Would you pay off $58K early at 2.95%?

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benaaye
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Would you pay off $58K early at 2.95%?

Post by benaaye »

Curious on other thoughts. I have the loan amount set aside to pay off a personal loan (with First Republic) of $58K in full and I might be able to qualify for an additional $2K interest paid rebate if this is paid in the next month or so before 48 months is up.

I've had this amount set aside for years now as a sense of comfort as I've been job insecure and wanted a cash reserve to cover this. I am now uncertain of any additional income coming in for the remainder of the year past next week. I do have an emergency fund of about ($20K or 5+ months) and have decided to move closer to family to lower my costs as well as COVID related concerns in this next month or so. I'd always anticipated paying the loan off early and for the rebate but I'm wondering if I should pull the trigger.

I have other investments and saved cash intended for other hopeful investment purposes as well. I do like to have cash on hand and might have "too much" but paying it off without potential additional cashflow for the year makes me a little nervous even though my expenses should drastically go down if I move in with family.
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Watty
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Re: Would you pay off $58K early at 2.95%?

Post by Watty »

How long will it take to pay the loan off if you just make the normal payments?

Is the interest rate fixed or variable?
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benaaye
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Re: Would you pay off $58K early at 2.95%?

Post by benaaye »

Watty wrote: Wed Sep 02, 2020 9:41 pm How long will it take to pay the loan off if you just make the normal payments?

Is the interest rate fixed or variable?
I actually had to go quickly check because I never thought of riding out the loan! It's fixed for 10 years--so not bad terms. I think if I didn't get the $2K rebate I would probably just ride or punt the decision to a later date.
Outer Marker
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Re: Would you pay off $58K early at 2.95%?

Post by Outer Marker »

benaaye wrote: Wed Sep 02, 2020 9:51 pm
Watty wrote: Wed Sep 02, 2020 9:41 pm How long will it take to pay the loan off if you just make the normal payments?

Is the interest rate fixed or variable?
I actually had to go quickly check because I never thought of riding out the loan! It's fixed for 10 years--so not bad terms. I think if I didn't get the $2K rebate I would probably just ride or punt the decision to a later date.
What is your alternative use of the money? Safe investments, i.e. CD's or high yield savings are paying less than 1%. The market is at frothy highs. I'd pay it off in a heartbeat.
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Re: Would you pay off $58K early at 2.95%?

Post by protagonist »

Even in the top tax bracket you would have a hard time earning a secure income off an investment to compete.
Yes, if you can afford it, pay it off for sure.

In addition to the probable financial benefit, consider the psychological value (and secure feeling) of knowing you are out of debt. How much is that worth to you? To some that value may be negligible. To me it is huge.
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benaaye
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Re: Would you pay off $58K early at 2.95%?

Post by benaaye »

Outer Marker wrote: Wed Sep 02, 2020 10:45 pm
benaaye wrote: Wed Sep 02, 2020 9:51 pm
Watty wrote: Wed Sep 02, 2020 9:41 pm How long will it take to pay the loan off if you just make the normal payments?

Is the interest rate fixed or variable?
I actually had to go quickly check because I never thought of riding out the loan! It's fixed for 10 years--so not bad terms. I think if I didn't get the $2K rebate I would probably just ride or punt the decision to a later date.
What is your alternative use of the money? Safe investments, i.e. CD's or high yield savings are paying less than 1%. The market is at frothy highs. I'd pay it off in a heartbeat.
Good question--I have been thinking for the past 2 years of getting into real estate investing. I don't own anything. But I otherwise I would maybe earmark those funds to buy an investment property. I'm still far too early but I'd thought about targeting a property if I could find one of no more than $300K. I think I have 20K earmarked for that so if I didn't pay it off and assuming I could find something in real estate that worked I could put more than 20% down. Now that I think about it though I don't know if I could still get financing without a w2 the rest of the year? Otherwise if I paid it off I'd have to look for lower value properties or hope I can get back to saving for a downpayment relatively soon.
BestCoast123
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Re: Would you pay off $58K early at 2.95%?

Post by BestCoast123 »

How old are you? If you are young enough to afford to tale on the risk, invest in risky assets for the very long term.

But I would love a 10-year loan that cheap. Could invest in anything and you basically have a fixed-rate margin loan that can't be called.
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Watty
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Re: Would you pay off $58K early at 2.95%?

Post by Watty »

benaaye wrote: Wed Sep 02, 2020 9:51 pm I actually had to go quickly check because I never thought of riding out the loan! It's fixed for 10 years--so not bad terms. I think if I didn't get the $2K rebate I would probably just ride or punt the decision to a later date.
.....
I might be able to qualify for an additional $2K interest paid rebate if this is paid in the next month or so before 48 months is up.
.....
Would you pay off $58K early at 2.95%?
That was not clear if you were almost four years into a ten year loan so there are only six years left, of if you have about ten years left on it.

