Pay this off now or not?

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hightower
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Pay this off now or not?

Post by hightower » Fri Nov 24, 2017 12:19 pm

Hi Folks,
I want to get everyone's input on this. I'm 35 y/o, physician, wife and I bring in around 350k/yr right now. I have a mortgage and student loan debt. No other debt. Mortgage is very affordable for us (291k at 4% for 30 years on a ~500k house). LCOL area

I have 101k of student loan debt at 2.6% interest, fixed, 22 year payment plan, $488/month
The payment doesn't bother me much, but the fact I still owe $100k kind of does.

My plan this year was to just buckle down, sign up for lots of extra work and pay it all off in the next 6 months. BUT, now I'm second guessing myself because my brother in law thinks it's silly to pay off the debt any quicker given the low interest rate.
I've done some very simple calculations for comparison sake. Paying it off all now would save me about 30k in interest. However, putting 100k in the market and hoping for 6% return over 30 years or so would result in about $500k in the bank.

Obviously the numbers would most likely work out in favor of investing the money instead of paying it all off quickly. HOWEVER, there's one major hang up....I don't know how much longer I am going to be able to stand my current line of work (I'll spare you the details). So, I don't know that my income will be even close to what it is 1, 2, 5, or 10 years from now.
The payment of $488/month isn't going to be difficult to deal with even if I'm working a job that pays 1/2 as much as my current line of work, so I'm not worried about that. And my wife and I are fine with downsizing our lifestyle a little if we need to, so that's not too much of a worry. I just can't decide if I'd be better off working my butt off for 6 months to pay off the last of my student loans or if I'd be better off holding on to the cash and putting it in the market for the next 30 years instead?

What would you do given the above information??

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flamesabers
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Re: Pay this off now or not?

Post by flamesabers » Fri Nov 24, 2017 12:53 pm

I don't think finances is the only pertinent question in this sort of situation. For instance, would it be a major relief to not have the $100k student loan hanging over your head anymore? Do you feel you have to continue to work in this field so long as you have the student loans?

If I were you, I would pay off the student loan debt in six months. I like the certainty of saving $30k in interest and having one less major financial burden to deal with as I get closer to retirement. If I were to get laid off, or otherwise needed to switch to a different career, I wouldn't have to worry about making payments on this debt.

Have you asked yourself the question in reverse? Would you take out a $100k loan at 2.6% interest rate to invest the money? I certainly wouldn't, but then I'm not a fan of debt.

DrGoogle2017
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Re: Pay this off now or not?

Post by DrGoogle2017 » Fri Nov 24, 2017 12:56 pm

My preference is to pay off that kind of debt first before investing. Only debt I like to keep is mortgage.

hightower
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Re: Pay this off now or not?

Post by hightower » Fri Nov 24, 2017 1:14 pm

flamesabers wrote:
Fri Nov 24, 2017 12:53 pm
Have you asked yourself the question in reverse? Would you take out a $100k loan at 2.6% interest rate to invest the money? I certainly wouldn't, but then I'm not a fan of debt.
I would not either. I feel like I should get rid of it too, but I just want to make sure I'm thinking about this correctly. My brother in law claims he wouldn't mind taking out a loan at such low interest to invest, but this is coming from a guy who currently has no debt other than a small mortgage and has never had to feel the burden of large debt (I used to have over 240k of student loans, plus car loans, credit cards, etc). Plus, I don't think he dislikes his career as much as I do.
The student loans are not really weighing into my decision to stay in my current position that much. I am still here because it pays so much better than I would otherwise be able to make and I felt like if I could make it work, it would be better to rake in as much cash as possible before calling it quits.
To be able to say I'm debt free except the mortgage would be wonderful. So, that's been my motivation really.

campy2010
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Re: Pay this off now or not?

Post by campy2010 » Fri Nov 24, 2017 1:18 pm

I'll caveat my post by saying that I'm less emotional about low interest debt that others in this forum.Would you be worried if your mortgage balance was $391K @4% and your student loan balance was $0? If that scenario doesn't bother you then neither should a $291k mortgage @4% and $100k student loan balance @2.6%. That said to protect your spouse, you should have life insurance to cover non-dischargeable debt.

If I were in your shoes, I would put the loans on auto-pay and focus on your overall net worth. But with your income you'll be fine either way.

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Watty
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Re: Pay this off now or not?

Post by Watty » Fri Nov 24, 2017 1:19 pm

There is a wiki on this choice. - spoiler alert there is not one right answer.

https://www.bogleheads.org/wiki/Paying_ ... _investing

Investing and getting a higher return is harder than it sounds because you would likely have a significant portion of your investments in bonds that don't pay a lot and you will have a sequence of returns risk. Here is what I have posted on that before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
One thing you might do is work the extra hours until you have the extra $100K saved up and then decide what to do. There would be a huge difference in your situation if you have the money set aside in a separate account to pay it off at any time if you wanted to and you were asking if you should pay it off or not.

