Extra $750/month

[guppy]

Hi everyone! I have an extra $750 per month to apply towards debt or retirement. I'm wondering what you think would be best with the money?

Husband: 7% to 401k
Myself: 6.25% to pension
~1.75% to 403b (like 401k)

Debt:
Husband Student Loan: 5100 left, 10 yrs remaining, 6.8% interest, ~60/mo
My Student Loan: 20700 left, 20 yrs remaining, ~7% interest, ~165/mo
Rental Property: 94000 left, 20 yrs remaining, 5.86% interest, ~665/mo (renters unfortunately only pay 400 of that, so we make up the difference. that money is not included in the $750 mentioned above)
Home: 161000 left, 22.5 yrs remaining, 7.24% interest, 1215/mo

My husband is 27yrs old and I just turned 25. Would it be wise to up our retirement investments some and also pay down debt? Or just pay down debt? And which do you suggest paying off first? I think it's a given we pay my husbands student loan first since there's relatively little left, but after that I'm not sure what to focus on. Our mortgage for the home is at such a high interest rate but we can't refinance due to there being such little equity. Would it be smart to pay that down as fast as possible and then try to refinance? In all liklihood, that'll take around 2 years and I'm afraid interest rates will be even higher then.

Any suggestions??

[anonymous_saver]

(1) I would say keep putting money into your pension. However, are you and your husband putting ONLY up to your companies match in your 401(k)/403(b)? I would only put up to the match. After that comes the Roth IRA (although considering some of your debt, I would only start off small there).

(2) Sell your rental property. Yes, you are probably going to take a cut. But really, you have a fair amount of other debt to pay off first, plus saving for retirement. Once you pay off your primary residence, maybe I'd consider doing that again, but I don't think you guys are in a place to do that. You are currently losing a lot of money by owning this. I say take your losses now instead of later.

(3) Why is your house at a high interest rate? Have you tried to refinance?

(4) Do you have an emergency fund? If not I would start saving up to 1 month worth of an emergency fund in a high interest savings account. I would be comfortable with saving more, but I could see how your priority could be to pay down some of this debt.

(5) Assuming you can refinance your home, and after you saved a modest emergency fund, I would put the extra money towards your highest interest debt first. I would also start putting money towards Roth IRA's for each of you. Perhaps something in the $100/month range?

Good job on getting things in order early on in life! You should be proud.

[disneysteve]

Ultimately, I'd say you aren't saving enough for retirement, but in the short-term, you need to knock down your debt, almost all of which is at a relatively high interest rate. I'd be pouring that extra money into debt reduction.

Do you get any tax deduction for the student loan interest paid? If not, I'd probably focus on your husband's debt, even though yours is at a slightly higher rate. $750/month would get rid of that $5,100 in 7 months. Then you can snowball and have $810/month to put toward your student loans every month after that.

The mortgage is a problem, but at least after the deduction, the real rate is only about 5.43% making it the cheapest of your debts.

Your single biggest problem is the rental property. It makes no sense whatsoever to keep an investment property that is losing $265/month. You either need to up the rent to cover your costs or sell the place as soon as you can.

Edited to correct typo.

[anonymous_saver]

Your single biggest problem is the rental property. It makes no sense whatsoever to keep an investment property that is losing $265/year. You either need to up the rent to cover your costs or sell the place as soon as you can.

I'm just correcting your post to reflect it costs them an extra $265/month ($3,180)/year.

And that reminds me, I'm assuming that's not including anything other than the mortgage? If so, than it's much more that $3,180 a year.

[disneysteve]

Oops. Thanks for catching my typo. $265/year wouldn't be so bad.

[guppy]

I agree with you all about the rental property. Unfortunately we bought half of the property off of my parents near the height of the market. They depend on the income they receive from their share and even if we did sell today, we'd be ~30k in the hole. The $400 I said I receive from the tenants is actually $500. $100 of that I automatically deduct since we use that for property taxes/ins/condo dues, and does not go towards the mortgage. If the situation were different, I would sell the property, so I definitely see where you are all coming from. There is a slight chance of my parents actually moving into the condo in the next few years if they sell their house, and they've already said they would pay us 775/mo to cover mortgage and expenses or buy our half back from us at the same price we paid. I don't see that as being fair to my parents though. We'll see what happens with that scenario..

[guppy]

anonymous - refinancing isn't really an option at this point since i don't have enough equity in the house.

[Walt_Pennsyl]

I would say put it into the house.

[guppy]

Thanks for the advice everyone! I'm definitely tempted to put it all on my house and try to get that down to the point where I can refinance. How likely do you think it is that interest rates will be above 7.24% in 2 years?

[anonymous_saver]

Sounds like a rough situation with your parents and the condo. However, it is really hurting you by keeping it going. I would try to have a serious discussion with them about how this is hurting you (and them!) financially. I think I would at least try to think of a different solution. At this point, I'd say taking a 30k hit would be worth getting rid of this property.

That being said, I am really proud of you guys for trying to get the situation under control. You should also be proud.

[msmorrisonspeaks]

(4) Do you have an emergency fund? If not I would start saving up to 1 month worth of an emergency fund in a high interest savings account. I would be comfortable with saving more, but I could see how your priority could be to pay down some of this debt.

(5) Assuming you can refinance your home, and after you saved a modest emergency fund, I would put the extra money towards your highest interest debt first. I would also start putting money towards Roth IRA's for each of you. Perhaps something in the $100/month range?

I totally agree with you on these.
Have an emergency fund. Have at least three months' income (some say six) in a high-yield savings account that can be easily accessed.