Author Topic: Case Study - Mortgage or Student Debt?  (Read 1750 times)

Pav

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  • Location: Hudson Valley, NY
Case Study - Mortgage or Student Debt?
« on: December 31, 2013, 11:30:41 AM »
Hi Everyone,

I found this blog a few weeks ago and it has already helped me a lot. I'm 28 years old, live in the Hudson Valley region of NY, been working in banking for about 3 years. My SO is 30, a preschool teachers assistant. She is two semesters away from obtaining her Associates in Early Childhood. We are currently trying to start a family. Depending on how everything goes, she may continue bachelor level courses next fall. Here are our details:

Gross Annual Income
Me        45,000.
My SO  20,000.

My monthly income=  2230 (this is less Health insurance, group term life, 401k, HSA)
SO monthly income = 1680 (only during school year)

Total Income = 3910

Current fixed monthly expenses:
1008   on FHA mortgage (incl. taxes, homeowners, PMI)
500     on SO current Tuition
400     on groceries (~100 per week )
323     on gas and electric (100 yr old house with little insulation. We're working on that...)
320     on gas ($40 per fill up, per car, once a week)
130     on auto insurance (2 vehicles, we live 45 min from work, in opposite directions)
108     on mobile phone
100     on Emergency Fund
50       on internet
8         on netflix

Total Expenses: 2947

Income - Fixed Expenses = $963


Assets

2300 in EF (almost $8k was depleted this year from wedding expenses)
116,000 estimated Home value on Zillow
~3000 in 401k (contributing 6% with 3.5% employer match)
~600 in HSA


Liabilities
Student Loan #1 =  7310.00 @ 1.75% (currently deferred)
Student Loan #2 =  2145.00 @ 6% (currently deferred)
Mortgage = $95,500.00 @ 4.25%


Specific question:

I have been putting an additional $192 towards the mortgage every month, in an attempt to drop the ~$90 PMI. I'm not sure with Wells Fargo, but we might have to wait another 3.5 years to drop PMI, even if we have 22% equity before then. We had been paying ~100 per month towards the student loans until they slipped back into deferment when SO enrolled this fall. Does it make the most sense to keep paying down the mortgage? Should I be focusing on paying down the Student Loan at 6%?

Our 100 yr old house makes most of our additional income goes towards repairs and upgrades.

Thank in advance for the feedback!

Pav

EDIT: I just found out that the PMI is required for the first 5 years of the loan. That will be 2017. Both of the deferred SL are not accruing interest while on deferment. The emergency fund has 1500 and my checking account always has an additional 1.5 months of mortgage payments, plus the monthly expenses to pay off the credit card. I suppose an additional question is where the MTG rates will be in a year or so. If I can get a no-closing cost refi to a conventional mortgage, that's one way to lose the PMI.

« Last Edit: December 31, 2013, 03:08:59 PM by Pav »

Catbert

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Re: Case Study - Mortgage or Student Debt?
« Reply #1 on: December 31, 2013, 12:28:28 PM »
Well, let me start by saying that I don't know all the ends and outs of either PMI or SLs.  You, however, need to determine "for sure" whether or not  PMI will disappear when you reach 22% equity.  You also need to understand whether "deferment" means no interest is accruing on the SLs  or just that you don't need to make payments.

If interest is accruing on the SLs and you have to wait 5 years for PMI to disappear, then pay extra on the 6% SLs.
If interest isn't accruing on the SLs and PMI disappears when you get to 22% equity, then pay extra on your mortgage.

Until you understand your loans better there is not way to know which a better strategy.

The Money Monk

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Re: Case Study - Mortgage or Student Debt?
« Reply #2 on: December 31, 2013, 02:52:24 PM »
Yeah, find out for sure what it takes to drop the PMI, because that is what will make the difference.

Regardless, I would not bother paying more than the minimum on the student loan at 1.75%, and would instead invest your money.

I also wouldn't count money you are putting towards your emergency fund as an 'expense'. Although it is a great idea, It is just part of your savings; just a pre-allocated part.

Not sure where your emergency fund is at right now, but I wouldn't put anything extra toward anything until you have at least a couple months worth of mandatory expenses in the emergency fund.

You are in a good spot overall though, especially once your spouse is done with her schooling. Not only will you lose that $500 a month bill, but she will  probably starting making more too! And you have a nice cheap house that you could then pay off in less than a decade.

Good work, keep it up!