Another student loans question

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Joppajoe
Posts: 3
Joined: Wed Mar 22, 2017 12:49 am

Another student loans question

Post by Joppajoe » Wed Mar 22, 2017 1:04 am

Hello all, just wanted some opinions regarding student loans. Partner and I are preparing to buy a house in the next 90 days (offer accepted) around 350k. We currently have about 50k in cash for down payment/emergency fund etc. at the same time I have a lot of student loans, roughly 230k at 6.5% and 15k at 7.65%. I've been pre approved for several mortgages for 15 or 30 years at 3.6 and 4.3%, with 5% minimum down payment. My question is, given the mortgage rates likely being significantly less than my student loans, should I just use a chunk of the money I had been saving for a down payment and just knock out the 7.65% loan now and pay the minimum down payment, taking the hit of PMI because even with it it will be less than my student loans? Or should I hold the cash until I close on the house. Thanks for any suggestions, joppajoe

User avatar
JonnyDVM
Posts: 1583
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: Another student loans question

Post by JonnyDVM » Wed Mar 22, 2017 5:50 am

Have you tried refinancing your loans? Those are high interest rates. SoFi would be the first place I would check. I assume loan forgiveness is not an option and that you will be making making decent income to chip away at that debt.

I would put down the minimum to avoid paying PMI and use the rest to pay off loan debt. I would favor taking on more mortgage debt over student loan debt because the mortgage interest is deductible whereas I assume your student loan interest isn't (phased out pretty early on the income scale). Many here would question the wisdom in your buying a house at all given that heavy student loan debt.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

shanghaista
Posts: 35
Joined: Sun Mar 19, 2017 8:50 am

Re: Another student loans question

Post by shanghaista » Wed Mar 22, 2017 6:08 am

It depends on your PMI situation (what the difference would be).

A few things to keep in mind:
1) Student loan interest is deductible above-the-line on your tax return (meaning it counts whether you do standard or itemized deduction)
2) You can only deduct $2,500 in student loan interest though because it's above-the-line, so you're most likely well above that limit.
3) You didn't state your income; student loan interest deduction is starts to get phased-out at $65,000 for singles and $130,000 for married filers.

Very generally (with only what you've currently provided), I'd say reduce your student loans first. Your amortized mortgage should be able to be accelerated later.

Quite frankly, if you have the money to make 15-year mortgage payments, you should instead be putting that towards student loans. Realistically your comparison should only be between 30-year and student loan payoff. I'd avoid PMI as much as possible (20% down), but the next best thing would then be to put the requisite 5% down and get the 7% savings on the SL.

awval999
Posts: 1048
Joined: Fri Apr 08, 2011 10:17 pm

Re: Another student loans question

Post by awval999 » Wed Mar 22, 2017 6:36 am

I would see if you can get LPMI instead of traditional PMI. LPMI pretty much is just a 0.25% higher interest rate over the life of the loan. But in your case, the higher interest rate will be deductible (as long as you itemize) and in addition, the higher interest rate will still be less than your loans.

I assume with those large student loans you're a lawyer/doctor/etc. I would definitely consider refinancing those loans and knocking them out. Once you free up that large cashflow when the loans are done you can go after the mortgage, refinance, bump up savings, or just live life.

User avatar
gasdoc
Posts: 1257
Joined: Mon Nov 03, 2014 8:26 am

Re: Another student loans question

Post by gasdoc » Wed Mar 22, 2017 7:42 am

I guess I am in the minority here. I would put down 20%, no PMI, and go with a 15 year term on the mortgage. Then work as hard as possible on the student loans. Consolidation should be considered. If the money is tight, I would put off buying for a year and get some of the debt mess cleaned up, and then reconsider. Renting for a year or more is never a bad thing to get a better feel for an area and to make sure new job choices are lasting before you buy a house. (I am obviously making some assumptions here that were not stated explicitly.) Sometimes the math is not the most important thing. I would make sure you are on the right PATH financially, rather than to worry about a few bucks the first couple of years. Building wealth is more often about not making big mistakes, then it it about making wise small decisions.

