Author Topic: Too many directions to go in!  (Read 1856 times)

iowagirl30

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Too many directions to go in!
« on: September 27, 2014, 12:02:20 PM »
My husband and I are struggling with developing a plan to tackle our debt and prepare for the eventual death of our HVAC system.  Some background information, we're both combat vets who met in AFG were engaged before the end of our tour.  We currently live in Virginia, but he owns a house in a suburb of Cleveland which is currently rented.  We break even with that arrangement at the moment.  I have approximately $2000 each month that can be put to principal or savings.  We're trying to decide where best to place those funds.  Here's the monthly breakdown:
VA Mortgage: $1056/mo, 30 year mortgage, been paying on it for a year (currently owe $189,699, interest rate 3.175)
OH Mortgage: $996/mo, 20 year mortgage, currently owe $86500 (PMI will drop off at ~$78000, interest rate ~4%)
Student Loans (mine): Currently in deferment because I am in an MBA program full time.  I pay $180/mo to ensure I am paying off the interest so that won't capitalize.  Usually that payment is $400/mo.  Currently owe $53423, highest interest rate for bulk of loans is 5.5%.  More details on why I'm not paying more in a minute.
Two car loans (yep, I know, bad juju, but what's done is done and there is no desire to downsize or sell).  A Nissan Xterra: $249/mo (11031) and a Nissan Titan: $234/mo (10471).  Both are used and the interest rates are at 2.99%.
Our HVAC will be 20 years old next year and was installed and maintained by the previous homeowner who was a pipe fitter and we are not.  Also, there was a mold issue so the duct work will be replaced with metal duct work when we replace the system.  I anticipate that to be approximately $12,000. 
My MBA is mostly funded by the GI 9/11 Bill (I was a reservist and only qualified for 80%).
We have approximately $5000 in savings.

My plan was to put the $2000 aside until I could cover the HVAC/duct work replacement and then put $1500 of the $2000 to the student loans which is the debt with the highest interest rate and the other $500 into savings so we have that built in cushion.  I know I cannot get a home equity line of credit on my house yet and I do not expect to get one on his house either.  We're also considering moving to the Midwest in the next two years depending on job availability.

Here are some of our thoughts on this:
1) We put the $2000/mo aside for the eventual demise of the HVAC, which will probably happen sooner rather than later (also half the household has some major allergies that replacing the duct work would help, so even if the HVAC doesn't die it should probably be replaced sooner rather than later).  After that is saved up, the $1500/month could go to the OH house until it reaches the $78000 and the PMI drops off the mortgage.  This way we're making money, not just breaking even.
2) Save for the HVAC, then put the money towards the high interest student loans.  Based on my calculations, we could have them paid off in less than three years if we focus our efforts on this lingering debt.
3) HVAC, then car loans.  This is my least favorite option because the interest on the car loans is so low. 
4) HVAC then the VA mortgage until it reaches $157000-ish so that we have equity in the house.

What is the best way to divide up our surplus cash so that we are most effective in eliminating debt and planning for a major replacement for our home and an eventual move to the Midwest?

Thanks!

Terrestrial

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Re: Too many directions to go in!
« Reply #1 on: September 27, 2014, 12:32:53 PM »
Don't pay extra on the VA mortgage...you aren't paying PMI on it and a rate of 3% is about as cheap as you can borrow money.  I would make this the last priority after pretty much everything else (student loans, car loans, retirement savings, etc).  Having equity in that house will do little good, all it would be doing is transferring liquid cash asset into illiquid equity asset while paying down your lowest rate debt.  If you are concerned about equity primarily because you want to sell the place you would be better off just saving the cash then writing a check to cover any shortfall on the sale.

Save up what you need for the HVAC first if it's a pressing issue that needs to be done (sounds like it).  Sounds like that will take you 3-4 months starting at 5k and adding 2k/month.  Its better to have the cash ready to go, if the system goes before you have the cash you would probably be stuck using credit cards to pay for most of it as you only have 5k in cash and no HELOC's to tap, not an ideal situation at all.

After that, is there any reason to keep the Cleveland house?  Are you planning on moving back into it at some point in the near future?  It's not in a great situation from an investment perspective, it's not making you money on a cash flow basis and any extended vacancy or unexpected large maintenance could cost you money you don't have at the moment and certainly probably dont want to pour into a rental that doesn't make you money anyway.  To put it another way, if you didn't have that house, would you want to buy it at that price as an investment (being cash flow neutral)...probably not, so you need to decide if there is any compelling reason to keep it.   If you have enough equity in it to get out from under it I would consider selling it and not having to worry about paying it down to get out from under the PMI.

That would leave you with the ability to throw most of your 2k surplus into either your student loans or start saving for retirement.  You note the highest rate on the loans is 5.5%, if a lot of the loans are at lower rates than that I wouldn't worry about it too much.  Start kicking in money into tax-advantaged accounts.

