Use cash to pay off low interest student loans and car or downpayment for house?

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sf_eca
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Use cash to pay off low interest student loans and car or downpayment for house?

Post by sf_eca » Thu Aug 09, 2018 8:42 pm

I recently received a bonus of about 36k after taxes--something that i should not expect to be a regular occurrence in the future. At this point, I can use this to pay off all my remaining low interest debt and max out my 401k contributions for the year OR I could keep the debt and put that cash along with some savings and part of a roth 401k towards a down payment for a house. Additional details and considerations below. I know this is a personal choice, but what would you do?

Current financial situation:
-Student loan balance is 27k at 3.15%, 4.5 years to pay off
-Car loan balance is $6200 at 0.9%, about 1 more year to pay off
-annual income is 110k base + annual bonus that ranges from 10-20k
-$110k in company 401k
-current monthly rent is $2175 in san francisco (rent controlled, so can only go up a few % each year). rent and bills total about $2500 per month.

Home purchase:
-if i purchased a home, i would initially rent it out with the goal of moving there eventually
-the house would be in Sacramento to be with friends and family, but would like to keep renting my apartment in San Francisco for now because I work in the south bay. this could always change, but SF is the spot to be if you work in tech like i do.
-i don't see myself ever being able to afford to buy in San Francisco and most likely not even the bay area
-urgency to buy is that Sacramento is a hot market right now and I'm worried I will be priced out if I wait much longer
-if I used the cash for a downpayment, i would not necessarily be able to max out my 401k every year, but could try
-home price would be approximately $450k for a 2 to 3 bedroom with a SoFi loan that allows 10% down. mortgage would end up being about $2600 + taxes.
-renters would cover most if not all of the mortgage and taxes

If I did not buy a house house now I would probably just pay off all the debt, max out my 401k every year going forward, focus on index fund investing with any remaining cash and put off entering the housing market for the unforeseeable future.

HEDGEFUNDIE
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by HEDGEFUNDIE » Thu Aug 09, 2018 8:50 pm

Your income is not high enough to be adding on another debt obligation like a mortgage, even if you intend to rent it out. I would pay off your student loans and put the rest in an emergency fund.

mortfree
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by mortfree » Thu Aug 09, 2018 9:00 pm

I would wipe out the student loans.

I can’t comprehend the housing market where you are so I’ll leave my suggestion at that.

Keep the car loan. Pennies for interest.

Flyer24
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by Flyer24 » Thu Aug 09, 2018 10:01 pm

Pay off the student loan with it. Car loan is low interest so just keep paying as normal. As long as your emergency fund is ok then put the rest towards retirement.

KyleAAA
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by KyleAAA » Thu Aug 09, 2018 10:03 pm

You’ll pay a higher interest rate in the mortgage since the bank will see it as an investment property and you probably won’t be able to put just 10% down. When you got a rate quote from Sofi, did they know you wouldn’t be living in it right away? Their terms disallow mortgages on rental properties. I’d probably do neither and just save for retirement.
Last edited by KyleAAA on Thu Aug 09, 2018 10:07 pm, edited 3 times in total.

runner540
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by runner540 » Thu Aug 09, 2018 10:05 pm

Pay off all the debt, and start saving for a home. Additionally, I would be shocked if you are allowed to own a home while benefitting from rent control.

sf_eca
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by sf_eca » Thu Aug 09, 2018 10:11 pm

KyleAAA wrote:
Thu Aug 09, 2018 10:03 pm
You’ll pay a higher interest rate in the mortgage since the bank will see it as an investment property and you probably won’t be able to put just 10% down. When you got a rate quote from Sofi, did they know you wouldn’t be living in it right away? Their terms disallow mortgages on rental properties. I’d probably do neither and just save for retirement.
I applied for the mortgage pre-qualification as a second home and they offered 5.125% fixed (no points), but I didn't take it any further than that so maybe there are some surprise fees in there i'm missing.

sf_eca
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by sf_eca » Thu Aug 09, 2018 10:14 pm

runner540 wrote:
Thu Aug 09, 2018 10:05 pm
Pay off all the debt, and start saving for a home. Additionally, I would be shocked if you are allowed to own a home while benefitting from rent control.
Rent control in SF is based on the building itself, not the financial status of the occupant, so it wouldn't be an issue. However, you do raise a good point about the ethical considerations of taking advantage of this system.

Ron Ronnerson
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by Ron Ronnerson » Thu Aug 09, 2018 10:18 pm

I would pay off the debt.