Trying to save of that much in six months might burn you out so doing the extra work over a year or 18 months might make more sense depending on all the details of your situation.

Once you have the money saved up one option would be to use the money to "recast your mortgage"(Google this) to lower your mortgage payment by about a third since that has a higher interest rate.

reggiesimpson
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Re: Pay this off now or not?

Post by reggiesimpson » Fri Nov 24, 2017 1:38 pm

Unload the debt. You will be happier in the short and long term.

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Earl Lemongrab
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Re: Pay this off now or not?

Post by Earl Lemongrab » Fri Nov 24, 2017 3:48 pm

flamesabers wrote:
Fri Nov 24, 2017 12:53 pm
Have you asked yourself the question in reverse? Would you take out a $100k loan at 2.6% interest rate to invest the money? I certainly wouldn't, but then I'm not a fan of debt.
I would. That's good, cheap leverage, and likely to be a wealth-builder. That's probably on the order of the OP's mortgage (I would assume that the home loan interest is deductible and the student loan not).

I have no fear or hatred of debt. It's a good financial tool when used responsibly.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

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flamesabers
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Re: Pay this off now or not?

Post by flamesabers » Fri Nov 24, 2017 4:11 pm

campy2010 wrote:
Fri Nov 24, 2017 1:18 pm
I'll caveat my post by saying that I'm less emotional about low interest debt that others in this forum.Would you be worried if your mortgage balance was $391K @4% and your student loan balance was $0? If that scenario doesn't bother you then neither should a $291k mortgage @4% and $100k student loan balance @2.6%. That said to protect your spouse, you should have life insurance to cover non-dischargeable debt.

If I were in your shoes, I would put the loans on auto-pay and focus on your overall net worth. But with your income you'll be fine either way.
I don't think student loans are comparable to mortgage debt. Interest on student loans isn't tax-deductible. Furthermore, unless your mortgage is underwater, you can always sell your house as a last resort to eliminate your mortgage. Student loans as you noted are non-dischargeable. While the student loan is easily manageable with the OP's current income, a lot can happen in the next 22 years that may change this situation dramatically: disability/chronic illness, natural disaster, economic recession, stock market crash, laid off/reduced working hours, etc.

The OP has a golden opportunity to work extra hours to pay off his non-dischargeable debt.
Earl Lemongrab wrote:
Fri Nov 24, 2017 3:48 pm
flamesabers wrote:
Fri Nov 24, 2017 12:53 pm
Have you asked yourself the question in reverse? Would you take out a $100k loan at 2.6% interest rate to invest the money? I certainly wouldn't, but then I'm not a fan of debt.
I would. That's good, cheap leverage, and likely to be a wealth-builder. That's probably on the order of the OP's mortgage (I would assume that the home loan interest is deductible and the student loan not).

I have no fear or hatred of debt. It's a good financial tool when used responsibly.
Would your opinion on this be different if equities were in a bear market and the economy was contracting?

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Earl Lemongrab
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Re: Pay this off now or not?

Post by Earl Lemongrab » Fri Nov 24, 2017 4:43 pm

flamesabers wrote:
Fri Nov 24, 2017 4:11 pm
Earl Lemongrab wrote:
Fri Nov 24, 2017 3:48 pm
I have no fear or hatred of debt. It's a good financial tool when used responsibly.
Would your opinion on this be different if equities were in a bear market and the economy was contracting?
I had no fear or hatred of debt in 2007-2009. The leverage was a good financial tool which I used responsibly. It was a great wealth-builder for me.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

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CyclingDuo
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Re: Pay this off now or not?

Post by CyclingDuo » Sat Nov 25, 2017 10:19 am

campy2010 wrote:
Fri Nov 24, 2017 1:18 pm
I'll caveat my post by saying that I'm less emotional about low interest debt that others in this forum.Would you be worried if your mortgage balance was $391K @4% and your student loan balance was $0? If that scenario doesn't bother you then neither should a $291k mortgage @4% and $100k student loan balance @2.6%. That said to protect your spouse, you should have life insurance to cover non-dischargeable debt.
Go one step more, roll the $100K student loan debt over into the mortgage with a refinance for a cash out up to 75-80% of the home's value on a 30 year mortgage, pay off the student loan with the cash out, and that way you still have cheap money with low interest thanks in addition to now being able to deduct the interest payments on the $100K that is currently not allowed as a student loan. It doesn't remove the debt, but it moves it into a position where it at least improves your taxes, and a portion of each monthly payment from the old student loan debt is now going into home equity.