It sounds like you're not willing to consider it but honestly what would help you out alot is to ditch the 21k and almost 500/mo in car debt.  On top of it, neither are what you would call 'efficient' cars especially if you are doing alot of commuting.  No way you can at least get rid of one of them and get a beater commuter car to get you by until you're debt free (or at least done with school and presumably earning alot more money)?





frugaliknowit

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Re: Too many directions to go in!
« Reply #2 on: September 27, 2014, 12:49:43 PM »
My husband and I are struggling with developing a plan to tackle our debt and prepare for the eventual death of our HVAC system.  Some background information, we're both combat vets who met in AFG were engaged before the end of our tour.  We currently live in Virginia, but he owns a house in a suburb of Cleveland which is currently rented.  We break even with that arrangement at the moment.  I have approximately $2000 each month that can be put to principal or savings.  We're trying to decide where best to place those funds.  Here's the monthly breakdown:
VA Mortgage: $1056/mo, 30 year mortgage, been paying on it for a year (currently owe $189,699, interest rate 3.175)
OH Mortgage: $996/mo, 20 year mortgage, currently owe $86500 (PMI will drop off at ~$78000, interest rate ~4%)
Student Loans (mine): Currently in deferment because I am in an MBA program full time.  I pay $180/mo to ensure I am paying off the interest so that won't capitalize.  Usually that payment is $400/mo.  Currently owe $53423, highest interest rate for bulk of loans is 5.5%.  More details on why I'm not paying more in a minute.
Two car loans (yep, I know, bad juju, but what's done is done and there is no desire to downsize or sell).  A Nissan Xterra: $249/mo (11031) and a Nissan Titan: $234/mo (10471).  Both are used and the interest rates are at 2.99%.
Our HVAC will be 20 years old next year and was installed and maintained by the previous homeowner who was a pipe fitter and we are not.  Also, there was a mold issue so the duct work will be replaced with metal duct work when we replace the system.  I anticipate that to be approximately $12,000. 
My MBA is mostly funded by the GI 9/11 Bill (I was a reservist and only qualified for 80%).
We have approximately $5000 in savings.

My plan was to put the $2000 aside until I could cover the HVAC/duct work replacement and then put $1500 of the $2000 to the student loans which is the debt with the highest interest rate and the other $500 into savings so we have that built in cushion.  I know I cannot get a home equity line of credit on my house yet and I do not expect to get one on his house either.  We're also considering moving to the Midwest in the next two years depending on job availability.

Here are some of our thoughts on this:
1) We put the $2000/mo aside for the eventual demise of the HVAC, which will probably happen sooner rather than later (also half the household has some major allergies that replacing the duct work would help, so even if the HVAC doesn't die it should probably be replaced sooner rather than later).  After that is saved up, the $1500/month could go to the OH house until it reaches the $78000 and the PMI drops off the mortgage.  This way we're making money, not just breaking even.
2) Save for the HVAC, then put the money towards the high interest student loans.  Based on my calculations, we could have them paid off in less than three years if we focus our efforts on this lingering debt.
3) HVAC, then car loans.  This is my least favorite option because the interest on the car loans is so low. 
4) HVAC then the VA mortgage until it reaches $157000-ish so that we have equity in the house.

What is the best way to divide up our surplus cash so that we are most effective in eliminating debt and planning for a major replacement for our home and an eventual move to the Midwest?

Thanks!


1.  Definitely get rid of the Cleveland house.  You guys are not financially "thick" enough to be carry an out of town rental with such little equity (and PMI to boot!).  If anything goes wrong, there will be a shxx storm!  Be done with it.

2.  Echoing make saving up for the hvac in cash a priority.  After that, for Pete's sake have an emergency fund.  Things go wrong with houses and cars.  $5,000 in savings as a married couple, are you kidding?

3.  Consolidate the cars.  Too much debt on wheels.


iowagirl30

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Re: Too many directions to go in!
« Reply #3 on: September 28, 2014, 06:46:38 AM »
Thank you for your replies, they helped affirm what we were thinking was the best way forward in the first place. 

We tried selling the Cleveland house to no avail.  Also, we just now are no longer underwater with the house and have a tenant for the next 12 months.  Our initial preference was to sell, but at this point, we don't have a choice but to keep it at this time and we're unsure when we will be able to unload it in the future.  The house was bought right before the bubble burst, I think that says it all. 

The emergency fund is a priority as well.  Thank you frugaliknowit for pointing that out.  I would consider the $12,000 (once I get there) to be the beginnings of an emergency fund, but I must think about that as a sunk cost that isn't really there.  We go back and forth as to if we should use our disposable income for an emergency fund or to pay off debt quickly.  Also, we're basically living off of one income (unintentionally due to the job market).  We expect most of these concerns to lessen once we're living on two consistent incomes instead of one.  Something I should have provided earlier.

I did not put out for consideration that I do contribute to a 401(k) at 6% only because an emergency fund and debt repayment are my top priorities at the moment.

Current way ahead:
1) Save like a mad woman to get cash set aside for the HVAC, continue saving for an emergency fund
2) Pay off student loans and car loans (yes, I'm reconsidering at least one of the vehicles for a more fuel efficient vehicle).
3) Retirement

Thanks!