gasdoc

KT785
Posts: 79
Joined: Fri Jul 11, 2014 2:21 pm

Re: Another student loans question

Post by KT785 » Wed Mar 22, 2017 8:27 am

Joppajoe wrote:Hello all, just wanted some opinions regarding student loans. Partner and I are preparing to buy a house in the next 90 days (offer accepted) around 350k. We currently have about 50k in cash for down payment/emergency fund etc. at the same time I have a lot of student loans, roughly 230k at 6.5% and 15k at 7.65%. I've been pre approved for several mortgages for 15 or 30 years at 3.6 and 4.3%, with 5% minimum down payment. My question is, given the mortgage rates likely being significantly less than my student loans, should I just use a chunk of the money I had been saving for a down payment and just knock out the 7.65% loan now and pay the minimum down payment, taking the hit of PMI because even with it it will be less than my student loans? Or should I hold the cash until I close on the house. Thanks for any suggestions, joppajoe
Does the $50,000 you reference constitute all/most of your cash (you indicate it's both down payment and emergency fund)? With a $350,000 purchase price, even using the entire chunk won't get you to the 20% LTV range for no PMI . . . and depending on your answer to my prior question, may deplete all of your cash reserves. Accordingly, I might only put 5% down to maintain some liquidity and focus on the student loans (when my wife and I bought our house, we only put 5% down and I had loans from law school to contend with, it may not be very Boglehead-like, but I'm sure I'm not the only one on here in that situation). :happy

Are you utilizing any income based repayment programs (PAYE, REPAYE, etc.) and/or would you qualify for public service loan forgiveness? Answers to those questions may help in analyzing your situation.

If you're on a standard repayment plan, I'd certainly consider refinancing the debt to a lower interest rate . . . it should go without saying that this would be after you close on the house so you don't impact your credit during underwriting. Even with refinancing, your interest rate will likely be higher than your mortgage and I'd accordingly prioritize paying on the student loans.

bloom2708
Posts: 2939
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Another student loans question

Post by bloom2708 » Wed Mar 22, 2017 8:34 am

We don't have enough information to help that much. What are your incomes? Do you have other cash? I would step back and ask if you should be buying a home with $245k of high interest student loans.

A $350k home is not a small commitment when you factor in property taxes, insurance, repairs/maintenance. Upgrades, filling the new house with furniture.

Home ownership can be a tremendous joy or a huge weight. Ask questions and do some additional number crunching. Good luck and welcome.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

KT785
Posts: 79
Joined: Fri Jul 11, 2014 2:21 pm

Re: Another student loans question

Post by KT785 » Wed Mar 22, 2017 8:55 am

bloom2708 wrote: I would step back and ask if you should be buying a home with $245k of high interest student loans.
I had the same reaction and depending on his full situation (income, liquid assets, etc.), is definitely a consideration OP should take into account even though he's already under contract at this point.

Joppajoe
Posts: 3
Joined: Wed Mar 22, 2017 12:49 am

Re: Another student loans question

Post by Joppajoe » Wed Mar 22, 2017 10:15 am

Thanks for the replies,

Current SL Debt: 245K (6.55 and 7.65)
No other consumer/mortgage debt
Cash:57k (includes emergency fund)
Income: 140k annually, increasing to 290k annually in June. (Me: 100K, Partner: 40K)
No significant retirement savings

A little more info, I'm a doc finishing up last year of residency, will be starting my new attending job mid July. Starting salary will be around 250k, with partner in 1 year and increase to 350k/yr after that. Currently as a resident and moonlighting I'm making roughly 7k/month (100k yearly), this will continue until June. Plan is to close on the house in June. Plan is to fully fund 401k once starting attending job, and continue living frugally to knock out SL's within 3 years, mortgage within 10.

