Save more or start paying down loans?

**Slug** · 04-16-2010, 12:08 PM

You're in a good place. A little leveraged for my taste, but probably fine if you're in top 20 MBA program and not planning a career in non-profit. For answer, I think we need to know if you'll just be taking Federal Stafford loans for your education or you'll also end up taking EXTRA loans to cover yourself. If you don't need the EXTRA loans, I'd probably put most of that $500 to the Heloc. Otherwise, I would save it and plan on using it to pay off the EXTRA loans once they are out of the deferral period. Nothing like being able to knock out loans straight out of your program.

**Fizgig** · 04-16-2010, 12:13 PM

If you feel that your employment and income are secure, yes absolutely I think you should agressively pay down debt. You didn't post a monthly budget but it looks like your $16,000 savings could cover you for at least three months, and your debt load is considerable and needs attention.

I'm curious about your rental property. You collect $950/mo in rent, but the mortgage + HELOC is $920 even before paying taxes and insurance. You're losing money every month, and vulnerable to repairs, bad tenants, market fluctuations, etc. Why are you keeping it? If you're not upside down I'd seriously consider selling.

Also, I know I'm just looking at words on a screen and don't know you personally, but you seem to have eagerly taken on a lot of debt at a very young age. Your cars, for example, are both very expensive. I would recommend that you slow down, adjust your expectations, and not sign that dotted line so readily next time.

**cbr600rr** · 04-16-2010, 02:06 PM

Originally posted by Slug View Post

For answer, I think we need to know if you'll just be taking Federal Stafford loans for your education or you'll also end up taking EXTRA loans to cover yourself.

I take out around $4500 every semester in Federal Subsidized loans that goes towards tuition.

Thanks for the advice!

**cbr600rr** · 04-16-2010, 02:11 PM

Originally posted by Fizgig View Post

If you feel that your employment and income are secure, yes absolutely I think you should agressively pay down debt. You didn't post a monthly budget but it looks like your $16,000 savings could cover you for at least three months, and your debt load is considerable and needs attention.

I'm curious about your rental property. You collect $950/mo in rent, but the mortgage + HELOC is $920 even before paying taxes and insurance. You're losing money every month, and vulnerable to repairs, bad tenants, market fluctuations, etc. Why are you keeping it? If you're not upside down I'd seriously consider selling.

Also, I know I'm just looking at words on a screen and don't know you personally, but you seem to have eagerly taken on a lot of debt at a very young age. Your cars, for example, are both very expensive. I would recommend that you slow down, adjust your expectations, and not sign that dotted line so readily next time.

Thanks for the reply!

My employment is pretty secure and I was leaning towards going after debt aggressively like you suggested.

You're right about the rental property, I'm losing a couple hundred a month on it. I have pretty good tenants that pay early each month and don't need a lot of attention. This used to be my primary residence but couldn't sell it when I had to move due to the fact that it's upside down financially (house worth around $100K now), so renting it was the best option as I didn't want to do a short sale/foreclosure.

Good advice on the cars... will definitely plan on driving these two for a LONG time!

**jpg7n16** · 04-17-2010, 12:27 AM

Originally posted by cbr600rr View Post

...

Good advice on the cars... will definitely plan on driving these two for a LONG time!

Any chance of convincing you to move down in car on either of the two?

I don't know the current market value of the cars, but for the $28k @ 4.95%... if you were able to sell that one, and move down temporarily into say a $10k car - you might be able to knock out 13-18k of debt instantly depending on if you're upside down or not. At 4.95% that'd save you 643.50-891 a year in interest. If you did the same with your lease, and instead of buying it afterwards, opted to go for a $10k car, add on another $500 of interest saved. (1100-1400/yr in interest payments not coming out of your pocket) Add onto that the "cost" savings of your car's value (28k car in 5 yrs = 8k car, loss of 20k or 4000/yr; 10k car in 5 years = 3k car, loss of 7k or 1400/yr) so add 2500 or so -per car- and the switch to cheaper cars could easily add $5000-6000 to your net worth each year for the next 5 years.

By the way, you can find a very reliable car for $10k. I have an '06 Honda Accord I got for 13k and I absolutely love it

As for what to do with your extra $500/month. I'd suggest paying down the HELOC first (highest interest rate obv).

