Author Topic: Which Loan to pay extra first?  (Read 4159 times)

crazy30

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Which Loan to pay extra first?
« on: November 15, 2016, 05:50:25 PM »
Need help on which should we start paying off early:
Rental Home: 299k at 4.25%
Principal Home: 328k at 3.625%
Heloc: 14k at 4.25%
Car Loan: 12,500 at 1.99%
Thank you!

MrsCtank

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Re: Which Loan to pay extra first?
« Reply #1 on: November 15, 2016, 06:16:08 PM »
I would knock out the heloc then snowball into either the car or principal house, but others may have more experienced advice.

Bracken_Joy

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Re: Which Loan to pay extra first?
« Reply #2 on: November 15, 2016, 06:58:53 PM »
Yeah, I'd hit HELOC first, although I'm not aware of any tax advantages in this situation- I may be missing something. My thinking is with such a high balance on the rental, free up the HELOC payments first (snowball) and then tackle the highest interest rate (avalanche).

More important though, is are your ducks in a row elsewhere? Tax advantaged space maxed?

MDM

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Re: Which Loan to pay extra first?
« Reply #3 on: November 15, 2016, 08:30:44 PM »
Need help on which should we start paying off early:
Rental Home: 299k at 4.25%
Principal Home: 328k at 3.625%
Heloc: 14k at 4.25%
Car Loan: 12,500 at 1.99%
Are you contributing $18K/yr to a 401k, and $5500/yr to an IRA, (and the HSA maximum if eligible)?  If not, then consider "none of the above" for early pay-off.

Some context might be helpful - see http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/.

Goldielocks

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Re: Which Loan to pay extra first?
« Reply #4 on: November 16, 2016, 12:31:18 AM »
Do you have income investments (such as rental downpayment or dividend stocks) outside of registered investments?
If so, then everything is tax deductible to some extent (assuming itemized taxes for the home), except for the car loan.

Car loans really suck, too.  For that reason, I would start with the car loan.....hmmm  maybe sell the car and get a cheaper one if needed?

Ditto the comment about adding to your investment savings, at these lowish rates, ensure you are maxing out.

Playing with Fire UK

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Re: Which Loan to pay extra first?
« Reply #5 on: November 16, 2016, 01:10:55 AM »
Highest interest after tax.

Catbert

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Re: Which Loan to pay extra first?
« Reply #6 on: November 16, 2016, 11:37:19 AM »
I'd go with the HELOC first.  It's one of the highest interest rates and presumably variable.  It's also almost the smallest balance.


crazy30

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Re: Which Loan to pay extra first?
« Reply #7 on: November 16, 2016, 12:00:11 PM »
Thanks everyone!

401k, roth and hsa are all maxed out. I guess I will hit the HELOC first. Right now Im throwing extras on everywhere (a little bit on Mortgage 1, 2 and heloc.

MDM

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Re: Which Loan to pay extra first?
« Reply #8 on: November 16, 2016, 03:12:52 PM »
Right now Im throwing extras on everywhere (a little bit on Mortgage 1, 2 and heloc.
You could go to http://www.vertex42.com/Calculators/debt-reduction-calculator.html, scroll down a bit to find (note: not the obnoxious "fromDOCtoPDF" download ad) this:


Download that spreadsheet, enter your loans, and see how much difference it makes among various pay-off strategies.
« Last Edit: May 08, 2018, 12:13:49 PM by MDM »

Goldielocks

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Re: Which Loan to pay extra first?
« Reply #9 on: November 16, 2016, 03:16:01 PM »
BUT first figure out which loans you can deduct.   What is your REAL interest rate after you get tax credit for your loans?