In regards to student loans I'm looking at refinancing when I start my attending job, partly so I can refi into a 5 or 10 yr variable plan to knock out the loans. I will not qualify for PSLF at my new job. Currently I'm on PAYE.

In regards to the mortgage I'm leaning towards the 30 yr fixed so even though despite the increased interest rate, i'll be able to use the saved cash flow to knock down student loans faster, rather than paying down my mortgage which will be deductible (assuming my SL interest will not be deductible based on income). (Similar to what Shanghai was suggesting). We have already placed an offer and had it accepted, renting unfortunately not an option for my partner as she has been agreeable to renting for 5 years now, we both wanted to get a comfortable home we could spend 15 years in, rather than a "starter" home.

Mortgage options
30 year conventional 4.3% payment 1650/mo (not including PMI)
15 yr conventional 3.5% payment 2348/mo (not including PMI)
7.1 ARM, the initial rate is 3.625, monthly payment is 1610 (including PMI)

I've read a bunch of stuff saying to steer clear of the ARM's, but it is tempting given the lower rate and lower payment.

Any thoughts on which mortgage?
Thoughts on using cash reserves to pay off high interest SL (15k @ 7.65%) now versus waiting a few months to refinance?
Any other thoughts on using cash to pay off SL now?

KT785
Posts: 79
Joined: Fri Jul 11, 2014 2:21 pm

Re: Another student loans question

Post by KT785 » Wed Mar 22, 2017 10:44 am

Joppajoe wrote: Any thoughts on which mortgage?
Thoughts on using cash reserves to pay off high interest SL (15k @ 7.65%) now versus waiting a few months to refinance?
Any other thoughts on using cash to pay off SL now?
I'm personally too risk averse to go with an ARM unless I know I'm only going to be in the house for 7 years or less--based on your comment, this isn't a "starter house" and you and your partner may conceivably stay there for 15+ years (your rationale) . . . my wife and I had the same mindset and bought a home that we could stay in for 10+ years (but we still went looking at new homes this weekend and we've only been in our current house for 3 years) :shock:

Re: paying off the higher interest SL using current cash reserves--that would leave you with ~$42k before you subtract the down payment on the house which, if you do 5% down ($17.5k) will leave you with around $24.5k in remaining cash reserves. That's not an awful position to be in, especially given your anticipated increasing cash flow in July. However, be mindful of any anticipated (and unexpected) expenses you may incur with the new house--things can (and do) go expensively wrong.

If it were me, I might plan on paying off the higher interest loans prior to refinancing the remainder, but wait to do so until after closing on the home to maintain a better liquidity position in case something unexpected occurs. If you do decide to pay them off prior to closing, make sure you discuss this with your mortgage broker so you don't have any surprises during underwriting.

Re: 30 vs. 15 years mortgage - will the cost of a 15 year mortgage enable you to max out all tax advantaged accounts (both you and your partner)? If so, I'd go for the 15 year for the better interest rate and faster equity accumulation.

Joppajoe
Posts: 3
Joined: Wed Mar 22, 2017 12:49 am

Re: Another student loans question

Post by Joppajoe » Wed Mar 22, 2017 11:36 am

KT785 - makes sense, yeah I'm definitely going to try hard to prevent any further upgrades to another house, I can imagine it's easier said than done. I guess it comes down to how much cash I should keep liquid. Thosee estimates you had were similar to what I had too, but I can see the benefit to holding the cash until closing, and just biting the bullet on the 300 bucks of accumulating interest.

Awval, how do I apply for the LPMI, is that only through certain lenders or is it a pretty common thing?

Gas doc, appreciate the reply, just wondering if the 20% down to avoid PMI is really the best thing to do, especially if my overall interest rate is still lower than my SL interest? Is there additional benefits in a mortgage with 20% down like lower rates?

