on that.

At that point you could make extra withdrawals from the inherited IRA up to the top of the 15% tax bracket and use that money to pay off your student loans. Adjusted for taxes your net worth would stay the same.

Once they are paid off you could use some of the freed up cash flow to make more 401K and Roth contributions.
easye418 wrote:Current: $308,629.62
.....
Current Home value (today, take a while to sell): $360K
80% of $360K is $288,000 so you are only about $30K away from being able to refinance so one option would be would be to free up that money somehow so that you could do a refinance without PMI and at at lower interest rate.

One option would be the PenFed 15/15 ARM that is now at 3.125%

https://www.penfed.org/mortgage-rates-all/

It would be locked for the first 15 years and if you are still in the house then your situation may be much different and the loan balance would be much lower then.

I didn't try to crunch the numbers but even if you had to pay $10K in taxes to withdraw $40K from the inherited IRA in order to refinance then the payback would be pretty quick with the saved interest and PMI.
I didn't plug in everything into to Taxcaster, but I had a CPA run the Estimated Tax for my wife since she is 1099.

Her tax alone was $12k dollars a year. She only makes $47k.

My tax withholding is looking to be around $10k.

I don't want to mess with it in case I am wrong and get in a pickle.

Nice call on that PenFed ARM. I don't think I can't get the mortgage down to 80% for at least 12 months.

I want to focus on eating away that high interest student loans 6.8%. Then I will shift to principal. I'm thinking on side income ($5k from assets and $7k side income). I might be able to start on Principal - Jan 2016.
guitarguy
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by guitarguy »

1. Do not sell the house. You seem to like everything about it, moving is expensive, and you wouldn't save much shopping for a house that isn't much cheaper. And I wouldn't bank on real estate markets.
2. Adjust your withholding ($7k return is way high, and this is coming from someone that likes to get something back each year rather than shoot for 0).
2. Use extra cash flow from withholding change to pay down mortgage, refi, and get rid of PMI. Based on a current loan of $308k, a current value of $360k, and $3k/m (plus more with the withholding change) you'll be there in no time.
3. Use extra cash flow (which will really be significant now) and aggressively pay down student loans, smallest balance first.

Free up cash flow. This is the approach we're currently taking with a baby due in January and wife plans to drop to 1 day a week working or possibly none at all. With more cash flow, you have more options later.

If you can come up with $100k (which I thought I read that you said you could), you should be able to refi and get rid of PMI, plus blast out a lot of these student loans within the next 2 years. :beer

EDIT: Just saw you said you don't want to change withholding...my advice would still be the same even if you skip that step.
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Watty
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by Watty »

easye418 wrote:Nice call on that PenFed ARM. I don't think I can't get the mortgage down to 80% for at least 12 months.

One deadline for refinancing is that once your wife stops working then you might have a hard time qualifying for the mortgage on just your income.

The other wildcards are that your local housing market might slump or that mortgage interest rates could be higher then. Even a 10% decline in home prices would make it a lot harder to get to 80% equity that you would need to refinance the loan.

Instead of just looking out six months or so it would be good to make a spreadsheet with your projected expenses and income for the next ten years to see how things might work out.

I am a bit concerned that even if you get the student loans paid off that the current house payments will not be sustainable when you get down to one income of $70K a year.
inbox788
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by inbox788 »

What's wrong with the current home? Location? Size? Condition? Features?

How long have you been in it? Can it handle a child or two? You're basically switching to a similarly priced home to another and paying realtor fees and mortgage fees on both sides, which amount to about $20-30k if you split with other buyer and seller. Don't forget the hassles of moving, moving costs, new stuff, unexpected repairs, upgrades before move-in (paint, carpets), etc.