Good primer here:

https://www.edelmanfinancial.com/educat ... g-mortgage

BogleBoogie
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Re: Pay this off now or not?

Post by BogleBoogie » Sat Nov 25, 2017 10:31 am

Given your income and relatively low cost of living, I would pay off the student loans as quickly as you can. As you calculated, this is a GUARANTEED savings of $30K. If your income was not as high and you were losing valuable time to get money in your retirement account, IMO this would be tough decision. For you, you can get the best of both worlds. Get rid of student loans then start loading up your retirement accounts. Here is what I would do.

1. Eliminate all the debt, except for the mortgage.
2. Invest everything you can in a Bogleheadish manner.
3. Live below your means - I imagine that income is tempting to spend!

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avenger
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Re: Pay this off now or not?

Post by avenger » Sat Nov 25, 2017 11:27 am

I was in a similar situation. I paid off all of my debt. It feels good, but in my case I opened up the purse strings a bit once it was paid off. I’m not a spendthrift, but I don’t save as much as I did before. I felt somewhat more motivated to save when I had the debt.

Just my anecdotal experience. Your mileage may vary.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

O2sats
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Re: Pay this off now or not?

Post by O2sats » Sat Nov 25, 2017 11:36 am

HIghtower,

I enjoy your posts both here and over at WCI as well. I know you have been struggling with paying off debt, wanting to increase taxable account, etc. It sounds like you want to pay off the student loans, but want to maximize your net worth. If you were to ask Zaphod over at WCI, he would tell you to keep the loans and leverage. I get that, I really do. I just think people will not necessarily be disciplined enough to invest that amount in taxable. They may want to increase spending.

I think long term, it may be better to keep the loan to build net worth. I know for me, and WCI says this, it is the behavior of being wealthy. Not too many wealthy people he knows are using leverage of student loan debt to get rich. I have been an attending for less than 1.5 years, have refinanced my loans into a 5-year loan, but I plan to pay them off within the next 2 years. I have increased my lifestyle a little, but certainly don't live like a full attending. Most of my extra spending has been on travel, not house or cars. I know for me I haven't finished med school until those loans will be paid off. And once the loans are paid off, I can start shoveling tons of money into taxable if I want to. The leverage for those 2 years for me isn't worth it to keep those loans any longer than I have. Plus I don't know how much longer I will be in my current position. Right now I have fun most days I go to work, but once those loans are paid off, I will have the freedom to take a lower paying job with a better lifestyle if I desired. For me, paying off the loans will help me sleep better at night and give me more options. Plus the thought of paying student loans 20 years after residency is just downright depressing to me.

Hope this helps.

Nate79
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Re: Pay this off now or not?

Post by Nate79 » Sat Nov 25, 2017 11:45 am

Pay it off. You don't need these gimmicks and leverage to be wealthy long term. Debt is fine until it isn't. When things go wrong the risk part of the equation rears its head. Unless you would borrow money to invest then just pay it off.

jayk238
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Re: Pay this off now or not?

Post by jayk238 » Sat Nov 25, 2017 11:49 am

CyclingDuo wrote:
Sat Nov 25, 2017 10:19 am
campy2010 wrote:
Fri Nov 24, 2017 1:18 pm
I'll caveat my post by saying that I'm less emotional about low interest debt that others in this forum.Would you be worried if your mortgage balance was $391K @4% and your student loan balance was $0? If that scenario doesn't bother you then neither should a $291k mortgage @4% and $100k student loan balance @2.6%. That said to protect your spouse, you should have life insurance to cover non-dischargeable debt.
Go one step more, roll the $100K student loan debt over into the mortgage with a refinance for a cash out up to 75-80% of the home's value on a 30 year mortgage, pay off the student loan with the cash out, and that way you still have cheap money with low interest thanks in addition to now being able to deduct the interest payments on the $100K that is currently not allowed as a student loan. It doesn't remove the debt, but it moves it into a position where it at least improves your taxes, and a portion of each monthly payment from the old student loan debt is now going into home equity.

Good primer here:

https://www.edelmanfinancial.com/educat ... g-mortgage
Im sorry but If I'm understanding his points correctly- he's dead wrong at edelman.

This link is toxic and scares the bleep out of me. No way am I comfortable with what he says.

point 7 basically says (with a feeble caveat to protect his integrity) - that if you are worried your home value will fall after sometime to get a second mortgage thats larger than your first on the basis that your home value has gone up for whatever reason. And somehow this is funny money thats yours to play with and the same as selling the home and having that cash in hand.

Is he SERIOUS? This is just toxic nonsense that mortgage brokers shoveled onto unsuspecting buyers and helped lead to the economic crisis of 2007.