KyleAAA
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by KyleAAA » Thu Aug 09, 2018 10:21 pm

sf_eca wrote:
Thu Aug 09, 2018 10:11 pm
KyleAAA wrote:
Thu Aug 09, 2018 10:03 pm
You’ll pay a higher interest rate in the mortgage since the bank will see it as an investment property and you probably won’t be able to put just 10% down. When you got a rate quote from Sofi, did they know you wouldn’t be living in it right away? Their terms disallow mortgages on rental properties. I’d probably do neither and just save for retirement.
I applied for the mortgage pre-qualification as a second home and they offered 5.125% fixed (no points), but I didn't take it any further than that so maybe there are some surprise fees in there i'm missing.
But it isn’t a second home, it is an investment property. They will refuse to give you a mortgage when you go through the process because they will make you sign a statement saying you plan to use it as a second home and not rent it out. If you mislead the bank, that is mortgage fraud.

runner540
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by runner540 » Thu Aug 09, 2018 10:25 pm

KyleAAA wrote:
Thu Aug 09, 2018 10:21 pm
sf_eca wrote:
Thu Aug 09, 2018 10:11 pm
KyleAAA wrote:
Thu Aug 09, 2018 10:03 pm
You’ll pay a higher interest rate in the mortgage since the bank will see it as an investment property and you probably won’t be able to put just 10% down. When you got a rate quote from Sofi, did they know you wouldn’t be living in it right away? Their terms disallow mortgages on rental properties. I’d probably do neither and just save for retirement.
I applied for the mortgage pre-qualification as a second home and they offered 5.125% fixed (no points), but I didn't take it any further than that so maybe there are some surprise fees in there i'm missing.
But it isn’t a second home, it is an investment property. They will refuse to give you a mortgage when you go through the process because they will make you sign a statement saying you plan to use it as a second home and not rent it out. If you mislead the bank, that is mortgage fraud.
This particular fraud has been in the headlines this week...

Nate79
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by Nate79 » Thu Aug 09, 2018 10:32 pm

Ron Ronnerson wrote:
Thu Aug 09, 2018 10:18 pm
I would pay off the debt.
+1

sf_eca
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by sf_eca » Thu Aug 09, 2018 10:42 pm

runner540 wrote:
Thu Aug 09, 2018 10:25 pm
KyleAAA wrote:
Thu Aug 09, 2018 10:21 pm
sf_eca wrote:
Thu Aug 09, 2018 10:11 pm
KyleAAA wrote:
Thu Aug 09, 2018 10:03 pm
You’ll pay a higher interest rate in the mortgage since the bank will see it as an investment property and you probably won’t be able to put just 10% down. When you got a rate quote from Sofi, did they know you wouldn’t be living in it right away? Their terms disallow mortgages on rental properties. I’d probably do neither and just save for retirement.
I applied for the mortgage pre-qualification as a second home and they offered 5.125% fixed (no points), but I didn't take it any further than that so maybe there are some surprise fees in there i'm missing.
But it isn’t a second home, it is an investment property. They will refuse to give you a mortgage when you go through the process because they will make you sign a statement saying you plan to use it as a second home and not rent it out. If you mislead the bank, that is mortgage fraud.
This particular fraud has been in the headlines this week...
Makes sense. That was pure lack of knowledge on my part--I have no intention of committing mortgage fraud. I clearly have more reading up to do, which may be a good enough indicator on it's own that I'm not ready to go this route.

Nissanzx1
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by Nissanzx1 » Thu Aug 09, 2018 10:48 pm

I'd pay off the student loans and car. Great bonus!

Save up 5-6 months of expenses for an emergency fund. After that, start building a "house fund." You can use an index fund for that because it will be a few years... absolutely no rush whatsoever to buy.

San Fran is lots of fun. Enjoy!

sf_eca
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by sf_eca » Thu Aug 09, 2018 11:01 pm

Nissanzx1 wrote:
Thu Aug 09, 2018 10:48 pm
I'd pay off the student loans and car. Great bonus!

Save up 5-6 months of expenses for an emergency fund. After that, start building a "house fund." You can use an index fund for that because it will be a few years... absolutely no rush whatsoever to buy.

