Ok, I finally consolidated my student loans. My rate is like 4% I was on the 10 year plan (the default plan), but I thought I would increase my cash flow to buy a house. After talking to my mortgage broker, I find that I don’t have to pay 20% to avoid PMI because of my credit worthiness and because of alternatively financially structured loan options. I could put down less and still not pay PMI (e.g. something like a 80/15/5 loan). Anyway, now I have all this extra cash every month. I thought that I would go back to the 10 year plan of paying off my loans, but since the interest rate is like…what…2.5 - 3.5%, don’t I really have to beat a 1% return?
Put another way, holding onto debt is good if the inflation rate is going to rise. I’m optimistic that the economy is only going to get stronger (as evidenced by the stock market and my current holdings). As inflation rises, won’t that eat into the value of my debt?
Also: given the above (and if that’s not true, please attack the premise as well), what is a better way to use this increased cash flow? Back into my student loans? My house? Stocks or other financial instruments?
The house I’m going to buy will be in the trendy, young-people-infested, arguably over-priced, area of the city, that has been this way since the early 90’s. I’m a bit worried/skeptical that the housing market can keep up this rate of return, e.g. my friend bought his place for $136k in '95 and sold in '04 for $240k. I thought the '95 price was too high.
Pay down the debts with the highest interest rate first.
In general that will rank something like:
Installment company loans
Credit card debt
Car payments
House payments
Student loans
Your parents
Make sure the contract agrees that you can pay extra principal to accelerate the payoff of the loan.
You don’t need to do it all at once, just a few dollars a month extra can reduce that 60 month car loan to something like 38 months and save you bunches in interest over the life of the loan.
Any extra left after that, put it in short-term savings until you’ve built up a sufficient cash reserve. Then start funding an IRA or 401K for your old age, a college fund for yur future kids, etc.
Let’s assume the real estate bubble bursts in your area. The faster you pay down the loan and build equity, the lower the balance you’ll have to pay off on your mortgage when you seel in a few years.
Student loans may well have a lower interest rate than mortgages, but unless they are tax deductible, you might well be better paying then off first. If you’re in a 20% tax bracket then a 5% mortgage only costs you 4% [(1-.02)*5%] if you are itemiizing deductions. I do not believe that students loans are still tax deductible.
Yes. Depending on your student loan rates, it can actually make sense to get a home equity line for any extra equity you have in your home and max it out to pay off your student loans. You get a deduction for the home loan interest that you do not get for the student loan.
And you are also generally correct regarding investing in the market versus paying off the student loans. The economist/businessman in me tells me that the market has averaged far higher than 4% returns historically, so that by paying off a 4% rate loan, versus investing that money into the market, I am throwing away money.
And the stoic midwesterner debt hating part of me battles that logical analysis all the while.
Is this correct? I thought you could only take a deduction of the home loan interest for home improvements (not that anyone is actually checking for improvements to the house).
Also, I get a nice little statement from my lending institutions about how much interest I can deduct. Because of my tax bracket, I hit the max deduction (iirc, I believe that’s the reason) which is less than the total amount allowed otherwise. And, I do itemize my taxes.
Oh, I have the same mentality. I don’t like debt. Then, I attend my company’s quarterly con call about our financial health, and they talk about our debt as a good thing. If my company can have it, why can’t I? Knowing that one is making money above the cost of the debt is good knowledge to have.
The deductibility of mortgages and home improvement loans is jurisdictional. Here in Canada, your mortgage (for your “principal residence”) is not deductible. On the other hand, any capital gain / profit when you sell it is not taxable, either.
<hint>Fill in your “Location” in the User CP - it will make it a lot easier to give correct answers to questions like these </hint>
I thought that I would go back to the 10 year plan of paying off my loans, but since the interest rate is like…what…2.5 - 3.5%, don’t I really have to beat a 1% return?