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Pay down student loans or mortgage?
Hey guys! I'm kind of new here, but I've been lurking for awhile and wanted to see if y'all could weigh in with your advice.
Here's the situation:
DH and I have a 2 bed/2bath home that we owe about $75k on, but it's probably worth about $140k. We want to buy another home within about 5 years, and would need to spend at least $215k to get what we want. We've considered trying to pay off our current house in that time and keep it as a rental.
We have about $60k in student loan debt, but no other debt to speak of.
We recently sold a car for $15k and are trying to decide what to do with that income. We have about $8k in savings, so it's not necessary for us to save all of that income.
I'm a teacher, and if I stay in my current job for 4 more years, $17,000 of my loans will be paid off. If I stay for 9 years, they'll all be forgiven. Right now the payments are about $600 a month, but I don't know if they'll lessen in four years when the $17,000 goes away.
My inkling is to use the money to pay off the mortgage faster, since the loan debt will hopefully be forgiven anyway, and maybe having a rental income would put us in a better position for having a bigger house down the road?
Sorry, I know that was a lot of information - if you stuck with me through it, I'd love your advice!
Re: Pay down student loans or mortgage?
What are the tax benefits of keeping the mortgage/student loans vs paying one off? Do you itemize on your taxes because of the mortgage interest? Do you deduct your student loan interest?
How is your retirement savings going? Do you have a decent amount saved for retirement?
I would not be so quick to pay off these major debts until you do all the math. With only 8K in savings and wanting to buy another house, you might be better off just keeping it in a high interest account for a down payment. Or funding an IRA.
I think saving the cash as a rainy day fund or as a down payment towards your dream home would be best. If you can afford the mortgage on your current place plus your student loans than paying down the mortgage or paying down the student loans likely won't help that much.
Additionally, if you plan to buy and keep your current home as a rental you'll need even more money upfront because you won't have cash from that sale.
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My husband is still in school while he works full time, so we get tax benefits from that, which is nice.
Since I work for the state, I have a nice pension plan and I save money for a 403b plan on top of that so I'll have 100% of my retirement salary (or close to it) when I retire. DH works for a major healthcare corporation and also has a 403(b) that he contributes to every month, so I think we are probably ok on that front.
Maybe I wasn't clear enough - I'm thinking another house about 5 years down the road after we have kids and outgrow this one. We could probably spend less and have less property/not live in as desirable of an area in order to get an extra bedroom or two, but I'd like to be able to not sacrifice those things if we don't just have to.
Maybe we'll keep it in savings, even a CD if only to keep our paws off of it. Thanks for the advice!
Student loan and mortgage payments are good for your credit because they show on time payments every month. Do either of you pay more than $2,500 in interest on the student loans each year? That would show on the tax form they send you and it's the max that you can deduct on your loans. If either of you are paying more, I would pay the loan down to the point that you're only paying that much in interest.
I wouldn't jump to pay either off until evaluating the tax situation, especially since your loans will be repaid.
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Because I'm a teacher, I'm doing the income-based repayment plan. DH and I just got married last year, so I'm still just counting my own income (not his). Because of that, my payments are only $146 a month. I don't know how much is interest/principal/etc., I just know that if I pay them for 10 years on the income based plan, they go away.
With my husband's added income figuring in, I think the payments will go up to about $300-$350 a month next year. I hate to throw any more money than necessary at the loans because I don't really anticipate leaving public interest and I figure that's like saying no to free money in 10 years.
I hadn't really thought much about a down payment on our new (in-5-years-or-so) house but that's a really good point. I forget that 20% seems to be required and that is a TON of cash for us to have lying around.
So everyone thinks it'd be better to have the cash in a down payment and money left on our current mortgage payment when we go to buy a new house?
It's really hard to tell where the mortgage/house buying requirements will end in in 5 years- I mean people were getting 0% loans base on whatever they said they made 5 years ago (with little documentation required!)
I would say this would be your safest bet. I assume you will be moving from your current house to a new house directly, so you won't have enough time to include the rental income as actual income. This means you'll need to be able to afford both payments and also have probably 6 months of mortgage payments (on both homes) accessible plus a down payment.
I don't know if you said what your current mortgage rate is? With that much equity in your house, would it make sense to refinance to a 15 year and lock in a 3.something % rate?
Refinancing might be a good idea...we are currently at a 5% interest rate which seemed great at first but with mortgage rates the way they are now, that might be a good idea too.
Thanks for all the advice, everybody!
Edited by moderator.