Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




Personal Finance Advice Requested...What would you do next?

Reply to topic
Money Talk > Personal Finance

Author Thread
marshallartist
New Member


Cash: $ 1.45

Posts: 7
Joined: 26 Oct 2015
Location: SoCal
Personal Finance Advice Requested...What would you do next?  Reply with quote  

Hi my name is Damon. First time post after frequenting this forum for years. Sorry for the lengthy post.
I would like to seek your advice on what you would do next based on the following:

The dilemma is: Do I make extra payments toward student loans or retirement?

Combined monthly after-tax Income: 7K

New mortgage:
PITI payment=2,200/mo
Closing next week: 393K principal, 30 yr 5/5/5 ARM, 2.875%, 20% down

Student loan:
IBP payment plan currently 525/mo
APRs: 3% to 7.9%: weighted average ~6.4%. 138K balance, in 3rd year of payment.

No CC Debt.

No car loans. 2 end-of-life cars: 01 civic and 02 outback.

All other monthly Bills: ~3200/mo

401K: ~12K. I contribute 6% and get 3% match (max) from employer; wife not contributing at moment
combined 180K IRA and annuities + 7K Roth
We are in our forties with about 200k in retirement (from the above)

Pension: Vested next July (2016) ~20K

Emergency fund: ~32K

The income contingent payment plan for student loans are convenient at this stage but Im concerned that it only covers a portion of interest and that is building up fast due to almost half of loans at 7.9%. Would like to aggressively pay this down if we can overcome the high interest that is building up. If loan payoff is a race I cannot keep up with, why bother paying more than the minimum? It may be a strategy to only pay the minimum until the loan is forgiven (in 25yrs) and meanwhile put this money towards retirement.

Another option to consider might be to refinance the mortgage once we have enough equity to absorb the student loans and pay them off at the lower rate.

How would you attack this situation if you had an extra $200 per month? what would you pay down first?
Thanks in advance for any suggestions you can provide.
Post Mon Oct 26, 2015 7:48 am
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.60

Posts: 3500
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
combined 180K IRA and annuities


What kind of annuities are you putting money into? (I would want the $200k invested - mutual fund, SP500 Index fund, etc). A key part of your far-future is to grow that $200k to about $1.5M over the next 20 years. The 9%/yr that you are putting into the 401k could add another $1.5M in 20 to 25 years.

That $525/m that you are paying into SLs is only paying about 2/3 of the interest - so at the end of 25 years, me and your tax-paying neighbors get the rest of the bill? lol. Your family gross appears to be about $140,000, it might be better to pick up the pace and pay more than $525?

I would want to do something different with the mortgage - the US mortgage system provides the lowest cost capital in the world, all other nations have 10-year limits, continual refi requirements, etc. But in the US, the average person can go to a bank, ask for a $300k loan, demand a 30 yr fixed rate of less than 4%, and get the money. IMO, there will be many times over the next 30 yrs that you will love a longterm <4% 30 yr loan. (Remember the Jimmy Carter 14% mortgages and how quickly the rates skyrocketed?) A locked-in 4% would have been great!.

And your idea to pull equity out of the house later, and apply that to the SL is a good one - I used that concept during the 40 years that I was a landlord, I leveraged all of our houses and invested the equity elsewhere. But for now, it makes no sense for you to tie up $80,000 in house equity (when you have $138k of high-interest loans - and $32k probably sitting at 1/2% in a bank (losing 1.5% to inflation while it sits there).

In all of your dealings, think in terms of "highest and best use". Most of us don't actually need more money, more income, we just need to intelligently place our current money where it will work for us. Eg, your $200k and your $32k, placed at 11%/yr, would be over $5M in 30 years (when you are my age & happily retired).

Good job on the cars, a pair of older Japanese cars is optimal - most millionaires drive old cars - there is a reason for that, lol.
Post Mon Oct 26, 2015 3:34 pm
 View user's profile Send private message
marshallartist
New Member


Cash: $ 1.45

Posts: 7
Joined: 26 Oct 2015
Location: SoCal
 Reply with quote  

The retirement holdings are a broad mix of index funds mostly from Vanguard. Total Stock, Total International Stock, Emerging markets, Bond funds, etc. Average return about 10%

I'm not sure who pays the forgiven principal at the end of student loan life. Could be built into my high rates or some paid by tax payer or all of the above. Our gross is closer to 110K; my wife supplements income with sub teaching so it's not a full year.