Furthermore in point 1 he says that your home value will have ups and downs throughout the year with no expectation of where it will land other than that it will likely be up after a long time- but then in his next several points he basis his entire arguments- and even confusing charts- on the idea that each year the home will only go up in value. He cant seem to pick which argument to rest his cold callous hands on and so wants to throw everything at the unsuspecting first time buyer or financially illiterate. What nonsense.

This is such a dangerous link I had to comment here so that others won't befall misery due to it.

sport
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Re: Pay this off now or not?

Post by sport » Sat Nov 25, 2017 11:58 am

OP, you have really asked two different questions:
1. Should I do extra work to earn enough money to pay off the loan?
2. Should I use this money to pay off the loan, or should I invest it?
There was a time when I had a low cost mortgage and enough money to pay it off any time I wished. I found that having the money was just as comforting as having the loan paid off. In addition, I was in very good shape concerning liquidity. When I experienced a lengthy period of unemployment, that liquidity was much more important than having a paid off mortgage.

2pedals
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Re: Pay this off now or not?

Post by 2pedals » Sat Nov 25, 2017 12:19 pm

My order would be

get any available employer match,
use a Health Savings Account (HSA),
fund all available retirement accounts,
use Roth backdoor or/and mega backdoor and
pay off your debt in order of highest interest rate first (that would be your mortgage first not your student loans).

You have a big shovel in a LCOL area and should be able tackle all. Add extra payments to your debt. I am not sure why you would work overtime, this is a long term project.

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CyclingDuo
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Re: Pay this off now or not?

Post by CyclingDuo » Sat Nov 25, 2017 4:08 pm

jayk238 wrote:
Sat Nov 25, 2017 11:49 am
CyclingDuo wrote:
Sat Nov 25, 2017 10:19 am
campy2010 wrote:
Fri Nov 24, 2017 1:18 pm
I'll caveat my post by saying that I'm less emotional about low interest debt that others in this forum.Would you be worried if your mortgage balance was $391K @4% and your student loan balance was $0? If that scenario doesn't bother you then neither should a $291k mortgage @4% and $100k student loan balance @2.6%. That said to protect your spouse, you should have life insurance to cover non-dischargeable debt.
Go one step more, roll the $100K student loan debt over into the mortgage with a refinance for a cash out up to 75-80% of the home's value on a 30 year mortgage, pay off the student loan with the cash out, and that way you still have cheap money with low interest thanks in addition to now being able to deduct the interest payments on the $100K that is currently not allowed as a student loan. It doesn't remove the debt, but it moves it into a position where it at least improves your taxes, and a portion of each monthly payment from the old student loan debt is now going into home equity.

Good primer here:

https://www.edelmanfinancial.com/educat ... g-mortgage
Im sorry but If I'm understanding his points correctly- he's dead wrong at edelman.

This link is toxic and scares the bleep out of me. No way am I comfortable with what he says.

point 7 basically says (with a feeble caveat to protect his integrity) - that if you are worried your home value will fall after sometime to get a second mortgage thats larger than your first on the basis that your home value has gone up for whatever reason. And somehow this is funny money thats yours to play with and the same as selling the home and having that cash in hand.

Is he SERIOUS? This is just toxic nonsense that mortgage brokers shoveled onto unsuspecting buyers and helped lead to the economic crisis of 2007.

Furthermore in point 1 he says that your home value will have ups and downs throughout the year with no expectation of where it will land other than that it will likely be up after a long time- but then in his next several points he basis his entire arguments- and even confusing charts- on the idea that each year the home will only go up in value. He cant seem to pick which argument to rest his cold callous hands on and so wants to throw everything at the unsuspecting first time buyer or financially illiterate. What nonsense.

This is such a dangerous link I had to comment here so that others won't befall misery due to it.
Agree that it remains one argument that finds people on either side of the fence.

Dangerous? Misery? Toxic nonsense? Edelman is dead wrong?

Hmmm...https://www.fa-mag.com/news/the-truth-a ... 10176.html

:oops:

He's not the only one that recommends carrying a big, long mortgage at cheap rates.

No idea what the OP's state income tax rate is or deduction, but let's go with 7% which is typical. Basic crude comparison of $291K (OP's current mortgage at 4%) and if he refinanced to a 30 year to cash out the $100K he is currently paying 2.6% interest (which is non-deductible) on the student loans.

