Student loans vs saving for downpayment

**jpg7n16** · 02-17-2012, 08:21 PM

Would you rather:
a) Save 7 cents per dollar and save towards your goal? or
b) Save 4.5 cents per dollar and not save towards your goal?

If you're going to stay in the current house, refi! You say you have sterling credit? Well what good is it doing you?? People build credit scores for times like these where you can refi super low.

My point is - the whole point of improving your credit score is to get a low interest rate on your debt. So go get one!

(If you're selling the home shortly and upgrading, this doesn't matter as much - as the refi fees won't be recouped in time)

**jbings4** · 02-18-2012, 06:26 PM

Good Points

Your points are well taken, but I am not in a position to refi in my current property because I don't own 20% equity and also I plan on moving out once we are ready to financially. My thought of paying off my student loans was basically to improve my DTI and allow me to qualify for the mortgage we are looking to get. After speaking with a mortgage consultant this week, he informed me that with our credit scores, income level, and current DTI that it should not be an issue.
Also, the major goal we are working towards is buying a new house that will fit my family. I was always under the impression that our student loans would hold us back from obtaining a mortgage for 300k, but the advisor told me it wouldn't be a problem. For peace of mind, I would like to completely payoff our student loans before we begin saving for a down payment. With this method, we would be able to easily afford the new mortgage and live the lifestyle we have worked our whole lives for. With that being said, we could swing the new mortgage right now, but it would slow down the rate of current money we can throw at our student loans. Please provide your opinions as I would like to hear from an viewpoint.
My conservative nature is telling me to wait to buy the house until we payoff all student loans, but the wife on the other shoulder is telling me we can swing it now.

**jpg7n16** · 02-18-2012, 11:06 PM

Originally posted by jbings4 View Post

Your points are well taken, but I am not in a position to refi in my current property because I don't own 20% equity and also I plan on moving out once we are ready to financially.

Then you should really be paying down your current mortgage.

Not only do you save 7% interest instead of 4.5%, you also build equity in your home - equity that will be freed up when the current home sells, and will go towards the down payment on the new home. Also enables a refi if you change your mind on upgrading the home (though I doubt you guys will

)

You seem to be fixated on the SLs because of the DTI ratio - but if your current home sells 1st, that won't matter at all. Besides, with your income, you may qualify as is.

At those rates, paying on the mortgage will save over 50% more interest than paying extra on the SLs

For peace of mind, I would like to completely payoff our student loans before we begin saving for a down payment.

And how long will that take?

**jbings4** · 02-19-2012, 01:01 PM

Thanks

First, thanks for your response. Based on my current calculations, we would have our 80k in student loans paid off in a little over 2 years.
The reason I haven't been paying down the mortgage aggresively is because I know that I will be selling it within the next year or two. My goal has been to decrease my DTI. By eliminating various student loans it will free up my monthly cash flow which allows me to either save/payoff debt at a higher rate.
Another note regarding our current house. We currently owe 149k on our house and I would guess it would sell for around 140k in this down market we are living in. Is this even more reason why I should allocate more funds to pay down this mortgage?
My goal has always been to free up as much money possible and eliminate debt. We have been sucessful doing this over the past 16 months as I have paid off my wife's car which was 7k, 27k in student loan debt, and 29k in cc debt. Is it worth it to just suck it up for two more years and be completely debt free (besides our rental house which we owe 100k on)?

**disneysteve** · 02-19-2012, 02:10 PM

Originally posted by jbings4 View Post

My goal has been to decrease my DTI. By eliminating various student loans it will free up my monthly cash flow which allows me to either save/payoff debt at a higher rate.

Paying down the mortgage would also improve your DTI ratio and have the added benefit of saving you more money in interest since the rate is higher.

We currently owe 149k on our house and I would guess it would sell for around 140k in this down market we are living in.

All the more reason why your extra money should be going toward the mortgage, not the student loans.

Is it worth it to just suck it up for two more years and be completely debt free (besides our rental house which we owe 100k on)?

