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Which loan to pay

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  • #1

    Which loan to pay

    Hello all, I have a question about where I should pay a chunk of money I have saved in the sum of $20,000.

    Here are the two choices:

    1. Personal student loan $22,000 at 10%
    2. I have a first and second mortgage:
    - $50,000 at fixed 7% interest only payments
    - $270,000 at fixed 6%. This interest rate will fluctuate after 2011

    If I pay off the student loan, I will knock off a high interest loan and have an extra $290 a month to put somewhere else. I have been wanting to refinance my 1st and 2nd to a fixed 30year loan but cannot since the real estate market took a dive and my house is worth a lot less than I paid so there is no equity. My thought is that paying that chunk of money into the mortgage will at least turn my triangle upside down so that I would have equity and be able to refinance before my interest rate balloons in 2011. Any advice would be greatly appreciated
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  • #2
    Pay the student loan. For now it's you best option. You can add to your payments the 290.00 + any other funds possible and refi later.

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    • #3
      I agree pay the student loan off. Once you do that you can focus on the second mortgage to try to get it paid off quicker and then maybe you maybe able to refinance.

      Are you able to make payments now easily or it is a struggle?

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      • #4
        Another vote to pay down the private student loan. Those things are bad news.

        On the mortgage, what's the deal on the 50K interest only? When do the principal payments start and what will the rate be then? You've got the house on pretty shaky financials with an ARM and an IO loan, zero equity and now upside down. I hope you have a plan to remedy all of that.

        I'm curious why you've spent time saving up 20K when you could have been putting that money toward the loan all along.

        Regardless, once the student loan is gone, you can attack the home loan situation. Just make sure you keep an adequate emergency fund through all of that. Are you doing any retirement savings? Have you trimmed the spending to the bare minimum?
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

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        • #5
          Thanks for your responses. We are able to make the payments at this time good thing. I had been saving that money as a safety and have retirement savings invested at TRowe mainly from my previous job. We purchased the house during a big boom as a first time buyer and loans of this type seemed appropriate though we really didn't know any better. If I could do that over again I would:

          - Never get a deferred payment personal "student" loan.
          - Considered a 30 year fixed no matter how good the real estate market was at the time despite Realtor/Mortgage broker advisement

          Live and learn. We have trimmed our spending and don't use the CC unless it can be payed back immediately.

          Thanks again

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          • #6
            I agree with the other posters, pay down that private student loan now, like seriously get off your computer and write the check! Please check that the money will go towards the principal though! Sometimes loans have sneaky terms.

            Also, be sure to have at least a small emergency fund (maybe a $1,000 or so) in addition to paying down that student loan.

            Good luck.

            Comment

            • #7
              If you are looking to get debt free, the 10% student loan is an obvious choice to make that happen quickly...

              but consider what is happening to the mortgage market. You owe $320k on mortgages combined, and some of this is at risk to being higher than 10% after 2011.

              $290/month=$3480/year. In 3 years, that can reduce a mortgage by 10k- are you upsidedown more than 10k on the mortgage?

              How soon will $290/month pay off the student loan (5-7 years?).

              I think you need to consider a 7-10 year plan which does the following:

              1) reduces debt
              2) improves home equity
              3) improves liquidity


              You did not mention if you are married

              Comment

              • #8
                I'm torn between the two choices. paying off the student loan would be the best choice if you can refinance the mortgage in 3 years and that is a big if.

                the purchase price of your home was probably about 350k(5% down, 15% IO piggy back, 80% 5/1 ARM). it is most likely worth 300k or less now. the appreciation between now and 2011 is probably 0%(2008-falls, 2009-flat, 2010-slighty up, 2011-slighty up). given all of this, you need to get your total loan amount to less than 285k for a 95% ltv refinance, which is 35k less than you have now. if you payoff the student loan now and tansfer its payment to the 7% IO loan, then you'll payoff about 12k on the IO loan and about 11k off the 5/1 ARM with normal payments leaving you 12k short or 300/month extra on the IO loan on top of the student loan transfer. Now if you pay the 20k to the IO loan, you would payoff an additional 5k with continuing current payments on the IO loan and 11k off the 5/1 ARM with normal payments, which is 36k total with no real changes to your budget.

                what I would do is figure out a rough idea of what the house is worth today call it HV. now if you can pay down the mortgage debt to less than .95*HV by 2011 with paying off the student loan first, then you should pay off the student loan first. if you can't pay down the mortgage to .95*HV with paying off the student loan first, then I would put it towards the IO loan because not be able to refinance will probably be more costly than the interest save on the student loan.

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                • #9
                  It should be noted that 6% and 7% rates on the mortgage are almost on high side.

                  I doubt anyone could get 6% on first mortgage right now (30 yr fixed), but at same time this should be the focus within next 2 years.

                  If OP can refinance the loan before rates go up, that is the best solution. It might make more sense to keep liquidity ($290/month goes to cash, not paying down any loan) in an effort to refinance the mortgage (to a lower payment).

                  Then pay down the student loan when the mortgage payment is reduced with $290+difference from lower mortgage payment.

                  OP should look into refinancing now so they can plan- maybe improve credit or liquidity (probably both) to make the refinance doable.

                  Comment

                  • #10
                    Originally posted by jIM_Ohio View Post
                    It should be noted that 6% and 7% rates on the mortgage are almost on high side.

                    I doubt anyone could get 6% on first mortgage right now (30 yr fixed), but at same time this should be the focus within next 2 years.

                    If OP can refinance the loan before rates go up, that is the best solution. It might make more sense to keep liquidity ($290/month goes to cash, not paying down any loan) in an effort to refinance the mortgage (to a lower payment).

                    Then pay down the student loan when the mortgage payment is reduced with $290+difference from lower mortgage payment.

                    OP should look into refinancing now so they can plan- maybe improve credit or liquidity (probably both) to make the refinance doable.
                    Who knows if 20k will lower his principle enough for a refi. I would still payoff the SL and work extra hard to lower the balance on the second.

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