Current mortgage of $292K example:

Image

Potential example if he refinanced his current 30 year and utilized a cash out to add the $100K to pay off the student loans (we would personally spring for a refinance that is a $0/$0 points loan as the closing cost credits would make the monthly payment very similar to the example below give or take $20):

Image

This would result in an additional $1872 in tax savings per year (depending on his state income tax). The interest rate after tax goes down to 2.492% (that's lower than the 2.6% OP is currently paying). Monthly mortgage payment goes up $477 which is $11 less than his current mandatory $488 monthly payment to service the student loan. If the OP refinanced to a larger, 30 year mortgage to pay off the student loan, he still has the ability to make additional payments as an option. However, that money over the long haul going to investments has the historical potential over three decades to make a better return along with the money he is not tying up in the home by carrying a bigger, long mortgage than he currently has. If trading cheap financing for cheaper financing is dangerous, misery, toxic, dead wrong for an individual's decision - so be it. We all invest in companies/corporations that do it on a regular basis. :mrgreen:

There's more than one road to Dublin, right?

http://www.businessinsider.com/im-worth ... 2016-8/#-4

https://dqydj.com/why-you-shouldnt-pay- ... -mortgage/

jayk238
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Re: Pay this off now or not?

Post by jayk238 » Sat Nov 25, 2017 5:44 pm

I appreciate the detailed explanation but it still does not deal with the elephant in the room.

The assumption that the home itself is worth the 100k more. What happens if theres a downturn in the local economy and he wants to sell? Will he able to get the price at the higher value in such a short time? What if he doesnt? Now hes on the hook.

The student loan debt however will remain the same whether theres a downturn or not whether he sells the home or not

I feel like that example and the article basically ignore risk altogether and encourage investors head first without realizing the whole picture.

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CyclingDuo
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Re: Pay this off now or not?

Post by CyclingDuo » Sat Nov 25, 2017 9:34 pm

jayk238 wrote:
Sat Nov 25, 2017 5:44 pm
I appreciate the detailed explanation but it still does not deal with the elephant in the room.

The assumption that the home itself is worth the 100k more. What happens if theres a downturn in the local economy and he wants to sell? Will he able to get the price at the higher value in such a short time? What if he doesnt? Now hes on the hook.

The student loan debt however will remain the same whether theres a downturn or not whether he sells the home or not

I feel like that example and the article basically ignore risk altogether and encourage investors head first without realizing the whole picture.
The OP didn't mention a desire or need to move out of his LCOL city/town/area, but obviously if one is planning on being mobile with career transfers/job changes - then all of the pieces of the puzzle may not be in place to utilize arbitrage for shorter term durations due to the fluctuations of real estate in the shorter term. Longer term, the risk lessens. Assuming that a physician may be somewhat protected from a downturn in a local economy (physical health knows nothing with regard to economic cycles, so the patients keep on coming into the office for visits), we were assuming the OP was not going to be moving.

But to your point, provided he remained in his current home in the LCOL, why would one suddenly sell their property if the home value fluctuated? As long as the mortgage payment is made every month, it's not like it is callable leverage based on the home's resale value (as opposed to margin debt which is callable if the share prices go down low enough). A 30 year term is still in the OP"s favor for the duration if they remain in their house - no matter what the national, regional, local, and neighborhood real estate prices do in the shorter cyclical term durations.

Rather than thinking of the home as an investment and worrying about profits and losses based on it's current resale value, it's best to think of it as a purchase based solely on living in it. The more money you have sunk into the equity, the more dead money you have not working for you in other investments. Expanding his current mortgage amount to a level that would allow him to pay off the student loan(s) by transferring that non-deductible debt for mortgage debt, increase the tax deduction, and allow his capital to work for him outside of the real estate asset in hopes of topping a 2.492% return - the better for his wealth accumulation over the longer haul. No need to worry about losses or gains on the property value one is "living in" if one is staying there and in the middle of their working career.

Those of us who have lived through interest rates in the middle to upper teens are calling it how we see it.

Image

Granted, once one has entirely funded their retirement plans, saved a substantial amount in taxable and has nothing left to do with their money - sure, pay off the low interest rate mortgage as the game has already been won. We don't think the OP at age 35 is quite there yet. Seeking the best use of his capital for tax purposes, and return on investment to accumulate wealth seems to still be a top priority.

The good news it that both his current mortgage, and the student loan debt have low interest rates. Yet, pointing out that one could be even better (by moving the student loan debt to the mortgage side via a refinance and taking advantage of the tax deduction) - it's not such a worrisome transaction. Even if real estate prices fluctuate as they remain in their house. They would still have 21.8% equity as a starting point with a new loan, and continually be adding to that equity each month with the payment. All while the student loan debt was retired and moved into the mortgage loan for tax advantages.

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badbreath
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Re: Pay this off now or not?

Post by badbreath » Sat Nov 25, 2017 10:16 pm

I agree with the most of them get rid of the student dept as soon as possible will let you put max in tax deductable but also start a taxable account that should grow past your deductibles
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

epictetus
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Re: Pay this off now or not?