Would like to get into a fixed rate mortgage once we can afford it. SoCal is not an inexpensive place to live! lol.

I guess I need to find a calculator or just run the A vs. B vs. C scenarios for what to do with any extra income. A=Mortgage, B=Student Loan, C= Retirement. Of course, with two aging cars I may want to beef up the emergency fund more as well. This would be Scenario D.
It's clear to me that paying off 7.9% principal is a certain 7.9% return. What's not clear is if I can make an additional 5-10K per year payment to principal and win against the interest buildup on the student loans.
Post Mon Oct 26, 2015 7:39 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.60

Posts: 3500
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
It's clear to me that paying off 7.9% principal is a certain 7.9% return.


Agreed, that one is a gimme. 5% or 6% loans need more thought - some folks say "prepaying a %5 loan is a no-brainer". But if you are young, in your wealth-building years, then settling for a 5% return is not a good plan, you should be placing your money at 10% or 11% (as you are).
Your Vanguard Total Market fund is a winner, I've used it in my Taxable Account for decades, averages about 11%/yr, longterm.

Yeah, I know about SoCal prices, one daughter lives there. But you might reconsider a 30yr, zero down loan. Your current teaser PI (for the $393k) is $1631/m. The PI for a zero down ($473k) loan at 4% is $2258/m - that comes w/ a 30 yr lock. And that would leave you with an extra $80k cash plus the $32k EF, to pay-down the high interest part of the SL. And get away from that reverse-amortization part of the SL. And you would no longer be exposed to the 5-5-5 VAR mortgage situation.
Post Mon Oct 26, 2015 8:14 pm
 View user's profile Send private message
marshallartist
New Member


Cash: $ 1.45

Posts: 7
Joined: 26 Oct 2015
Location: SoCal
 Reply with quote  

I appreciate your advice. Thank you.

Hmm. This is making me have borrower's remorse. lol. I don't like being exposed to interest rate changes. At least right now, we are at an 2.875% interest rate for the first 5 years.

In 5 years, the rate can go up a maximum of 2% for a total of 4.875%. Max interest rate for the life of the loan is 7.8% (I think) which would be at least 15 years out. The hope is that within this time span of 10-15 years we can get out from the variable rates and refinance to a lower rate fixed. Who knows how far and how long that pendulum will swing as we have had historically low rates for a good 6-7 year stretch (and still going)!
Post Mon Oct 26, 2015 9:07 pm
 View user's profile Send private message
littleroc02us
Moderator


Cash: $ 382.10

Posts: 1880
Joined: 09 Feb 2009

 Reply with quote  

A couple of things that stand out to me. First off you make a great income of 7k after taxes. Second you mentioned 138k in SL's. Third your in your forties. Lastly, you said $3200 for all other bills.
Regarding the 138k in Student loans and your in your 40's. Did you recently go back to school or is this from your 20's? If the latter is correct, then why haven't you been paying down the loans. My concern is that your student loans are going to eat into your retirement savings at this point. Waiting 25 years for the myself and other tax payers to take care of your loans isn't a good choice. When you took out those loans it wasn't meant to be a social program that Obama has made it out to be. I'd work like the dickens to pay those suckers off. Is there a way to free up more cash or where is the $3200 going?

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Oct 26, 2015 9:17 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.60

Posts: 3500
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
loan is 7.8% (I think) which would be at least 15 years out. The hope is that within this time span of 10-15 years we can get out from the variable rates and refinance to a lower rate fixed.


lol, that's what everyone hoped when rates shot up to 17% in 1981, they went up in only 6 months. The lenders had such long lines of people waiting to get free of 'designer loans' that you couldn't get a new loan even if you wanted one. Personally, I had 6 loans on 4 houses (2 second morts), they were 30 yr Fixed Rate at about 7.5% - no teaser rates - so I was able to keep them as long as I wanted to, they were golden when others were getting stuck in 15% loans..