Only you and your wife can answer that question. You say you'd like a bigger place for a growing family. Just realize that is a want, not a need. If you are willing to live where you are a little longer, you'll be in better shape financially. It will give you more time to pay off debt and more time to save up a larger downpayment. You need at least 60K to put down on that 300K house. And don't forget to maintain your 6-month emergency fund along the way.

**jpg7n16** · 02-19-2012, 02:21 PM

Originally posted by jbings4 View Post

First, thanks for your response. Based on my current calculations, we would have our 80k in student loans paid off in a little over 2 years.
The reason I haven't been paying down the mortgage aggresively is because I know that I will be selling it within the next year or two. My goal has been to decrease my DTI.

If you sold the house today, you would owe the bank $9k. If you instead paid down the $80k on your current mortgage, when you sell the house, you would get a check for $71k. That would be more than enough for the 20% down needed on a $300k house ($60k).

When the 1st house sells, the mortgage will be paid in full, and thus no more mortgage payment. This would be removed from your expenses and thus lower your DTI.

--------------

If you instead use the $80k to pay off your SLs, when you sell the house, you will still owe the bank $9k. And will need to save up an additional $60k to have the 20% down for the new home.

By eliminating various student loans it will free up my monthly cash flow which allows me to either save/payoff debt at a higher rate.

So you're saying your goal in paying off the low interest debt, is to free up more cash to pay off high interest debt? Why not skip the middle step and go straight to paying off the higher interest debt?

Another note regarding our current house. We currently owe 149k on our house and I would guess it would sell for around 140k in this down market we are living in. Is this even more reason why I should allocate more funds to pay down this mortgage?

IMO - yes. That'd just be more you'd have to save up for your down payment.

My goal has always been to free up as much money possible and eliminate debt. We have been sucessful doing this over the past 16 months as I have paid off my wife's car which was 7k, 27k in student loan debt, and 29k in cc debt. Is it worth it to just suck it up for two more years and be completely debt free (besides our rental house which we owe 100k on)?

I'm not sure you understand fully that the mortgage is also debt. Paying off the SLs wouldn't make you debt free. You would still owe on the 1st mortgage, and rental property.

I think you've done a great job paying off debts so far - I would just shift the focus onto the current mortgage. As IMO, that will simultaneously accomplish both of your goals - debt reduction and saving for a downpayment.

**Hector** · 02-20-2012, 09:03 AM

Is your rental property generating positive cash flow?

As others mentioned, I would keep paying minimum on student debt and allocate as much money as I can towards your primary residence.

**jbings4** · 02-20-2012, 04:22 PM

Rental Property is Postive

We do have a postive cash flow on the rental home. I refinanced the home last summer to a 30/yr 4.875% rate. We currently owe around 100k on the property and our most recent appraisal last summer came out to 135k.
The only issue I have with allocating all our extra money towards our current residence is the fact that I will be able to move sooner, but will still be sitting on a hefty amount of SL debt. I always have subscribed to the Dave Ramsey plan with a gazelle-like approach to attacking our debt. I do understand that mortgage debt is debt. With our student loans, every time I pay one of them off, my monthly cash flow goes up. If I make extra principle payments towards my residence, my monthly cash flow remains the same. I do not want to get into our house with a hefty SL payment still. I do understand that allocating funds in either of these directions will improve my DTI. After meeting with the mortgage lender last week, he assured me that the DTI we currently have will work for the mortgage we are looking to obtain.
I met with my my wife last evening and we had a financial meeting of sorts. This was our conclusion, let me know your thoughts. We put a 3-year plan into place with the idea of moving at the end of three years.
Year 1 - Pay all extra funds toward student loan debt and take our loan balance from 80k down to 40k.
Year 2 - Continue to make the minimum payments on SL's, but start splitting the extra 3k monthly between the current house and savings. This would allow us to pay down our current mortgage to 130k and we be able to sock away 20k
Year 3 - Put all extra money (3K monthly) into savings. This would allow us to have 50 or 60k in savings as well as put us in a position to sell the house and not take a hit. Also our student loans will be around 35k or so which is managable from my perspective. This may be because we started this journey with 110k in student loans and 30k in CC's.
Let me know your thoughts on this plan.