Post by epictetus » Sun Nov 26, 2017 9:23 am

if it bothers you i would encourage you to pay it off as soon as you can and be done with it.

i don't like debt myself and would be relieved to have it paid off if I were you.

if you don't pay it off when you really deep down think that is the thing to do and invest instead and about the time you build up 100,000 in investments we have a 50% downturn in the market that lasts several years are you going to regret investing versus paying off the loan?

given the kind of income you are making and going to make in the future if you stay in the mindset to stay out of debt you are going to accumulate a lot of money over your lifetime !!
Focus on what you can control

tampaite
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Re: Pay this off now or not?

Post by tampaite » Sun Nov 26, 2017 10:05 am

hightower wrote:
Fri Nov 24, 2017 12:19 pm

The payment doesn't bother me much, but the fact I still owe $100k kind of does.

What would you do given the above information??
Pay it this week and end 2017 on a positive note!

jayk238
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Re: Pay this off now or not?

Post by jayk238 » Sun Nov 26, 2017 11:58 am

CyclingDuo wrote:
Sat Nov 25, 2017 9:34 pm
jayk238 wrote:
Sat Nov 25, 2017 5:44 pm
I appreciate the detailed explanation but it still does not deal with the elephant in the room.

The assumption that the home itself is worth the 100k more. What happens if theres a downturn in the local economy and he wants to sell? Will he able to get the price at the higher value in such a short time? What if he doesnt? Now hes on the hook.

The student loan debt however will remain the same whether theres a downturn or not whether he sells the home or not

I feel like that example and the article basically ignore risk altogether and encourage investors head first without realizing the whole picture.
The OP didn't mention a desire or need to move out of his LCOL city/town/area, but obviously if one is planning on being mobile with career transfers/job changes - then all of the pieces of the puzzle may not be in place to utilize arbitrage for shorter term durations due to the fluctuations of real estate in the shorter term. Longer term, the risk lessens. Assuming that a physician may be somewhat protected from a downturn in a local economy (physical health knows nothing with regard to economic cycles, so the patients keep on coming into the office for visits), we were assuming the OP was not going to be moving.

But to your point, provided he remained in his current home in the LCOL, why would one suddenly sell their property if the home value fluctuated? As long as the mortgage payment is made every month, it's not like it is callable leverage based on the home's resale value (as opposed to margin debt which is callable if the share prices go down low enough). A 30 year term is still in the OP"s favor for the duration if they remain in their house - no matter what the national, regional, local, and neighborhood real estate prices do in the shorter cyclical term durations.

Rather than thinking of the home as an investment and worrying about profits and losses based on it's current resale value, it's best to think of it as a purchase based solely on living in it. The more money you have sunk into the equity, the more dead money you have not working for you in other investments. Expanding his current mortgage amount to a level that would allow him to pay off the student loan(s) by transferring that non-deductible debt for mortgage debt, increase the tax deduction, and allow his capital to work for him outside of the real estate asset in hopes of topping a 2.492% return - the better for his wealth accumulation over the longer haul. No need to worry about losses or gains on the property value one is "living in" if one is staying there and in the middle of their working career.

Those of us who have lived through interest rates in the middle to upper teens are calling it how we see it.

Image

Granted, once one has entirely funded their retirement plans, saved a substantial amount in taxable and has nothing left to do with their money - sure, pay off the low interest rate mortgage as the game has already been won. We don't think the OP at age 35 is quite there yet. Seeking the best use of his capital for tax purposes, and return on investment to accumulate wealth seems to still be a top priority.

The good news it that both his current mortgage, and the student loan debt have low interest rates. Yet, pointing out that one could be even better (by moving the student loan debt to the mortgage side via a refinance and taking advantage of the tax deduction) - it's not such a worrisome transaction. Even if real estate prices fluctuate as they remain in their house. They would still have 21.8% equity as a starting point with a new loan, and continually be adding to that equity each month with the payment. All while the student loan debt was retired and moved into the mortgage loan for tax advantages.
Appreciate the explanation but I still strongly disagree with your analysis.

There are too many risks here and assumptions and while my previous language may have been strong, considering the consequences implied in this it was accurate.

Again, there are too many assumptions. OP may not want to move but what happens if his hospital, practice or other setting is sold, goes under, or deals with unexpected cash flow issues he is unaware/unprepared for?

Assuming even if his decision to stay is prudent and guaranteed it is still a bad decision to take out an extra 100k on it.

You are making assumptions that are still not guaranteed and fail to deal with the downside risk heres why:

The average increase in home values over the past 30 years even excluding the massive market correction in 2008 has been artificial and inflated.
When inflation was taken into account, when the fact that home sizes have been steadily increasing (accounting for the increase in home value) the home itself will not gain much in value relative to purchase price unless it was a fixer upper or in a depressed community that rapidly grows.