The financial decision is to pay down highest interest, which is the 6.8% student loan. The main benefit of paying down the mortgage would be elimination of PMI, which may be an option in your current home. Ask now much equity you need to eliminate PMI. Moving only costs you more and more time. Would you borrow $25k at 6.8% to make your move? That's the opportunity cost of not paying down the student loan! PMI costs you $2000/year and there's a case to be made if saving outweighs 2-3% interest rates (plus possible interest rate tax deductions).
bdpb
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by bdpb »

Don't you have another thread on this topic already?

http://www.bogleheads.org/forum/viewtop ... 2&t=171643

Have you factored in the additional cost of anywhere between 5k and 10k per year for a kid?
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

bdpb wrote:Don't you have another thread on this topic already?

http://www.bogleheads.org/forum/viewtop ... 2&t=171643

Have you factored in the additional cost of anywhere between 5k and 10k per year for a kid?
Kinda. Different question, same topic. Found an interesting house at $279k.

If I could sell current house for $365k, would it be worth it?

Figured I would lose $37,500 to transaction costs and $8k to capital gains.

Or would it be best to wait it out 12 months, hope for more appreciation, try to sell at $400k, avoid capital gains tax, and move then into a $275k house? Figure at that time, I'll have 6.8% loans paid off and $15k more down on Principal. So potentially, $67k to put towards $275k mortgage = $208k note @ 30 year.
Last edited by easye418 on Sat Aug 22, 2015 3:11 pm, edited 1 time in total.
stoptothink
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by stoptothink »

easye418 wrote:
bdpb wrote:Don't you have another thread on this topic already?

http://www.bogleheads.org/forum/viewtop ... 2&t=171643

Have you factored in the additional cost of anywhere between 5k and 10k per year for a kid?
Kinda. Different question, same topic. Found an interesting house at $279k.

If I could sell current house for $365k, would it be worth it?

Figured I would lose $37,500 to transaction costs and $8k to capital gains.

Or would it be best to wait it out 12 months, hope for more appreciation, try to sell at $400k, avoid capital gains tax, and move then into a $275k house? Figure at that time, I'll have loans paid off and $30k more down on Principal. So potentially, $90k to put towards $275k mortgage = $185k note @ 30 year.
Based upon your previous threads, it is quite interesting now that you are open to the idea of moving into less home.
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

stoptothink wrote:
easye418 wrote:
bdpb wrote:Don't you have another thread on this topic already?

http://www.bogleheads.org/forum/viewtop ... 2&t=171643

Have you factored in the additional cost of anywhere between 5k and 10k per year for a kid?
Kinda. Different question, same topic. Found an interesting house at $279k.

If I could sell current house for $365k, would it be worth it?

Figured I would lose $37,500 to transaction costs and $8k to capital gains.

Or would it be best to wait it out 12 months, hope for more appreciation, try to sell at $400k, avoid capital gains tax, and move then into a $275k house? Figure at that time, I'll have loans paid off and $30k more down on Principal. So potentially, $90k to put towards $275k mortgage = $185k note @ 30 year.
Based upon your previous threads, it is quite interesting now that you are open to the idea of moving into less home.
Priorities. Priorities. Priorities.

:beer
JoeJohnson
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by JoeJohnson »

Unless you're not telling the whole story, there's no way you're getting a tax refund of $7k at the end of the year. Your $70k + the wife self-employed = you owe ~$19k in taxes. Withholding of $10k leaves you owing $9k!

Need the following:
Your 2015 W-2 Income (YTD Earnings + remaining earnings - YTD 401k - remaining 401k)
Her 2015 Income
Your withholding (assuming $10k)
Her estimated tax payments (assuming $0)
RMD on the bene
Any TIRA contributions for you
$9k property tax and $12k mortgage interest? Is that close?
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easye418
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

JoeJohnson wrote:Unless you're not telling the whole story, there's no way you're getting a tax refund of $7k at the end of the year. Your $70k + the wife self-employed = you owe ~$19k in taxes. Withholding of $10k leaves you owing $9k!

Need the following:
Your 2015 W-2 Income (YTD Earnings + remaining earnings - YTD 401k - remaining 401k)
Her 2015 Income
Your withholding (assuming $10k)
Her estimated tax payments (assuming $0)
RMD on the bene
Any TIRA contributions for you
$9k property tax and $12k mortgage interest? Is that close?
I'm withholding much more than $10k. Sorry I'll clarify. $12k from my wife and probably around $9-10k from me. So I think I'm withholding the correct amount.