**jbings4** · 02-20-2012, 04:41 PM

Sorry, got lost in my post

Specifically, our entire mortgage with taxes and insurance is $722/month for our rental property. We currently receive $1000/monthly and have had the same renter for the past four years. We bring home around $278 per month in rental income, but put some aside for repairs or unforseen situations.

**jpg7n16** · 02-20-2012, 05:23 PM

Originally posted by jbings4 View Post

With our student loans, every time I pay one of them off, my monthly cash flow goes up.

True. But every time you pay towards your 4.5% debt, as opposed to your 7% debt, your future net worth goes down.

I'm trying to help your net worth

I met with my my wife last evening and we had a financial meeting of sorts. This was our conclusion, let me know your thoughts. We put a 3-year plan into place with the idea of moving at the end of three years.
Year 1 - Pay all extra funds toward student loan debt and take our loan balance from 80k down to 40k.
Year 2 - Continue to make the minimum payments on SL's, but start splitting the extra 3k monthly between the current house and savings. This would allow us to pay down our current mortgage to 130k and we be able to sock away 20k
Year 3 - Put all extra money (3K monthly) into savings. This would allow us to have 50 or 60k in savings as well as put us in a position to sell the house and not take a hit. Also our student loans will be around 35k or so which is managable from my perspective. This may be because we started this journey with 110k in student loans and 30k in CC's.
Let me know your thoughts on this plan.

No surprise here - I don't like it. But I have a compromise of sorts that I hope you'll consider. So consider this... what if I had a plan that could save you more interest, increase your cashflow more, and still have your SLs paid off in the same 3 year period? How does that sound??

If you're taking a 3 year plan on this - a refi on mortgage 1 is now a viable option. And here's how I'd recommend you do it.

1) Pay down the home only enough to refi (then go refi!)

This will increase your cashflow, save a ton of interest, will pay for itself over the 3 years, and will get the interest rate down so that it doesn't matter which debt you pay first - making the SLs and mortgage save the same amount of interest

2) Pay off your SLs.

Since the interest rates are now essentially identical after the refi, it doesn't matter which one you pay off first so - knock yourself out! Go crazy and get rid of the SLs!

3) Pay down the mortgage again until you have enough for a downpayment

When you sell home 1, you get all your equity back in a check. By paying down the mortgage, you not only save for your downpayment, you also save a ton of interest in the meantime.

This plan takes the same amount of time as your current plan, and accomplishes all the same goals, but saves you significantly more interest.

**jbings4** · 02-20-2012, 07:27 PM

Great Points!

Refinancing is a great option, but I see some problems with it:
1. It would take us around 14 months to pay down the mortgage to the point where we could consider a refi. With this scenario, we would only have 18 months or so to recover the cost of the refinance which would probably be around $3500.
2. Before the refinance, our monthly payments would remain the same. The refi would help take years off the mortgage, but our payment would remain the same by the time we are ready to move. We would owe considerably less on the mortgage which would put us in a good position to sell the property.
Here is a stupid question: I�ve always thought that by paying down the mortgage early would not free up more monthly cash flow. I believe it would cut years off of the mortgage on the back end. But would paying down the mortgage principle increase the amount of our regularly scheduled payment that would go towards the principle?
Another point here. Due to the fact that our interest payments on our home are tax deductible, wouldn�t that basically lower the actual APR from 7% to somewhere around 5% when considering the tax break? If so, this APR is around the same as our student loan payments. I know that student loan interest is also tax deductible up to $2500/yearly, but that break does not equal my mortgage tax break.
I realize I am rambling, but I hope you all understand somewhat of what I am trying to convey.
You are right that paying my mortgage off right now would increase my net worth quickly than taking the SL debt because of the interest rates.

**jteezie** · 02-20-2012, 07:51 PM

I would focus on the mortgage. It's pretty clear.

If I had a 4.5% student loan interest rate, I'd pay the minimum forever. That's a good rate. I should also note that it is a personal preference to stretch out my student loans because I believe it is a morally good thing to do and that I help to support the education system. Most others here would likely recommend paying off the mortgage first then tackle the student loan fully as well.