KT785
Posts: 79
Joined: Fri Jul 11, 2014 2:21 pm

Re: Another student loans question

Post by KT785 » Wed Mar 22, 2017 12:15 pm

I can speak briefly re: LPMI (lender paid mortgage insurance) as my wife and I went that route when we bought our home 3 years ago. Ultimately, I felt I was "sold" that vs. PMI and our mortgage broker's rationale was that we'd buy a new house within 5-7 years (his view, not mine) and accordingly LPMI made more financial sense. There's also the issue of the PMI tax deduction (I don't think it's been renewed for 2017 yet) which is phased out at higher income levels--since LPMI is just a higher interest rate, it remains deductible.

I'd run the numbers on both approaches and keep in mind that the LPMI is a persistent higher mortgage interest rate so it's there unless and until you refinance (will rates in the future make refinancing as attractive). With traditional PMI, it goes away once you hit 78-80% LTV; you can get the faster by making additional principle payment and if you opt for the 15 year mortgage, you'll get there faster as well. Your situation and plans will dictate which approach makes more sense . . . the longer you stay in the house, the more PMI (since it's removable) may be a better.

For awareness, we refinanced this past summer, going from a 4.875% (that includes the LPMI) to a 3.125% rate (both are/were 30 year fixed).

User avatar
gasdoc
Posts: 1257
Joined: Mon Nov 03, 2014 8:26 am

Re: Another student loans question

Post by gasdoc » Wed Mar 22, 2017 1:58 pm

Joppajoe wrote:KT785 - makes sense, yeah I'm definitely going to try hard to prevent any further upgrades to another house, I can imagine it's easier said than done. I guess it comes down to how much cash I should keep liquid. Thosee estimates you had were similar to what I had too, but I can see the benefit to holding the cash until closing, and just biting the bullet on the 300 bucks of accumulating interest.

Awval, how do I apply for the LPMI, is that only through certain lenders or is it a pretty common thing?

Gas doc, appreciate the reply, just wondering if the 20% down to avoid PMI is really the best thing to do, especially if my overall interest rate is still lower than my SL interest? Is there additional benefits in a mortgage with 20% down like lower rates?
Joppajoe,
The degree to which your expenses will rise once you purchase your non-"starter" home will surprise you. When I was in your position, we rented for one year. Then, we bought a "smallish" home, more than the average person would call a starter home, in the $300K range. Finally, we purchased the $500K home we live in now (in a LCOLA) and we really like the last house. I can look back and see that our expenses overall jumped markedly at each stage, though we have always paid a lot of attention to our savings percentage, using Quicken. There is a term the Bogleheads use, "lifestyle creep," which means you insidiously step up your lifestyle over time without really noticing it. In my opinion, moving up in house and neighborhood will hasten this effect. I believe that paying off your mortgage more quickly will slow this effect, since it will be taken out of your income before it has a chance to be spent on leisure. Once your loans are paid off, I would feel better knowing you were on a path to have your home paid off faster via a 15 year mortgage and a large down payment. Hope this helps.

gasdoc

shanghaista
Posts: 35
Joined: Sun Mar 19, 2017 8:50 am

Re: Another student loans question

Post by shanghaista » Wed Mar 22, 2017 9:01 pm

Even though you may get a lower interest rate with 15-year, it's a hard 15-years that you'll be required to make higher monthly payments on.
If you're accounting for the raise when you reach attending, you can use the inflow to accelerate and pay down your mortgage; you shouldn't have to be stuck with it for all 30 years (make sure your mortgage allows prepayment without penalties). So even though you may have signed up for the 30-year, you could be down with it in 10 years if you really wanted to. All the while, allowing yourself room and flexibility to pay down your debts in a fashion that you can choose.

Again, your income won't allow you to deduct ANY of your student loans, so it's a fast and hard 6.5% - 7.5% that's going out of your bank account.
Pay those ASAP, put what you need for the house but don't be overly concerned about PMI/interest rate. Remember as you said, even with PMI it'll likely be lower than your SL. That should be as straight-forward as it gets for you.

As a kicker, if you pay down your non-tax-deductible SL loans (at higher rate) and instead trade it in for a mortgage (which is tax deductible @ lower interest) why wouldn't you?!

Post Reply