Lump sum payment question

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Hh1980
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Joined: Tue Aug 13, 2019 6:33 am

Lump sum payment question

Post by Hh1980 » Tue Aug 13, 2019 6:41 am

Good morning, I currently have a student loan with a 6.75% interest rate. There is less than $10,000 remaining on that loan. I also have a home mortgage at 3.75% with 343k remaining. Since I only put 5% down, there is a PMI charge of $155/month through 2024 (total mortgage payment excluding insurance and property taxes is $1795/month), unless I can get down to 80% of original selling price sooner. I have a $7,000 lump sum payment I can make now and I am wondering if it would be better to direct it towards the student loan, or towards the principle of the mortgage so I can reach the point of no PMI sooner. Thanks for any advice on how to approach this.

HomeStretch
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Re: Lump sum payment question

Post by HomeStretch » Tue Aug 13, 2019 7:08 am

The potential savings from eliminating PMI of $155/mo is larger than eliminating the monthly interest on a $10k student loan at 6.75%. But it sounds like the $7k isn’t enough to have the PMI removed.

You need to figure out the savings from each to decide - if/when you’ll get to 20% equity and can have the PMI removed versus paying off $7k now on the student loans. Plus you need to factor in any cost to having PMI removed (is a new appraisal needed?) and the likelihood of a market value drop in your home.

If you won’t be at 20% in 1-2 years, you might be better off paying off $7k of the student loans and refinancing the remaining $3k to a lower rate if possible.

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Stinky
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Location: Sweet Home Alabama

Re: Lump sum payment question

Post by Stinky » Tue Aug 13, 2019 7:14 am

Welcome to the Board!

I would pay down the student loan debt with your $7,000, and continue to aggressively pay it down until it is gone. It's a "bird in the hand" to get rid of that debt, and when it is paid off you can direct any monthly amounts you were paying on the student loan to further savings or mortgage loan paydown.

It will be a while until you get the loan to value ratio on the house down to 80%. I'd put the student loan over the mortgage.
It's a GREAT day to be alive - Travis Tritt

wilked
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Re: Lump sum payment question

Post by wilked » Tue Aug 13, 2019 7:45 am

Student loan for me. Then knock off the $3k.

Good luck!

Topic Author
Hh1980
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Joined: Tue Aug 13, 2019 6:33 am

Re: Lump sum payment question

Post by Hh1980 » Tue Aug 13, 2019 9:07 am

Thanks, everyone. My gut had been saying student loan, but it annoys me to pay the PMI each month. As mentioned, it would still take time to get to the 20% equity in the house even with this lump sum payment, so I think I will just take care of the student loans first. Appreciate the quick responses!

Carl53
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Re: Lump sum payment question

Post by Carl53 » Tue Aug 13, 2019 9:08 am

I'm a little surprised that I'm coming out on the side of pay off the student loan. PMI, is horrible, but putting $7k on the student loan (make sure you tell them to apply it to the principal, not the next 45 or so payments), ought to save you perhaps $1800 interest payments with you finish paying it off in about a year and a half. Putting it on the home loan will knock about a year off the length of your loan and PMI period. PMI savings would be around $1800 in about four years, plus about $20,000 in the last year of your current mortgage.

The likelihood of you remaining in the home five or 30 years, only you know, but most folks would not at least for the longer term. If you attack the home loan once you knock out the student loan with the money formerly allotted to the student debt, you would still knock off perhaps 6 months of PMI and get a good return on that effort.

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