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




How to spend $30k

Reply to topic
Money Talk > Personal Finance

Author Thread
Sdubz
Full Member


Cash: $ 12.90

Posts: 59
Joined: 24 Dec 2009

How to spend $30k  Reply with quote  

Hi there,

I just had a $30k windfall and hoping for some advice on how to best utilize it. Some background and then my question below:

Mortgage interest rate if 4.75 but now that there is only 2 years left the majority of the interest was paid earlier in the loan. The monthly interest portion is $145 a month and every month it goes down by $6. So basically paying it off will save $1600 in interest but nothing to write off the end of each year for a tax benefit.

The equity line is $149,000 interest rate of 2.5% which fluctuates based on the economy, I do not see that moving too much in the next year.
I think in 2008 is when it needs to convert to a fixed loan and to whatever rates are in the market. I can write off the interest every year which reduces my taxes.

My chevy I owe $19,029, it has 59 (5 years) remaining payments, since I pay $50 more per month it will reduce the term of the loan to 47 (4 years) months or less, but there is no write off for the interest, no tax benefit.

So the question is
Do I payoff the car now and save $400 a month which I would apply to the largest loan balance so when I do refinance there is less to finance.
Do I pay off the mortgage now and pay more per month for the equity loan.
Do I keep the money invested and let it possibly earn more?
Do I do a mix of the above?
Post Tue May 24, 2016 4:47 am
 View user's profile Send private message
plush
Member


Cash: $ 2.85

Posts: 14
Joined: 06 Dec 2015

Re: How to spend $30k  Reply with quote  

quote:
Originally posted by Sdubz
Hi there,

I just had a $30k windfall and hoping for some advice on how to best utilize it. Some background and then my question below:

Mortgage interest rate if 4.75 but now that there is only 2 years left the majority of the interest was paid earlier in the loan. The monthly interest portion is $145 a month and every month it goes down by $6. So basically paying it off will save $1600 in interest but nothing to write off the end of each year for a tax benefit.


Since the bulk of your payment is in principal due to the maturity of the loan, your write-off should be pretty small anyways. If you were to keep it, it shouldn't be for this reason, in my opinion.

quote:
The equity line is $149,000 interest rate of 2.5% which fluctuates based on the economy, I do not see that moving too much in the next year.
I think in 2008 is when it needs to convert to a fixed loan and to whatever rates are in the market. I can write off the interest every year which reduces my taxes.

I am assuming this equity line is attached to the property with just 2 years left on the 1st lien position mortgage. Thinking out loud... what if you paid off the small mortgage balance? This would move the equity line into first position on the property. You could then refinance the property for 75-80% LTV over a new 30 year term, do a cash-out option and reinvest the money into a rental/stock/etc (I prefer rental personally), and have one low monthly payment. YES, the interest rate would be higher than your (currently) low adjustable rate, but it's possible you'd fare better over the long haul even at 4% fixed on a conventional. Not knowing what the home is worth, it might be possible to just refi both loans into one fresh 30 year term and keep your 30k for better use. If you look at directing that $30k into a fixed rate debt repayment, you have a guaranteed, no risk rate of return of whatever debt it is that you're paying off. Conversely, it costs you the weighted percentage of all your debts to have access to that 30k if you don't pay off a debt with it and don't reinvest.
quote:

My chevy I owe $19,029, it has 59 (5 years) remaining payments, since I pay $50 more per month it will reduce the term of the loan to 47 (4 years) months or less, but there is no write off for the interest, no tax benefit.

So the question is
1. Do I payoff the car now and save $400 a month which I would apply to the largest loan balance so when I do refinance there is less to finance.
2. Do I pay off the mortgage now and pay more per month for the equity loan.
3. Do I keep the money invested and let it possibly earn more?
4. Do I do a mix of the above?


