Which Loans Should Be Paid Off First? Student Loans or Mortgage?
July 9, 2010 | In: Uncategorized
Mortgage: 185,000 at 5.25%
Student Loans: $40,000 (three at prime+2, and two at prime+1)
If we’re ready to increase our payments (say by $100/month), where should we put that money – on the mortgage or on the loans? Is the tax refund for interest paid significant enough to tip the balance? (We’ll pay over 3200 in student loan interest this year).
6 answers
babywait
July 9th, 2010 at 1:08 am
Without knowing more about your financial situation I would say pay off the unsecured debt first. Your student loans (this assumes you have no credit card debt or car loans) If you have cc debt or car loans I would pay those off first. Your net worth will be better helped by paying off the unsecured debt. Good luck.
Brenda M
July 9th, 2010 at 1:24 am
If the goal is to get out from under as much interest as possible ~ it is necessary to build some amortization schedules (with full details of each of the loans and their particulars) . . . and simply build different scenario’s of payment.
Some people are eager to get their liabilities in ONE situation and nail down an interest rate so that it doesn’t float and their are no surprizes when interest rates change.
The question can be one of lifestyle and future goals as well ~ Bottom line is to consider the overall plan for the reduction of the debt and allocate or restructure the debt to best suit what is desired for your particular situation.
I have found that most people appreciate the ONE situation. The reductions can be significant if one engages in a HELOC (home owner line of credit) vs. a mortgage ~ if the income is substancial enough to qualify . . . this way all funds being deposited against the HELOC on an ongoing basis hit the principal hard and reduce interest payments quite quickly.
Try an amalgamated approach with a fixed interest rate for a period of time with options of principal “lump” payments without penalty . . . or, preferably ~ a HELOC
Gary E
July 9th, 2010 at 2:11 am
Apply available funds in the following order.
1. Stay current on all loans and bills.
2. If your employer has a 401K plan that matches contributions, contribute at least enough to get the maximum match.
3 Accumulate savings up to three months income.
4. Pay off any credit card or line of credit debt.
5. Pay off the prime + 2 Student Loans
6. Pay off the prime + 1 loans
7. Max out your contributions to 401Ks, 403Bs, and IRAs using the ROTH option where available.
8. Start investing in Mutual Funds outside of the tax shelters.
The tax advantage for your mortgage interest payments would be significant enough to tip the balance, if it weren’t already tipped that you by the excellent rate you have.
contemplating
July 9th, 2010 at 2:51 am
Don’t pay off the mortgage 1st (assuming that it is fixed). The interest rates will eventually go up (eventually means within a few years at most). And those student loans will start to burn then. Those are the biggest risk to your stability right now.
When interest rates start climbing, it will probably be significant (think double digits).
doreen k
July 9th, 2010 at 3:36 am
Assuming your mortgage is fixed rate and not a variable rate, and that you are a disciplined investor, you will come out ahead by investing that extra $100 instead of putting it toward your mortgage. Over time, the value of $100 contributed monthly to a broad market no-load index fund should be much greater than your interest savings by paying down the mortgage. Another consideration regarding your mortgage – as you pay down a mortgage and build equity it is difficult to get your hands on that equity – in the best case you could apply for an equity loan and pay interest to tap into that pool of money. But, if you have invested the money, instead of paying down the mortgage, it is always available to you. In an Roth IRA, for example, you can withdraw your contributions (but not earnings) at any time without taxes or penalties.
In deciding how to invest the $100, contribute first to tax-advantaged arrangements such as a 401K and Roth IRA.
The student loan is of little advantage to you. Assuming you’re in a 25% tax bracket, you have to pay $1 in interest to get 25 cents back on your taxes. And, that doesn’t take into account the standard deduction, which you would get even if you had no itemized deductions.
Why don’t you try to come up with a little extra – invest $100 per month in a 401K or Roth IRA and pay down the student loan as quickly as possible?
marshall y
July 9th, 2010 at 4:25 am
You always pay off the debt with the higher interest rate first. In this case the mortgage is at prime rate and your student loans are at a higher rate.