If I had a HELOC not tied to the rental downpayment, you bet I would ensure that I had some offsetting non-registered investment to allow me to claim taxes on a equivalent amount.   You may need to pay off a loan, then restart it tied directly to the purchase of the investment to make this claim happen, but worth a look.

crazy30

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Re: Which Loan to pay extra first?
« Reply #10 on: November 16, 2016, 03:44:45 PM »
Right now Im throwing extras on everywhere (a little bit on Mortgage 1, 2 and heloc.
You could go to http://www.vertex42.com/Calculators/debt-reduction-calculator.html, scroll down a bit to find (note: not the obnoxious "fromDOCtoPDF" download ad) this:


Download that spreadsheet, enter your loans, and see how much difference it makes among various pay-off strategies.

wow! thanks for this!

crazy30

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Re: Which Loan to pay extra first?
« Reply #11 on: November 16, 2016, 03:53:52 PM »
BUT first figure out which loans you can deduct.   What is your REAL interest rate after you get tax credit for your loans?

If I had a HELOC not tied to the rental downpayment, you bet I would ensure that I had some offsetting non-registered investment to allow me to claim taxes on a equivalent amount.   You may need to pay off a loan, then restart it tied directly to the purchase of the investment to make this claim happen, but worth a look.

so for the past few months, this is what I have been doing:

Rental Home: 299k at 4.25% (bi weekly but no extra payments)
Principal Home: 328k at 3.625% (additional 400$ on principal)
Heloc: 14k at 4.25%  (additional 350$ on principal)
Car Loan: 12,500 at 1.99% (i am paid until may 2017) i pay 400$ every month as regular payment

Heloc is tied on the principal home (i live in bay area so this is actually a good figure for SFR), i opened the heloc before to add payment for the rental, which is just new.

I am just wondering if I am throwing principal at the wrong basket instead of focusing into one. The car loan is really low and i still have 4 years to pay that with a very low 1.99%. Should I just stop paying extra on others and just start snowballing heloc??? or im actually saving more by paying extra on the mortgage? sorry everyone! i am very very confused.

Goldielocks

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Re: Which Loan to pay extra first?
« Reply #12 on: November 16, 2016, 04:06:50 PM »
1)  Rental home -- mortgage is tax deductible, and you are likely already claiming it
2) Do you itemize and get the mortgage tax deduction  (I assume SFO  = yes)
3) HELOC -- If you have money sitting around, I would pay off the HELOC, then borrow a similar amount to invest in non-registered income producing funds.

Assuming you get a 30% tax deduction for these, that makes those interest rates net out to

1) Rental  4.25 x 70% = 2.95%
2) Principal home 3.625 x 70% = 2.55%
3) Heloc  4.25 x 75% = 2.95%
4) Car loan 1.99%

If you have a 50% top marginal rate, and the tax deduction is at the marginal rate, that nets out to:
1) Rental  4.25 x 50% = 2.13%
2) Principal home 3.625 x 50% = 1.82%
3) Heloc  4.25 x 50% = 2.13%
4) Car loan 1.99%

By these calculations, the HELOC is the winner, by a very slim margin.

Meanwhile, investments  --> could you beat 2% with money in non-registered investments instead of paying down debts as quickly?
Emotions-- do you want to kill the cash flow drain of $400 going to car loan?

Other?

You have no bad choice here, crazy30!

crazy30

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Re: Which Loan to pay extra first?
« Reply #13 on: November 16, 2016, 04:14:22 PM »
1)  Rental home -- mortgage is tax deductible, and you are likely already claiming it
2) Do you itemize and get the mortgage tax deduction  (I assume SFO  = yes)
3) HELOC -- If you have money sitting around, I would pay off the HELOC, then borrow a similar amount to invest in non-registered income producing funds.

Assuming you get a 30% tax deduction for these, that makes those interest rates net out to

1) Rental  4.25 x 70% = 2.95%
2) Principal home 3.625 x 70% = 2.55%
3) Heloc  4.25 x 75% = 2.95%
4) Car loan 1.99%

If you have a 50% top marginal rate, and the tax deduction is at the marginal rate, that nets out to:
1) Rental  4.25 x 50% = 2.13%
2) Principal home 3.625 x 50% = 1.82%
3) Heloc  4.25 x 50% = 2.13%
4) Car loan 1.99%

By these calculations, the HELOC is the winner, by a very slim margin.