But you knew this because you mentioned that a home is not really an investment. Yet the idea that it is an investment is implicit in your argument! How can you expect that the increase in the value of the home over 30 years will match the 100k increase in value? Who is to say it will at all recover the costs also associated with the purchase and sale of the home? On top of this what if OP wants to upgrade his home since its something to live in and not an investment? Should he further sell the home at a greater loss because his upgrades are not going to accompany the increase in home value?
Suppose his home upgrades cost 50k. Without the artificial inflated 100k value he could sell the home at 50k more + whatever costs associated and still cover it if the home were supposedly to rise in 100k over time. But if he inflates its value and takes this loan he's looking at a 150k value he can only hope to get a sale price for if that.

Homes are not an investment- I think you and I can agree on as I have proved and you have admitted to.

If homes are not an investment there's no way that he can take this 'additional' potential value and use it to something else. Thats because it doesn't exist.

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Re: Pay this off now or not?

Post by KlangFool » Sun Nov 26, 2017 12:07 pm

OP,

In general, I would not recommend paying off the student loan. But, in your case, I would suggest that you pay this off in 6 months. The reason is with this short-term goal in mind, you will work the extra hours to pay this off. It is hard to think about 500K in 30 years.

KlangFool

hightower
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Re: Pay this off now or not?

Post by hightower » Sun Nov 26, 2017 12:22 pm

Thanks for all the replies and discussion! This is a very informative thread and it's very helpful to hear so many people's take on this decision. I'm leaning towards paying it off still, but I'll keep you posted as the year progresses.

aristotelian
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Re: Pay this off now or not?

Post by aristotelian » Sun Nov 26, 2017 12:50 pm

For those that are advising paying it off, why would you pay the student loan first when the mortgage is at a higher interest rate?

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CyclingDuo
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Re: Pay this off now or not?

Post by CyclingDuo » Sun Nov 26, 2017 1:17 pm

jayk238 wrote:
Sun Nov 26, 2017 11:58 am
If homes are not an investment there's no way that he can take this 'additional' potential value and use it to something else. Thats because it doesn't exist.
In essence, the premise of Edelman and others who suggest the arbitrage method by utilizing the big and long 30 year larger mortgage, is that one would be "selling" a portion of their current home equity via a cash out refinance, and using that capital to put to work in investments that historically have returned more than the interest rate of the mortgage. The investor pockets the difference.

A 60/40 portfolio consisting of a S&P500 & 40% Treasury Bills with all dividends & interest reinvested has historic returns as follows since 1950:

Looking at 30 year periods (includes all rolling 360 month periods) shows that the average return was 9.9% per year. The poorest performing 30 year period averaged out to a return of 8.1% per year.

Looking at 20 year periods, the average was 9.6% return per year. The poorest performing 20 year period averaged out to a return of 6.3% per year.

We all know that future gains in the market for stocks/bonds are not guaranteed by looking at the past, but we remain optimistic that market returns over the next 10, 20, 30 years have the potential to do better than 2.492%. Sure it's a risk on bet, but investors have been rewarded for the risk over time.

You get it, but just to clarify that the option - in the case of the OP, which was outlined in the previous posts - is that he could very well "sell" a $100K of his current home equity to retire the student loan debt immediately all in one fell swoop. Are there risks to transfer that same $100K debt (which isn't going away) by a swap so it is now part of a cash out refinanced 30 year mortgage while rates are low to take advantage of the tax breaks and have a lower interest rate on the loan? Sure. Making money always involves risks. In addition, instead of that student loan payment each month going simply to service the student loan debt, a portion of it would be going towards paying off the principal of the home and building up the home equity again to where it was before the swap. So a triple, financial planning wise: better tax treatment for the OP, immediate retirement of his non-deductible debt, and a portion of what was formerly the student loan payment now trickling back into home equity as opposed to the student loan company on a monthly basis to slowly build up his equity again over the years. The "additional" money everyone was suggesting that he pour into servicing student loans could now go to investing - although it would be DCA as opposed to a lump sum - but nonetheless, have the same power to beat the 2.492% interest rate of the mortgage (interest rate after the tax deduction) that absorbed the student loan debt.

Either way, the OP's mortgage and student loan debt are not going away if left how they are, or if they were combined using a cash out refinance. They both will still need to be serviced no matter what happens to his job, real estate prices, or the price of tea in China. In other words - his monthly payments to service both debts are not going to change. All of the "what if scenarios" you raise still apply to his current state of financial affairs. Human capital is in his favor to survive it all, but it would be interesting to revisit the what if's of both scenarios 5, 10, 15, 20 years down the road.

jayk238
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Re: Pay this off now or not?

Post by jayk238 » Sun Nov 26, 2017 1:58 pm

I'm still not comfortable with this choice

would love to see what wci has to say
Last edited by jayk238 on Sun Nov 26, 2017 2:02 pm, edited 2 times in total.