Either way the if you keep it the interest rate is a lot higher than 2.95% because you would in effect be paying an extra $2,000 in interest if you do not pay it off. This is very similar to paying points on a new mortgage.

I assumed that you really have 6 years until it would be paid off.

Then I used this APR calculator using $58K, 6 years 3.5% points($2k/58K= 3.45%), and no other closing costs.

https://www.mortgagecalculator.org/calc ... or.php#top

That gave a 4.916% APR.

With ten years the APR was 4.161%.

Either way that is a really good risk free tax free return. I would go on and pay it off if you can really get that $2,000 rebate.

You can then invest your free up loan payment each month.
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benaaye
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Re: Would you pay off $58K early at 2.95%?

Post by benaaye »

Watty wrote: Thu Sep 03, 2020 6:01 pm
benaaye wrote: Wed Sep 02, 2020 9:51 pm I actually had to go quickly check because I never thought of riding out the loan! It's fixed for 10 years--so not bad terms. I think if I didn't get the $2K rebate I would probably just ride or punt the decision to a later date.
.....
I might be able to qualify for an additional $2K interest paid rebate if this is paid in the next month or so before 48 months is up.
.....
Would you pay off $58K early at 2.95%?
That was not clear if you were almost four years into a ten year loan so there are only six years left, of if you have about ten years left on it.

Either way the if you keep it the interest rate is a lot higher than 2.95% because you would in effect be paying an extra $2,000 in interest if you do not pay it off. This is very similar to paying points on a new mortgage.

I assumed that you really have 6 years until it would be paid off.

Then I used this APR calculator using $58K, 6 years 3.5% points($2k/58K= 3.45%), and no other closing costs.

https://www.mortgagecalculator.org/calc ... or.php#top

That gave a 4.916% APR.

With ten years the APR was 4.161%.

Either way that is a really good risk free tax free return. I would go on and pay it off if you can really get that $2,000 rebate.

You can then invest your free up loan payment each month.
Wow, thanks Watty this is great. I actually didn't follow all of the calculation but it sounds like you calculated the true interest if I don't pay off in 4/10 years and get a $2k rebate--this would actually make the true interest rate higher..so essentially I think you calculated opportunity cost of not receiving a rebate in order to pay off?

That is really interesting because I didn't even think about thinking about it like that! I will definitely have to inquire about the rebate because it's helpful thinking about it in that additional context in any event. If, for whatever reason, I can't guarantee I'd receive it then I think this is something I'll wait on.
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Re: Would you pay off $58K early at 2.95%?

Post by grabiner »

I would suggest paying it off, even if you don't get the rebate. A risk-free 2.95% short-term return is a very good deal, particularly since you say that this is a personal loan and is thus not tax-deductible.

A side benefit is that you can keep a smaller emergency fund once you have paid off the loan, since you have eliminated one of your regular obligations.

If you have a Roth IRA, you might keep some of your emergency fund there, in a short-term bond fund; you can withdraw contributions from a Roth IRA tax-free or penalty-free in an emergency.
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Xrayman69
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Re: Would you pay off $58K early at 2.95%?

Post by Xrayman69 »

Pay it off. 2.95% on 60K debt and add the added bonus of 2K makes this over 4% instant ROI.
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Re: Would you pay off $58K early at 2.95%?

Post by j0nnyg1984 »

Yes. I don’t like debt.
hightower
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Re: Would you pay off $58K early at 2.95%?

Post by hightower »

benaaye wrote: Wed Sep 02, 2020 9:35 pm Curious on other thoughts. I have the loan amount set aside to pay off a personal loan (with First Republic) of $58K in full and I might be able to qualify for an additional $2K interest paid rebate if this is paid in the next month or so before 48 months is up.

I've had this amount set aside for years now as a sense of comfort as I've been job insecure and wanted a cash reserve to cover this. I am now uncertain of any additional income coming in for the remainder of the year past next week. I do have an emergency fund of about ($20K or 5+ months) and have decided to move closer to family to lower my costs as well as COVID related concerns in this next month or so. I'd always anticipated paying the loan off early and for the rebate but I'm wondering if I should pull the trigger.

I have other investments and saved cash intended for other hopeful investment purposes as well. I do like to have cash on hand and might have "too much" but paying it off without potential additional cashflow for the year makes me a little nervous even though my expenses should drastically go down if I move in with family.
Sounds like the real issue is that you're feeling nervous because of a lack of income for the rest of the year? So, why not wait until the new year to pay it off once you have a better idea of your outlook in terms of income? I get that the 2k bonus is tempting, but if you don't feel secure due to lack of income, that 2k discount won't help much.
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Re: Would you pay off $58K early at 2.95%?