San Fran is lots of fun. Enjoy!
I appreciate the feedback and thank you. That gets to one of my main concerns, regardless of whether it makes sense for me to buy right now or not. I'm aware that a house isn't always a good investment, but some advice i've heard is to buy as soon as possible. In the bay area or any of the major California cities, it seems that any decent neighborhood quickly becomes out of reach. Does that mean there is in fact a rush to buy if you can? FWIW i'm not a snob to the CA and I do understand that there are great places to live where the price is right, but my family and friends are all in California, so it's where i would like to stay if possible. I guess what I'm asking is--is it just as financially smart to keep investing and buy later than to stretch your budget to buy now given the soaring property prices?

Nissanzx1
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by Nissanzx1 » Thu Aug 09, 2018 11:13 pm

sf_eca wrote:
Thu Aug 09, 2018 11:01 pm
Nissanzx1 wrote:
Thu Aug 09, 2018 10:48 pm
I'd pay off the student loans and car. Great bonus!

Save up 5-6 months of expenses for an emergency fund. After that, start building a "house fund." You can use an index fund for that because it will be a few years... absolutely no rush whatsoever to buy.

San Fran is lots of fun. Enjoy!
I appreciate the feedback and thank you. That gets to one of my main concerns, regardless of whether it makes sense for me to buy right now or not. I'm aware that a house isn't always a good investment, but some advice i've heard is to buy as soon as possible. In the bay area or any of the major California cities, it seems that any decent neighborhood quickly becomes out of reach. Does that mean there is in fact a rush to buy if you can? FWIW i'm not a snob to the CA and I do understand that there are great places to live where the price is right, but my family and friends are all in California, so it's where i would like to stay if possible. I guess what I'm asking is--is it just as financially smart to keep investing and buy later than to stretch your budget to buy now given the soaring property prices?
So much of that advice to buy that you hear is rooted from people working as realtors or lenders. I will give you an example of my own life:

I was about 24, thought I "gotta buy a house!" Paid $70,000 after negotiations, put $700 down. Kept home ten years- refinanced it 3 times during that time (did not take out equity) and only ended up with $6000 after realtor fees. Everybody forgets to tell you that the lions share of the interest is on the front end of the loan. Also- I spent $25,000 additional on that house during those 10 years I lived there. New HVAC, new garage door, new roof, new windows, refinished hardwoods, new sewer line...

The moral of the story is sometimes renting isn't a bad thing!

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jadd806
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by jadd806 » Fri Aug 10, 2018 6:40 am

sf_eca wrote:
Thu Aug 09, 2018 11:01 pm
I'm aware that a house isn't always a good investment, but some advice i've heard is to buy as soon as possible.
And who are you hearing that advice from? Home owners and realtors?

Buying a home is the largest purchase 99.9% of the population will ever make. Additionally, most people don't like to be wrong. When facing a decision that huge in their life, they especially want to be told they made the "right" choice. But there's a mental break with the fact that home ownership really isn't that great of a financial decision, so they talk about it all the time to rationalize their decision and seek assurances from others. And one of the best ways to convince themselves that they're "right" is to convince you to believe the same as they do!

I have to prevent myself from laughing sometimes when coworkers brag about how great of an investment their house is, and that they're so happy to not be throwing away money on rent. And then in the next sentence they mention that they just spent $5k on a new boiler, or $16k to replace all the windows in their house. These people are house poor with no liquid assets to speak of.

A house is an undiversified bet on your local real estate market. This can go really well for you if you get lucky, really poorly for you if you are unlucky, but in most cases has historically provided a real return barely above 0%, and probably below that when factoring in maintenance. Unless you have a significant amount of other assets such that the house would not constitute the majority of your net worth, I would avoid making such a concentrated bet.

Keep renting. Save and invest in index funds. Max out your 401k and IRA, and toss a little extra towards a taxable account if you can. Ignore the homeowners - most of them are BROKE!

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wabbajack
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by wabbajack » Fri Aug 10, 2018 8:15 am

I second not buying a house at your stage in life. A $400k+ undiversified asset on a $100k income is not going to go well. I'd also probably just keep the loans around since the interest on them isn't high enough to worry about. Sock the $30k away into an index, and then go buy yourself something nice.

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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by grabiner » Fri Aug 10, 2018 8:28 am

Since you can max out your 401(k) every year, I would prefer to do that in preference to paying down low-interest loans. The benefit from getting more money into the 401(k) now lasts as long as you have the money in the 401(k).

I am assuming that the student loan is fixed-rate. If it is variable-rate, paying it off is a good deal because it will likely save you more interest in the future.

If you are planning to buy a home, it would still be better to keep the existing loans, because their rates are significantly lower than your mortgage rate. That is, it would be better to have a $317K mortgage and $33K in non-mortgage debt, rather than a $350K mortgage and no other debt. You owe the same amount either way, but you pay less interest by having more low-interest debt.