$1.7 in tIRA contribs. $9k prop tax. $12k mortgage interest sounds right.
EnjoyIt
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by EnjoyIt »

Mathematically the correct answer is to pay down school loans 1 and 2. Though more importantly I believe that cash flow is a much bigger deal.

How much cash do you think you will have available to drop into debt payment. See which option provides the best cash flow. Paying off a couple of loans, or getting rid of PMI. Maybe even paying off the two smallest loans could provide you with the highest cash flow.

As for selling the house. I agree with those above that selling is not a good option unless you are willing to rent or go much cheaper. Maybe, just maybe staying put is the right decision. Especially if you can pull in some extra income by not wasting time looking for a new home, selling your current home, and moving.

Lastly, I do not think hopping or expecting home prices to keep going up in Texas is a good idea. For all we know, we may be heading into another recession right now. Also, if your house goes up 10%, so will the house you want to buy.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
Seattlenative
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by Seattlenative »

My suggestions:

Pay off the student loans AND beef up the size of your emergency-fund savings if a baby will be coming.

Don't move out of your very nice (expensive) house unless you are going to simply rent a simple apartment. Nobody knows the future of home prices, particularly since parts of Texas are being affected economically by the dramatic oil-price slump.

Remember that Warren Buffett has lived in the same nice upper-middle-class Omaha residence which he purchased for $31,500 back in 1958. In today's dollars, Buffett paid $260,107 for a home where he and his family have lived for 57 years! It's a very nice family home in a stable neighborhood - but definitely not a mansion or estate. Obviously, Mr. Buffett can afford to live in any type of residential dwelling he wants, given he is one of the time five wealthiest people in the world.

Don't purchase a car which requires you to take out a loan - that would royally mess up an app for refinancing your home loan.

Once the baby talk becomes more like reality, get used to having to live much more frugally. Raising children is an amazing and wonderful experience but above all else, it requires sacrifices and compromises.

Congrats on what you and your wife have actually accomplished so far in your careers. You'll be happiest if you can get the student loan ball-and-chain off of your throats.
logicteach
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Re: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by logicteach »

I think it's at least worth considering a slightly different point of view. I agree with the posters that say you should probably not sell your current home in order to buy a new one. Stay put or even, if it seems feasible, trade down to a house with a lower mortgage. Given your (expected, not current) income, I think you've got a little too much house as it is. If you are, indeed, in Texas there is simply no way you actually need to spend that much on a house at this particular stage in your life. Bulk up your EF and continue to contribute at least enough to get the employer match. The next part is where I differ with many of the other posters; if you want to make extra payments on something I would concentrate on the mortgage rather than student loans. Why? Say you experience some financial downturns in the next few years: excessive medical expenses, job loss, recession, or maybe just find that the loss of that second income is harder than you thought. Can you defer or get of forbearance on your mortgage? Probably not. Can you get your mortgage payments reduced due to financial need? Possibly there is such a thing now, but I haven't heard of it. But you can do those things with student loans. Given you're both pretty new in the labor force, are planning some major transitions, and the fact that you're already carrying a fairly hefty debt load for your projected income once you add a baby, I think I would go for that extra security in your position. Again, I know you don't want to hear this, but at least consider finding a less expensive house. Given real estate prices in Texas, you should be able to rent or buy a perfectly nice house for a young family that would better suit your (financial) needs once you lose your wife's income. Congrats and good luck!
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easye418
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Re: Update: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

So after a few weeks of thinking about it, we met with a realtor (who sold a house down the street from me in two weeks). She is going to get me a number on what she thinks she can sell my house for. When we intially spoke, she said all builders are on hold until the new year to start building and some builders are 12 month build time. She said bare minimum $369k-$394k.

At $369K, net proceeds of $29,495 (after 15% capital gains tax, "make" $7k over what I paid, break even scenario pretty much)
At $394k, net proceeds of $49,256 (after 15% capital gains tax, "make" $26k over what I paid, obviously optimal situation)

We have set a top dollar range of $275K (from $331K) with either situation. Probably will fall somewhere between $250K-$275K. Biggest effect with be property tax dropping significantly ($3k a year, $250), hopefully no PMI ($160 a month), lower mortgage ($300ish) = $710 cash flow coming back at least.

