Maximize Down Payment or Save for College

[wgroce]

Recently sold my house and cleared about $52K--trying to decide if I should put all of this and more into a 20% down payment on my new home with a 20 yr mortgage or put 10% down on a 30 year mortgage, putting the remainder in college accounts for my kids (7 and 9).

Option 1: 20 yr loan, down payment of $58K, and investing $0 in the kids college account. Interest in House will be $118,000 over the life of the loan and payment is $1776

Option 2: 30 yr loan, down payment of $30K, and investing $28K in the kids college account. Interest in House will be $203,000 over life of the loan.
It is a VA loan so no PMI required.

[corn18]

For full disclosure, while there is no PMI on a VA loan, there is a funding fee:

[wgroce]

Yes, thank you for clarifying! We are getting a lower rate by paying the funding fee at closing.

[LivingAlmostLarge]

Do you have anything saved for college? Are you planning on paying the home off in 10 years when the 9 year old goes to college?

[msomnipotent]

Not sure if this is possible for you, but I would do 20% down on a 30 year, and a little to the college accounts, and then set up automatic monthly payments towards the 529s each month. Are you able to make extra payments on a VA loan?

[Fishindude77]

The house is a real for sure thing right now. Kids college is a maybe at this point. Take care of yourself first and don't sacrifice your financial security for your kids possible future college needs. Keep the loan length short and put down a big down payment.

Even if you save nothing for their college, there are ways that they can pay for it themselves and still go to college. Also, they may decide to do something other than college; military, a skilled trade, marry somebody that's rich, etc.

[creditcardfree]

Are you in the military? Or eligible for the Post 911 GI Bill? That helps with some college costs.

I'd probably go with 30 year to keep payments lower, but know that I could add money to pay down principal at any time. I would make a plan to do that and fund college over the course of the 15 years (assuming 15 years is what it would take to get both kids through college).

[TexasHusker]

I would borrow as much as you can for the house and save what you can for college.

The interest rate on a home will be significantly less than an unsecured loan, because it is highly collateralized. Additioanlly, it is usually a deduction on your taxes.

Example: Your mortgage interest rate is 4 percent. You are paying $10,000 per year in mortgage loan interest. You are in the 25% income tax bracket.

That $10,000 in interest is fully tax deductible, meaning it puts 25% of the $10,000, or $2500, back in your pocket. So your effective interest rate is really 3%, not 4%.

Student loan interest rates are currently running in the mid 4s to the 7s, depending on whether the loan is subsidized by the tax payers. The window to deduct student loan interest on your 1040 is quite narrow, and even if you MAGI qualifies you, you are only allowed up to $2500 per year in deduction.

When your kids reach college age, if you are short some cash, you can always do a cash-out refi on your house and deduct the interest expense - yet again.