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Seeking input on prioritizing loans

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CakeQ
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Seeking input on prioritizing loans  Reply with quote  

We are getting closer to debt free with the following:

31K 401(k) loan 3.75% paid to account. $426 repayment every 2 weeks.
48K mortgage 4.125% and tax deduction. $676 payment every month (includes taxes and insurance). I make additional principal payment of $324 per month.
49K consolidated student loan 2.625% (plan to pay $279 / mth minimum for length of loan)

No car, credit card or other debt.

I currently have 26K to throw at a loan, with another 10K coming in 2 months. Another $23K in about 6 months. I am still maximizing my 401k contribution with the 401k loan. My job is secure from my employer side, but I would like to quit (change jobs) as soon as both the mortgage and 401k loans are paid off.

I am seeking any input as to prioritizing what to pay off (and how to pay it off). FYI, I do not qualify for the student loan interest deduction.

Thanks!
Post Sat May 21, 2016 1:14 pm
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oldguy
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Why are you wanting to prepay these loans, they all seem to have good rates/terms?

Or maybe the question reduces to - why do you want to be debt-free?
A better plan might be to retain the use of your borrowed capital and use it to build wealth.
Example - you have about $130,000 of borrowed capital - invested at 11%/yr (generic longterm market return) it would be about $2,800,000 . (And I sure wouldn't prepay 2.65% capital!).

But, if a job-change is planned, you'll need to pay the 401k loan. And it depends on age, income stream, etc. If you are age 60, a 30-yr wealth-building plan may not be helpful -but if you are under 30 it will be.
Post Sat May 21, 2016 4:02 pm
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CakeQ
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Thanks for the response!

The reasons for paying off those debt (and like you said, not the student loan):

(1) My parents live in the house with the mortgage. Once I pay off the mortgage, I can grant them a life estate so that they can live there the rest of their lives without fear if somehow I lose my job, savings, etc. And thus lose the house. My mom is 70 and my dad is 66. They are on a fixed income and need stability in housing. Once they pass (not anytime soon!), the house will be an investment vehicle (in Vegas). Though if my dad passes, my mom lives with us. The home is worth approximately $200K. Taxes and insurance are $3.5K per year.

(2). The 401k loan is, like you said, the freedom to leave my current job when I want. It has pushed me to the point of getting surly and barely containing myself to tell my boss what I think (not be nasty, but just level set that I am not chained to the position to be taken advantage of).

I am not old physically (37), but I am burning out from work. My line of work and location is susceptible to such. We rent (cheaply) at close to $3K per mth (which gives an idea where we live). We have a lease that ends next May. Though breaking a lease here would not be a problem since the rental market is HOT.

We are finishing a house in my wife's country in Europe, and I have already discussed with a couple of firms of doing work remotely (telecommuting has improved greatly the last few years) and collect half of my billables. So I can lower my hours, still have a decent income, but have time with my daughter while she grows up. However, changing jobs is never a sure thing (last one in, first one out), and I am an extreme risk aversion mindset (surprise lol). Plus, working for percentages means some risk (no steady salary).

To complete the landscape. My wife is 43. She is a stay at home mom. She teaches our one daughter of 7 at home. Our current savings in the bank is about $10K exclusive of the $25K to pay on a loan. Our 401k (with the loan paid back) is $280K conservatively invested. The home being finished needs about another $25k to be livable (with additional finishing things being done over time).

If any other questions, please let me know!
Post Sun May 22, 2016 11:47 am
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oldguy
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quote:
Once I pay off the mortgage, I can grant them a life estate so that they can live there the rest of their lives without fear if somehow I lose my job, savings, etc. And thus lose the house.


If I saved up $48k - and was faced with (1) pay off a $48k loan or (2) retain the use of my $48k and keep the loan - I would keep the loan. And put the $48k to work, double it about every 7 years (the rule of 72), to 96k, 192k, 384k - it piles up quick in just a couple decades. (BTW, the $3500 TI part of the payment is due no matter if there is a loan or not - and regardless of who owns it).

You could Will that house to them (instead of life estate) that covers them in case of your early death. And most likely they will predecease and no real estate event (re-recording will occur).

I would direct the $26k cash and some 'new' money to the 401k loan - it's usually good business to avoid balloon payments and other calendar deadlines that force you into decisions, the 401k is in that category.

quote:
Plus, working for percentages means some risk (no steady salary).


Another great reason to keep "low rate, long term" loans, it is safer to have plenty of available capital (rather that have it tied up in house equity). (During the 40 years that we held 4 houses, I continually refi'd them, took out the equity and invested it elsewhere - large lumps of capital are a great way to build wealth. As you can see, I'm not a Dave Ramsey follower, lol)
Post Sun May 22, 2016 9:06 pm
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CakeQ
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Thanks for the advice!

I was not thinking, but you are right. Sometimes capital preservation is better than being debt free.

My number 1 takeaway from your comments is that the 401k loan should be paid pronto. A debt that can be called at once (a balloon payment) should be paid first.

My number 2 takeaway is that having money in transition times is better than paying off debt. $25K in cash could float me for 6 months if absolutely necessary. And I should apply for a HELOC while rates are low. Paying off the mortgage frees my monthly income only by $370.

Thank you for the advice!! It makes alot of sense.
Post Mon May 23, 2016 12:41 pm
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