With that being said, we think this would be the best scenario either way. We plan on renting on the short term for 6 months then taking our time to find the right house. Since we are paying elevated property tax, higher mortgage, more utilities, we feel we 6 months of renting (save at least $750 on payment) along with $2,200, we can really do damage in this next 12 months.

--------------------------------------------------------------------------------------------------------------------------------------------

With all of the above being said (TL:DR, selling home within 3 months, renting for 6, buying $250-$275k range),
I have $61k of Student Loans remanining and currently we are paying $2,200 a month into them. Would it be better for the long term to start piling this $2,200/mo away to lay down on a larger down payment and re-fi Student Loans?
JoeJohnson
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Re: Update: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by JoeJohnson »

easye418 wrote:We have set a top dollar range of $275K (from $331K) with either situation.
The bolded is not what your current house is worth. You are moving from a $370k house to a $275k house. Are you comfortable with this lifestyle change? Being comfortable with the change now is a lot different than being comfortable with the change long-term.

How do the property taxes go down by 33%?

Are you going to regret your decision in a few years when you're out from under your student loan debt? Transaction fees are expensive.
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easye418
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Re: Update: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

JoeJohnson wrote:
easye418 wrote:We have set a top dollar range of $275K (from $331K) with either situation.
The bolded is not what your current house is worth. You are moving from a $370k house to a $275k house. Are you comfortable with this lifestyle change? Being comfortable with the change now is a lot different than being comfortable with the change long-term.

How do the property taxes go down by 33%?

Are you going to regret your decision in a few years when you're out from under your student loan debt? Transaction fees are expensive.
Technically, we are going to list the house at $385k-$395k.

I guess I don't have much of a choice on the lifestyle changes right? Pretty much we are giving up unnecessary space that we truly don't need. We will be getting other benefits from the new home. Downsizing gets us closer to Financial Freedom and allowing my wife to raise our children.

My current home has a MUD Tax. That adds on an additional 1% to my property tax (for a period of time, years at this rate). Property tax rate is at 2.73% currently. Should drop .5% plus cheaper home.

No, If we get the house I expect us to get (and wait for), we will be much happier. Not to mention, I'm driving 35 miles and 90 minutes each way to work. I don't mind the long drive, but its getting old. I'm hoping to cut it down to half or more.
Gronnie
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Re: Update: Pay Mortgage or Pay Student Loans

Post by Gronnie »

You do know if you have lived in the home 2 years that both you and your wife can exclude $250k in capital gains (for a total of $500k), right? You shouldn't owe any capital gains.

edit: I see you have only been there one year.
bdpb
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Re: Update: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by bdpb »

easye418 wrote: With that being said, we think this would be the best scenario either way. We plan on renting on the short term for 6 months then taking our time to find the right house. Since we are paying elevated property tax, higher mortgage, more utilities, we feel we 6 months of renting (save at least $750 on payment) along with $2,200, we can really do damage in this next 12 months.
This sounds like a really great idea. Have you considered renting for a little longer than 6 months? Most leases are for a year, anyway. It looks like you'd be able to save a ton by renting for a year or more.
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easye418
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Re: Update: Prepping to sell home: Pay Mortgage or Pay Student Loans

Post by easye418 »

bdpb wrote:
easye418 wrote: With that being said, we think this would be the best scenario either way. We plan on renting on the short term for 6 months then taking our time to find the right house. Since we are paying elevated property tax, higher mortgage, more utilities, we feel we 6 months of renting (save at least $750 on payment) along with $2,200, we can really do damage in this next 12 months.
This sounds like a really great idea. Have you considered renting for a little longer than 6 months? Most leases are for a year, anyway. It looks like you'd be able to save a ton by renting for a year or more.
Where I hope to buy at = where I will be renting at or new mortgage = rent. Rental prices are stupid high in the DFW area.
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Re: Update: Pay Mortgage or Pay Student Loans

Post by LadyGeek »

Sorry for the delay. I modified the OP's post content. As a reminder, this forum maintains a "family friendly" environment - things you can say in front of the little ones.
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