Post by dknightd »

benaaye wrote: Wed Sep 02, 2020 9:35 pm Curious on other thoughts. I have the loan amount set aside to pay off a personal loan (with First Republic) of $58K in full and I might be able to qualify for an additional $2K interest paid rebate if this is paid in the next month or so before 48 months is up.

I've had this amount set aside for years now as a sense of comfort as I've been job insecure and wanted a cash reserve to cover this. I am now uncertain of any additional income coming in for the remainder of the year past next week. I do have an emergency fund of about ($20K or 5+ months) and have decided to move closer to family to lower my costs as well as COVID related concerns in this next month or so. I'd always anticipated paying the loan off early and for the rebate but I'm wondering if I should pull the trigger.

I have other investments and saved cash intended for other hopeful investment purposes as well. I do like to have cash on hand and might have "too much" but paying it off without potential additional cashflow for the year makes me a little nervous even though my expenses should drastically go down if I move in with family.
I think it really depends on where you have the funds sitting, and how much you need/want sitting there.
If you have $58k, plus ($20K or 5+ months), plus "other money for future investments", sitting in a savings account earning less than 1%, then I'd pay off the 2.95% loan, even without the $2k bonus for paying it off early.
Only you can decide if you think you'll get better than 2.95% over the term of the loan. I'm not going to guess for you. I'd probably pay off the loan and be done with it.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.
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Re: Would you pay off $58K early at 2.95%?

Post by orthros »

The simplest answer volleys this back to you:

Would you accept an after-tax guaranteed return of 3% on a $58K slug of money? Revise with the ~3% one-time kicker if you qualify for the rebate.

If yes, do it. If not, figure out where else it will go (emergency fund, paying down higher-interest debt, investing, whatever) and do it.
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Re: Would you pay off $58K early at 2.95%?

Post by Brianmcg321 »

Yes. Pay it off.
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Re: Would you pay off $58K early at 2.95%?

Post by IowaFarmBoy »

The analysis that several have done shows that from a return standpoint it is a slam dunk. But you have indicated concerns about your income for the remainder of the year. You also indicated you have an emergency fund, other investments and have moved closer to family to reduce costs. I think the decision comes down to how much you value this additional liquidity and how you perceive the risk of lost income and of finding other income.
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benaaye
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Re: Would you pay off $58K early at 2.95%?

Post by benaaye »

hightower wrote: Mon Sep 07, 2020 7:20 am
benaaye wrote: Wed Sep 02, 2020 9:35 pm Curious on other thoughts. I have the loan amount set aside to pay off a personal loan (with First Republic) of $58K in full and I might be able to qualify for an additional $2K interest paid rebate if this is paid in the next month or so before 48 months is up.

I've had this amount set aside for years now as a sense of comfort as I've been job insecure and wanted a cash reserve to cover this. I am now uncertain of any additional income coming in for the remainder of the year past next week. I do have an emergency fund of about ($20K or 5+ months) and have decided to move closer to family to lower my costs as well as COVID related concerns in this next month or so. I'd always anticipated paying the loan off early and for the rebate but I'm wondering if I should pull the trigger.

I have other investments and saved cash intended for other hopeful investment purposes as well. I do like to have cash on hand and might have "too much" but paying it off without potential additional cashflow for the year makes me a little nervous even though my expenses should drastically go down if I move in with family.
Sounds like the real issue is that you're feeling nervous because of a lack of income for the rest of the year? So, why not wait until the new year to pay it off once you have a better idea of your outlook in terms of income? I get that the 2k bonus is tempting, but if you don't feel secure due to lack of income, that 2k discount won't help much.
Mm, yes I think that is the emotional part. Logically paying it off was always part of "the plan." It's actually in my IPS so part of me feels weird even questioning it but I think it makes sense to gut check given the new circumstances. Also, I am thinking and it seems from the other perspectives the logical perspective still does skew to paying it off especially if there's still the rebate previously promised/I qualify. But part of the reason I always had such a large cash reserve was because it blended the rational and emotional sides of me for the desired short term outcome during payoff. Thank you for your thoughts and identifying that there is an emotional discomfort that I should still be taking stock to check in with myself on!
Last edited by benaaye on Tue Sep 08, 2020 2:39 pm, edited 1 time in total.
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benaaye
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Re: Would you pay off $58K early at 2.95%?