And since your emergency fund is decent, but your goal is to pay down debt, I would stop saving the 5% and put it towards debt reduction as well. Later, after you guys have deleveraged a bit, get your emergency fund up to the full 3-6 months.

**cbr600rr** · 04-17-2010, 07:25 AM

Originally posted by jpg7n16 View Post

Any chance of convincing you to move down in car on either of the two?

Great advice, thanks!

On the financed car, that would be hard to do. It's a 2010 model I purchased in December (w/$5k down) and it already has 10k miles. However, I will follow your advice on the leased car. The thought behind buying it later was the fact that my wife only puts about 5K miles a year on it and it would be a waste to return it with such low mileage, but I have enough time to start driving her car more and putting some miles on it, then I can return it and downgrade per your advice.

On the HELOC, I can pay it off in 2-3 years, but I guess I'm a little hesitant throwing money at a property that's so upside down. I mean, you see the government coming up with mortgage modification programs all the time.... The alternative is to start paying down the non-deductible interest loan, the car, but for the same amount of loan roughly, I'd save a fraction of what I would save paying off the HELOC.

Looking forward to some feedback!

**cbr600rr** · 04-17-2010, 07:28 AM

One thing I should clarify, the second loan on the rental home is actually a 15 yr second mortgage with a fixed rate, not technically a HELOC...

**jpg7n16** · 04-17-2010, 10:18 AM

Originally posted by cbr600rr View Post

Great advice, thanks!

On the financed car, that would be hard to do. It's a 2010 model I purchased in December (w/$5k down) and it already has 10k miles. However, I will follow your advice on the leased car. The thought behind buying it later was the fact that my wife only puts about 5K miles a year on it and it would be a waste to return it with such low mileage, but I have enough time to start driving her car more and putting some miles on it, then I can return it and downgrade per your advice.

On the HELOC, I can pay it off in 2-3 years, but I guess I'm a little hesitant throwing money at a property that's so upside down. I mean, you see the government coming up with mortgage modification programs all the time.... The alternative is to start paying down the non-deductible interest loan, the car, but for the same amount of loan roughly, I'd save a fraction of what I would save paying off the HELOC.

Looking forward to some feedback!

Yeah maybe, but there's nothing really you can do to get that $5k down back. It's gone under either scenario (keep or sell). If the car was bought at $35k and it's only worth $28k now, that $7k is already gone, regardless of whether you sell it or not - the car's just not worth that much any more. True, there's a lot of emotions with just having bought a new car and put a lot of money into it and all. But you'll have to look at what options you currently have available and which is the best for your future, that may be sell or it may be keep, but that's for you to evaluate.

Well by all means, if the leased car is worth more than $20k at the end and you can buy it for $20k, do it!

If it's valued at say $25k, you can buy it at 20 sell at 25, and put that 5k towards a good 10k car. That would be a fantastic result for you guys.

I wouldn't really consider what the government may or may not do. The 2nd mortgage on the rental has to be repaid at some point. The sooner you pay it off, the less interest you pay, and the less debt you have out there. (And the better the cashflow position of the rental will be). Paying that sucker off in 2 years would be amazing.

As is, over the next 12 years, you will make 144 payments of $360 = $51,840. And -according to my financial calculator- if you paid it off in 2 years, it would by 24 payments of $1,411.61 for about $33,879 total. You would be saving interest payments of $17,961 over the life of the loan. I'd do that

**jason_simpson** · 04-20-2010, 05:21 PM

Simple math suggests it's better to get rid of debt before saving for retirement or an emergency fund.

After all, you will be earning less from the savings rate than you have to pay interest on the other debts, money is better spent paying down debt quickly.

**gpoitras** · 04-21-2010, 09:28 PM

If this were me. I would first get on a zero balance budget and stick to it. Next I would stop your investments until you are debt free (not including your primary mortgage). Next I would get rid of your car debt and get into some cars you can afford, meaning paying cash for. From there (assuming you are keeping the rental property) take any available cash, minus a thousand or two, and apply it to your HELOC. Focus any left over money each month to that HELOC until it's paid off. You'd probably have it paid off by the time you graduate at which time you should pay off those student loans.

**mortgage-wiz** · 04-24-2010, 01:32 AM

Try checking options to refinance your loan and adding the extra 500$. with today's market interst rate the process might end up saving you money...
Good luck!

Save more or start paying down loans?