The point is - when lots of people are betting on a refi at a later date (5 or 10 yrs) that pent-up demand keeps rates even higher. In engineering terms - a negative feedback loop. So don't fall into that, don't posture yourself so that a calendar-call could force you out of your house - eg, a balloon payment, a forced VAR, yada. Ideally, you want a fixed rate, 30 year loan that amortizes all the way down to zero with no bumps.
Post Mon Oct 26, 2015 9:44 pm
 View user's profile Send private message
marshallartist
New Member


Cash: $ 1.45

Posts: 7
Joined: 26 Oct 2015
Location: SoCal
 Reply with quote  

The student loans are mostly from grad school a few years back. 30K is from undergrad and at 3%.
Post Tue Oct 27, 2015 12:02 am
 View user's profile Send private message
bananafish
New Member


Cash: $ 1.45

Posts: 7
Joined: 23 Oct 2015
Location: East Coast
 Reply with quote  

3200 in other bills? How do you do that? I (single) go on vacation, eat out a lot, and, too, drive two older (2002, 2007) Korean and Japanese cars. I cannot find a way to reasonably spend that much money every month. (Kids?)
Post Tue Oct 27, 2015 2:48 am
 View user's profile Send private message
bananafish
New Member


Cash: $ 1.45

Posts: 7
Joined: 23 Oct 2015
Location: East Coast
 Reply with quote  

[quote="oldguy"]
quote:
But in the US, the average person can go to a bank, ask for a $300k loan, demand a 30 yr fixed rate of less than 4%, and get the money. IMO, there will be many times over the next 30 yrs that you will love a longterm <4% 30 yr loan.


This.
Post Tue Oct 27, 2015 2:50 am
 View user's profile Send private message
marshallartist
New Member


Cash: $ 1.45

Posts: 7
Joined: 26 Oct 2015
Location: SoCal
 Reply with quote  

Yes, 2 kids. Bananafish, you'd be surprised what happens to your budget once you have kids. More food, childcare, clothes. We are already looking at where we can cut costs and free up some money to put to better use.

However, my question is really about what to do with extra income every month. What to pay down first?
Post Tue Oct 27, 2015 5:16 pm
 View user's profile Send private message
marshallartist
New Member


Cash: $ 1.45

Posts: 7
Joined: 26 Oct 2015
Location: SoCal
 Reply with quote  

I appreciate all the advice so far.

It sounds like putting every extra dollar toward the 7.9% student loans is the best path forward. And then possibly the 6.8% loans after that.

However, it is not without any risk. There doesn't seem to be much middle ground here in terms of extra payments.

As much as I hate the thought of it, I'm even considering taking 10K in emergency funds plus 50K of my retirement (~25K after tax and penalties) to pay down some of the loans and speed up the snowball.

I mention that it's a risk because this is going to be a long slog to pay it off and could be derailed with life's "bumps in the road". In the event I would have to revert back to minimum payments and go back to the negative-amortization scenario, the previous extra payments could be for naught and swamped by interest.

That is my real dilemma. If I could wrap my head around some real numbers, I might feel better about path A vs B. Or what the breakeven point might be. I think I just need to get the spreadsheet going and look for that crossover point to positive-amortization and go from there.

Thanks everyone!
Post Tue Oct 27, 2015 5:43 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.60

Posts: 3500
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
I'm even considering taking 10K in emergency funds plus 50K of my retirement (~25K after tax and penalties) to pay down some of the loans and speed up the snowball.


Be sure to think about "why?". Don't prepay loans simply because you have loans - or because you dislike loans - make sure there is a logical reason before you direct your resources to prepaying loans. (Unless you're a Dave Ramsey follower, lol)
Always direct your resources to the highest and best use. Let the math do the talking, not emotions.
Post Tue Oct 27, 2015 9:10 pm
 View user's profile Send private message
marshallartist
New Member


Cash: $ 1.45

Posts: 7
Joined: 26 Oct 2015
Location: SoCal
 Reply with quote  

Thanks for helping me keep the emotions in check. Cashing in the retirement funds would reduce all the gains made due to taxes and penalties. Would really hate to see that. That's not a good return on investment.

The incremental approach to this is to keep the retirement as is but to apply each additional dollar earned/saved toward the 7.9% loans for an assured 7.9% return. Meanwhile the retirement can provide a return on average of about 10%.
Post Wed Oct 28, 2015 12:22 am
 View user's profile Send private message
EmeraldVA
New Poster


Cash: $ 0.40

Posts: 2
Joined: 02 Nov 2015

 Reply with quote  

Hi Damon! I would suggest the book Invest to Prosper. It's an accessible guide to investing. Plus it outlines how to better manage your behavior so that your investments actually pay off.

Hope this will help you. Here's the link .
Post Mon Nov 02, 2015 3:18 pm
 View user's profile Send private message

Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016