1. What is the interest rate on the truck? By paying it off, you have access to $10k of your cash infusion still. Could you liberate $10k by selling the truck, buying a truck for $10k in cash, and having a paid-for vehicle + $20k still?
2. Mortgage money is cheap to borrow. That variable rate equity loan scares me a little bit since I'm thinking rates will prop up significantly within the next two years (I'm in real estate and see the hot housing market eventually triggering a rate increase to cool off its unhealthy pace). If you have significant equity on top of your HELOAN and 1st lien mortgage, you might want to weigh out the pros and cons of refinancing to a fixed rate. It'll be higher now, but lower in the future. It's easier to plan and budget on a fixed payment rather than a variable, especially since most folks live in the payment, and it sounds like you've got quite a bit of time left on this debt obligation anyways.
3. Risky without knowing more details. Do you need access to the cash? Arbitraging has been used to make many fortunes, but it seems like most people don't look at reward as a function of risk. Yes, the S&P returns 11% per year on average over a long history, but it also comes with it the risk of an 11% yielding investment. Risk/return are usually correlated, and your weighted interest rate offsets that. For example: if you invest 30k in a fund expected to yield 11% but have 30k of debt at 5%, you're making 6% on your money, essentially, but still have the risk of an investment that yields 11%.
4. I wouldn't divide and attempt to conquer on 30k, personally. If you're young and aggressive, and really don't need to reduce your monthly overhead, maybe contribute that money to an existing investment plan or focus on buying a cash-flowing rental that can turn your down payment into monthly overhead-reducing cash flow while simultaneously having a tenant build equity for you. Since car loan interest rates are generally less than mortgage rates, and if you don't need to liberate yourself from a $400/mo car payment, your rate of return would be higher with paying off a higher-interest debt or buying a well-vetted rental.

Just some random ramblings. I personally avoid debt like the plague but that also comes at a significant opportunity cost.
Post Tue May 24, 2016 4:18 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 720.00

Posts: 3502
Joined: 21 May 2006
Location: arizona
 Reply with quote  

I would refi the house, combine the two loans into a Fixed Rate 30 year loan. That gets rid of the VAR note that is going to 'mature', and it locks in a longterm 4% Fixed loan (one that you will like very much at various times in the next 30 yrs).

And then quit prepaying on the car loan, instead direct your available income to your investing, an extra $200/m invested at 11%/y is about $500,000 in 30 yrs. And your available $30k lump sum would be about $660,000 in 30 yrs.

In general, the highest and best use of your income stream is to get your capital invested as early as possible so that it has as long as possible to compound. And that means paying interest for the use of capital.
Example - prepaying a loan to save $1600 in interest - that's looking at the wrong end of the equation, paying the interest is minor, turning the $25k or $40k that it represents into 6-figures is major.
Post Tue May 24, 2016 4:25 pm
 View user's profile Send private message
Sdubz
Full Member


Cash: $ 12.90

Posts: 59
Joined: 24 Dec 2009

 Reply with quote  

Thanks for the feedback. I forgot to mention that I hope to retire in the next 5 years. Does that change things?
Post Tue May 24, 2016 8:06 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 720.00

Posts: 3502
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
I hope to retire in the next 5 years.


LOL - you'll be 32 when you retire? You must have fallen into a major windfall? How much income will that windfall spin off - you might have up to 70 years to live, and 30 years before you see a SS check, so you have to plan carefully.

But yeah, do the same stuff - borrow for the longterm and at a low fixed rate. That applies to both the house and the truck.loan, you don't want to have any money locked in real estate equity. Andc get away from the VAR loan and the balloon requirements.
Post Tue May 24, 2016 8:52 pm
 View user's profile Send private message
Sdubz
Full Member


Cash: $ 12.90

Posts: 59
Joined: 24 Dec 2009

 Reply with quote  

This is for my uncle actually sorry for not clarifying he is currently 65?
Post Tue May 24, 2016 10:50 pm
 View user's profile Send private message

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





Money Talk © 2003-2016