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Re: Pay this off now or not?

Post by MedSaver » Sun Nov 26, 2017 1:58 pm

"One thing you might do is work the extra hours until you have the extra $100K saved up and then decide what to do. There would be a huge difference in your situation if you have the money set aside in a separate account to pay it off at any time if you wanted to and you were asking if you should pay it off or not."

^^this.

I have a little more than you in debt with a refi 5 year loan. I felt 5 years was aggressive enough that I would be satisfied from a timeline perspective and I invest the rest of my salary in an account earmarked to pay off the balance should I get fired/sick/whatever. Obviously you wouldn't benefit from a refi at this point but maybe run the numbers and set a more aggressive payment schedule for yourself. Set a goal that will let you balance quickly paying the loan and having something leftover to invest.

Over 2 years in and the loan is halfway paid off AND my investment account could cover the balance with 10s of thousands more to spare. Additionally, every month the balances get more and more lopsided. Just knowing that I could go through employment trouble/market downturn/etc and be fine financially is a psychologic boost.

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Re: Pay this off now or not?

Post by HardHitter » Sun Nov 26, 2017 2:28 pm

My 2 cents is to pay it off and be done with it.

My wife and I are a few years younger, make $100K less AND live in a HCOL area and we did exactly what I said above. Paid off $75K in her loans right away.

It is a pretty significant "hit" to your funds, but with only your mortgage and your income (assuming you have a good budget) you'll gain that money back quickly.

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Re: Pay this off now or not?

Post by White Coat Investor » Sun Nov 26, 2017 3:24 pm

jayk238 wrote:
Sun Nov 26, 2017 1:58 pm
I'm still not comfortable with this choice

would love to see what wci has to say
I was asked to comment on this thread. Not sure I have a lot to say. As others have noted, there is no right answer here. We all know that carrying a 10% student loan and investing is stupid. We all know that giving up a 401(k) match in order to pay off a 1% mortgage a little faster is stupid. But in between, there's plenty of room for reasonable people to disagree.

As a general rule, I think doctors ought to be rid of their student loans within 2-5 years of completion of training. Some people think that means you shouldn't be maxing out retirement accounts and investing at that time. But what I mean by that is you should both pay off the loans AND invest and the only way to do that is to live like a resident for a few years while you get your financial ducks back in a row, get back to broke, save up a down payment on your "doctor house", catch up to your college roommates with regard to retirement savings etc.

So I think it's important not to get dogmatic on any of this. Carrying a 3% loan to invest isn't insane. Paying it off in order to improve your cash flow and reduce leverage is also a reasonable thing to do.

As far as the "swap student loans for home equity" that can often be a smart move, just like refinancing it while living like a resident to pay it off fast. You're trading debt with a high interest rate, that is not deductible to attendings, and doesn't go away in bankruptcy for one that has a lower interest rate, is usually deductible to attendings and goes away with the sale or the house or in most states, with foreclosure. But moving debt around isn't the way you get rid of it. You get rid of it by writing 4 or 5 figure checks to the lender every month.

The OP talks about "buckling down, working more, and getting rid of his debt rapidly because he hates his job." That seems very wise to me. Being rid of the debt will likely provide freedom, even if it is only psychological, to change jobs, careers, work hours etc. Is it really all that different mathematically from buckling down, working more, and investing like crazy? Probably not.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Pay this off now or not?

Post by flamesabers » Mon Nov 27, 2017 11:06 am

aristotelian wrote:
Sun Nov 26, 2017 12:50 pm
For those that are advising paying it off, why would you pay the student loan first when the mortgage is at a higher interest rate?
Not all debt is the same. Assuming the OP itemizes his taxes, the real interest on his mortgage would be lower then the nominal 4%. I'm not saying the mortgage interest deduction is enough in this case to lower the interest rate below the rate of the student loan, but it does help to reduce the gap between the two rates.

A second reason is the difficulty of discharging the student loan vs. the mortgage. Barring participating in a loan forgiveness program or becoming totally and permanently disabled, outstanding student loans are for life. The student loan won't be an issue for the OP so long as he stays healthy and continues to earn a good income. However, if the economy craters or if he becomes partially disabled, it may become much more difficult for him to pay off the student loan. If the same happened while holding a mortgage, he could sell the house and move into a more modest home.

A third reason is psychological. While it's not unheard of on this forum to hold a mortgage close to (or in) your retirement years, I don't think the same can be said for student loans. When making your mortgage payment at least it can seem somewhat worth it when you have a nice house to live in. I don't think it's quite the same when you're still paying for a degree you got 15-20 years ago and you may not even be working anymore in the field you majored in.

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