Similarly, the loan rates are low enough (with the student loan deductible from federal and CA tax) that it doesn't cost you much to keep them,
Wiki David Grabiner

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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by Jags4186 » Fri Aug 10, 2018 10:02 am

Pay off all the loans, put the remaining $2800 towards your emergency fund (if you don't have it) or throw it in your Roth IRA. Change your 401k plan to the max. Start saving for a house, although, unless you expect your income to rapidly increase making $120 - $130k is not enough to buy a home anywhere you'd want to live in California.

Free up as much cashflow as possible so that you can get in a good habit of saving significant amounts of money every month. If you get into the habit of putting $1541/mo into your $401k, $458/mo into your Roth IRA, and $1000 or so a month into your taxable account you'll later learn that holding onto small dollar loans (like your car loan) is a waste and it will help you recenter your expectations, ability, and need to buy big ticket items.

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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by flamesabers » Fri Aug 10, 2018 10:14 am

sf_eca wrote:
Thu Aug 09, 2018 8:42 pm
If I did not buy a house house now I would probably just pay off all the debt, max out my 401k every year going forward, focus on index fund investing with any remaining cash and put off entering the housing market for the unforeseeable future.
This is my advice for you. I think you should pay off all existing debt before thinking about getting a house. Once you saved enough money for a good down payment, you can think about getting a mortgage.

sf_eca
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by sf_eca » Fri Aug 10, 2018 10:48 pm

Thanks for all the feedback, everyone! Just paid off all the debt and proud to soon be debt free once the payments clear. I realize holding on to the low interest debt and investing in the stock market might have made more sense to get a better return, but I wanted the emotional gratification of being debt free once and for all. I still have enough for a 3 month emergency fund, so i'm looking forward to padding that a bit more and then going the index fund route to build wealth.

sf_eca
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by sf_eca » Fri Aug 10, 2018 10:49 pm

jadd806 wrote:
Fri Aug 10, 2018 6:40 am
sf_eca wrote:
Thu Aug 09, 2018 11:01 pm
I'm aware that a house isn't always a good investment, but some advice i've heard is to buy as soon as possible.
And who are you hearing that advice from? Home owners and realtors?

Buying a home is the largest purchase 99.9% of the population will ever make. Additionally, most people don't like to be wrong. When facing a decision that huge in their life, they especially want to be told they made the "right" choice. But there's a mental break with the fact that home ownership really isn't that great of a financial decision, so they talk about it all the time to rationalize their decision and seek assurances from others. And one of the best ways to convince themselves that they're "right" is to convince you to believe the same as they do!

I have to prevent myself from laughing sometimes when coworkers brag about how great of an investment their house is, and that they're so happy to not be throwing away money on rent. And then in the next sentence they mention that they just spent $5k on a new boiler, or $16k to replace all the windows in their house. These people are house poor with no liquid assets to speak of.

A house is an undiversified bet on your local real estate market. This can go really well for you if you get lucky, really poorly for you if you are unlucky, but in most cases has historically provided a real return barely above 0%, and probably below that when factoring in maintenance. Unless you have a significant amount of other assets such that the house would not constitute the majority of your net worth, I would avoid making such a concentrated bet.

Keep renting. Save and invest in index funds. Max out your 401k and IRA, and toss a little extra towards a taxable account if you can. Ignore the homeowners - most of them are BROKE!
I think this is something I really needed to read. Thanks for your insight here!

sf_eca
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Re: Use cash to pay off low interest student loans and car or downpayment for house?

Post by sf_eca » Fri Aug 10, 2018 10:50 pm

Jags4186 wrote:
Fri Aug 10, 2018 10:02 am
Pay off all the loans, put the remaining $2800 towards your emergency fund (if you don't have it) or throw it in your Roth IRA. Change your 401k plan to the max. Start saving for a house, although, unless you expect your income to rapidly increase making $120 - $130k is not enough to buy a home anywhere you'd want to live in California.

Free up as much cashflow as possible so that you can get in a good habit of saving significant amounts of money every month. If you get into the habit of putting $1541/mo into your $401k, $458/mo into your Roth IRA, and $1000 or so a month into your taxable account you'll later learn that holding onto small dollar loans (like your car loan) is a waste and it will help you recenter your expectations, ability, and need to buy big ticket items.
You're spot on and this is exactly the plan now that I've ignored my home buying FOMO.

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