Post by benaaye »

dknightd wrote: Mon Sep 07, 2020 8:06 am
benaaye wrote: Wed Sep 02, 2020 9:35 pm Curious on other thoughts. I have the loan amount set aside to pay off a personal loan (with First Republic) of $58K in full and I might be able to qualify for an additional $2K interest paid rebate if this is paid in the next month or so before 48 months is up.

I've had this amount set aside for years now as a sense of comfort as I've been job insecure and wanted a cash reserve to cover this. I am now uncertain of any additional income coming in for the remainder of the year past next week. I do have an emergency fund of about ($20K or 5+ months) and have decided to move closer to family to lower my costs as well as COVID related concerns in this next month or so. I'd always anticipated paying the loan off early and for the rebate but I'm wondering if I should pull the trigger.

I have other investments and saved cash intended for other hopeful investment purposes as well. I do like to have cash on hand and might have "too much" but paying it off without potential additional cashflow for the year makes me a little nervous even though my expenses should drastically go down if I move in with family.
I think it really depends on where you have the funds sitting, and how much you need/want sitting there.
If you have $58k, plus ($20K or 5+ months), plus "other money for future investments", sitting in a savings account earning less than 1%, then I'd pay off the 2.95% loan, even without the $2k bonus for paying it off early.
Only you can decide if you think you'll get better than 2.95% over the term of the loan. I'm not going to guess for you. I'd probably pay off the loan and be done with it.
Yes, I agree--I think I'm trying to understand how much I feel I "need" to have in cash. I have gotten used to have around 75-100K liquid in HYSA since I always anticipated prepaying the loan but feel more emotionally/mentally secure with larger cash reserves. More emotional security than anything. And yes the uncertainty with additional cashflow is unsettling! But yes, also moving away very soon and temporarily to a lower cost area until EOY and winter/clarity with COVID and now job/income. I will also have to control for moving related costs but I do think I will be able to control those.

And yes in payoff my EF will stretch more without the $1K loan payments and $2K rent..I don't know how long it ($20K) would qualify for an EF going forward but even if I end up coming to another HCOL my monthly spend would be lower.

I like to compartmentalize the intended use of the other cash but yes another relatively small liquid amount ($34K) is currently in MMF (but the intended use was to be available for investments only/a house downpayment in the next year--but I think RE will be difficult to execute on until I get clarity on w2 income I realize now and this timeline might have to be pushed). Even without compartmentalizing that leaves me with around $50K in cash/liquid which I've gotten used to feeling is like "bare bones" for my ideal comfort in a scenario where I don't know that I will have guaranteed replacement/cashflow.

That's also part of what makes me kind of eager/motivated to try to learn and get into rentals for replacement income and cash flow as soon as practicable though!
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Re: Would you pay off $58K early at 2.95%?

Post by LittleMaggieMae »

I'm just throwing this out there... if you are seriously looking at buying a rental property - generally mortgage interest rates are HIGHER than for primary residence. If you pay off the 54K with money you have on hand - you may need to borrow that 54K back at a higher interest rate - possibly making your rental property more expensive. Also, like primary residences, rentals have expenses (beyond what you might get in rent) - so it's helpful to have some cash on hand to cover them - rather than having to borrow more money.

One of the reasons to not pay back a big low interest loan in a lump sum - is that you will need to borrow money again in the future and pay a higher rate of interest for it - especially if you KNOW you have a big expense on the horizon.
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benaaye
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Re: Would you pay off $58K early at 2.95%?

Post by benaaye »

LittleMaggieMae wrote: Tue Sep 08, 2020 2:55 pm I'm just throwing this out there... if you are seriously looking at buying a rental property - generally mortgage interest rates are HIGHER than for primary residence. If you pay off the 54K with money you have on hand - you may need to borrow that 54K back at a higher interest rate - possibly making your rental property more expensive. Also, like primary residences, rentals have expenses (beyond what you might get in rent) - so it's helpful to have some cash on hand to cover them - rather than having to borrow more money.

One of the reasons to not pay back a big low interest loan in a lump sum - is that you will need to borrow money again in the future and pay a higher rate of interest for it - especially if you KNOW you have a big expense on the horizon.
This is a great additional perspective and thank you for that! I am serious about buying rental property for additional income/cash flow and I was definitely intrigued if people from the real estate space would view this differently (as I think general that community is usually less debt averse). I definitely have thought about weighing this out because more properties and higher value properties will be available to me more quickly and with appropriate cash reserves to also balance a rental investment if I didn't pay it off. However, even with my cash on hand I wouldn't be able to do an all cash offer and would still need alternative financing or a hard money loan or partner until I find a new stable permanent position. So I'm thinking I'll have to wait either way to get into rentals in the markets I'm looking at.
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