Meanwhile, investments  --> could you beat 2% with money in non-registered investments instead of paying down debts as quickly?
Emotions-- do you want to kill the cash flow drain of $400 going to car loan?

Other?

You have no bad choice here, crazy30!

Thank you goldielocks! you got me at cash flow drain (cringe) :)

Playing with Fire UK

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Re: Which Loan to pay extra first?
« Reply #14 on: November 17, 2016, 06:16:34 AM »
Thank you goldielocks! you got me at cash flow drain (cringe) :)

If you feel badly about the cash flow, consider if what you actually feed badly about is spending too much on a car. How much did you pay and how much do you think you would sell it for today?

ShoulderThingThatGoesUp

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Re: Which Loan to pay extra first?
« Reply #15 on: November 17, 2016, 06:44:26 AM »
Just making sure, what are the numbers on the rental? If it's not a great property, selling it would clear up a lot of this.

Linea_Norway

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Re: Which Loan to pay extra first?
« Reply #16 on: November 17, 2016, 06:54:20 AM »
I think it is strange to have a loan on a car, even though it has good rent. You could probably have bought a cheaper car.

And I also think it is strange to have a second house with a second mortgage. In my opinion you buy a second house when you can afford it, after you have payed off your primary house and have so much money that you can afford a second. Or do you receive so much rent that it pays off?

crazy30

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Re: Which Loan to pay extra first?
« Reply #17 on: November 17, 2016, 07:46:25 AM »
I think it is strange to have a loan on a car, even though it has good rent. You could probably have bought a cheaper car.

And I also think it is strange to have a second house with a second mortgage. In my opinion you buy a second house when you can afford it, after you have payed off your primary house and have so much money that you can afford a second. Or do you receive so much rent that it pays off?
the rental home pays for itself, with a take home income of 300$/mo (that is without tax deduction calculations since its a rental income) --- the car blue book value is at 19k including depreciation. Its a 2016 model.

crazy30

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Re: Which Loan to pay extra first?
« Reply #18 on: November 17, 2016, 07:49:12 AM »
Just making sure, what are the numbers on the rental? If it's not a great property, selling it would clear up a lot of this.
the rental is doing good, i have a take home 300$/mo if you put in all piti expenses including maintenance, plus most expenses are tax deductible. Its worth 480k now if i sell.

ShoulderThingThatGoesUp

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Re: Which Loan to pay extra first?
« Reply #19 on: November 17, 2016, 10:07:13 AM »
Just making sure, what are the numbers on the rental? If it's not a great property, selling it would clear up a lot of this.
the rental is doing good, i have a take home 300$/mo if you put in all piti expenses including maintenance, plus most expenses are tax deductible. Its worth 480k now if i sell.

So you're cash-flowing 2% a year on your equity of $180k? I can't imagine that meets the 1% rule people here seem to use as a minimum.

crazy30

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Re: Which Loan to pay extra first?
« Reply #20 on: November 17, 2016, 10:58:18 AM »
So you're cash-flowing 2% a year on your equity of $180k? I can't imagine that meets the 1% rule people here seem to use as a minimum.
[/quote]

Im sorry Im not very literate on investment terms (which is why I am asking help here  :)) What does your statement mean? Please enlighten me :) thank you

ShoulderThingThatGoesUp

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Re: Which Loan to pay extra first?
« Reply #21 on: November 17, 2016, 11:20:08 AM »
I don't own rental property myself, but the general belief around here is that you must make at least 1% of a property's value in rent a month to have a chance at a good investment. I'm guessing it's renting for $4900/month.

Maybe you should do a rent-or-sell case study in the real estate subforum.