**jbings4** · 02-21-2012, 03:03 PM

Change to Plan

First, want to thank all of you for your thoughtful advice. Here is my plan of action:
1. Hold on to the rental house because I have 30k equity and have a positive monthly cash flow of $270
2. Aggressively pay down current mortgage to get to a point where we can refinance. We owe 149K and the house would appraise for around 140K. With that being said, I would need to payoff about 38k to get our principle balance around 110k. This will take us about a year. After the year is up, refinance immediately.
3. Pay minimum monthly payments on SL debt which is around $740/month
During the second and third year of our plan we would save money as well as pay down our student loans�.probably a 50/50 split with the extra 3k a month.
In three years this would leave us with the following scenario:
1. We would owe 106k on our current house that is currently valued at 140k.
2. We would owe around 45k in student loan debt (We started this journey with 107k in SL�s)
3. We would owe around 95k on our rental property that is currently valued at 135k.
This would leave us with around 100k in equity in both our properties and SL that is manageable.
Here is where I changed my plan:
Instead of selling my current residence in a down market, turn this home into a rental as well. After the refinance, our new monthly payment with taxes and all would be around $700/month. We can rent this house out for $1200/month which would leave us a positive cash flow on this property in the range of $500/month. Between both my properties we would be bringing home around $800/month, all while paying down the mortgages on these properties.
With this position, we would be able to get a 300k mortgage and our entire DTI would be around 31%. So in other words, we could swing the new mortgage and owning 2 rental properties at the same time.
Thoughts on this revamped plan?

**jpg7n16** · 02-22-2012, 09:58 PM

Originally posted by jbings4 View Post

Refinancing is a great option, but I see some problems with it:
1. It would take us around 14 months to pay down the mortgage to the point where we could consider a refi. With this scenario, we would only have 18 months or so to recover the cost of the refinance which would probably be around $3500.

True. You do want to consider the costs. But those are usually recouped fairly quickly (esp since your payment will drop $400-500...

A Consumer's Guide to Mortgage Refinancings

I'd also recommend shopping rates, and costs.

Mortgages and Mortgage Loan Rates in the United States-- Free search for the best mortgage rates

Originally posted by jbings4 View Post

First, want to thank all of you for your thoughtful advice. Here is my plan of action:
1. Hold on to the rental house because I have 30k equity and have a positive monthly cash flow of $270
2. Aggressively pay down current mortgage to get to a point where we can refinance. We owe 149K and the house would appraise for around 140K. With that being said, I would need to payoff about 38k to get our principle balance around 110k. This will take us about a year. After the year is up, refinance immediately.
3. Pay minimum monthly payments on SL debt which is around $740/month
During the second and third year of our plan we would save money as well as pay down our student loans�.probably a 50/50 split with the extra 3k a month.
In three years this would leave us with the following scenario:
1. We would owe 106k on our current house that is currently valued at 140k.
2. We would owe around 45k in student loan debt (We started this journey with 107k in SL�s)
3. We would owe around 95k on our rental property that is currently valued at 135k.
This would leave us with around 100k in equity in both our properties and SL that is manageable.
Here is where I changed my plan:
Instead of selling my current residence in a down market, turn this home into a rental as well. After the refinance, our new monthly payment with taxes and all would be around $700/month. We can rent this house out for $1200/month which would leave us a positive cash flow on this property in the range of $500/month. Between both my properties we would be bringing home around $800/month, all while paying down the mortgages on these properties.
With this position, we would be able to get a 300k mortgage and our entire DTI would be around 31%. So in other words, we could swing the new mortgage and owning 2 rental properties at the same time.
Thoughts on this revamped plan?

You seem fine with rental ownership, plus have experience with it so far and are doing well. So I like this plan much better than your other plan. Though I would caution that you're getting a lot of debt on hand, and need to increase your EF after entering the new home. You still have roughly $245k debt, plus you'll be adding a mortgage around the same.

That's nearly half a million in debt, and a significant amount of assets subject to the risks of real estate. If you're okay with that, your income is high enough to make it work.

Student loans vs saving for downpayment