is it crazy to pay down mtg before student loans?

[tambo]

My husband is a teacher - about $60k.  I teach at a college part time.  Brought home about $25k last year, but my hours have been cut due to ObamaCare, so I will loose about 1/2 of my income this year.  We have 4 small children and 1 on the way.  I am home with them in the day (we homeschool).  I know I could work more hours and increase our income,  but we have lots of freedom this way and our lifestyle/time together is more important than savings to us, so please evaluate without imploring me to work more.  :)   

We have a $170k mortgage that is $20k underwater at a fixed 5% interest rate. 
And I have $5000 in student loans at a fixed 4% interest rate (from undergrad, my grad school was pd by fellowship). 
No other debt.  And we're very thrifty when is comes to spending. 

We have only pension plans through our employers, but with the IL state budget (I believe it's the worst in the country), we are not confident those will be providing much by the time we retire.  No other retirement accts.  My husband has about $10k in annuities from previous employment that we are working now to put into an IRA. 

Oh, and about $10k in savings/money market.  We are making some changes which should free up at least $2k/yr.  And we generally have another $2000 to put toward debt, so I'm planning around $4000 this year to put away (maybe a little more but I'm always conservative in my #'s). 

I've been planning to get rid of the student loans first and then contribute to our IRA (index funds).  But now that I look at it, I'm thinking that since the mortgage interest is higher maybe we should start there.  I'd really like to get some equity in the house, as we'd like to open the possibility of moving in the future.  Does it make sense to pay down the mtg. before the student loans or investing??  General suggestions for a plan of attack??

[nereo]

both offer tax breaks for the interest paid, so I'd put it towards your home.  It has the higher interest rate. 

how did ObamaCare cause you to loose 50% of your work as a teacher? 

[tambo]

Well it's tricky, but the Affordable Care Act puts a limit on how many hours part time workers can work without the employer paying for insurance.  For teacher this arbitrary number is 12hrs.  So I can spend 12hrs/wk in front of students.  If any of the part time workers go over that 12hrs/wk, then the employer has to pay a fee (so many $1000's/employee they have - I don't have the #'s in front of me, but for our school it would be a $1million+ penalty if just 1 employee goes over the limit).  At a community college, 85% of the employees are part-time, so you can imagine that they couldn't possibly come up with the funds to pay insurance for all those employees that weren't previously covered.  And of course I'm under my husband's insurance, so I don't need insurance offered to me anyway.

In any case, at a college you teach per semester, not per week.  My husband teaches at a high school, so I am able to teach nights and summers, since he is home.  In the past I taught full time in the summer and also could teach intercessions, which is a condensed semester of 4wks.  But the ACA doesn't care how much I work per year, but per week.   I can teach a course in a 16wk semester and I am only in front of students 9hrs/wk.  But in the summer or intercession the same class is taught in fewer wks, so I am in front of students more than 12hrs/wk. 

So the colleges around here have all cut hours and hire more part time employees to make up the difference.  I have many friends in other part-time jobs who have had the same problem. 

[Gerard]

Paying down the mortgage makes sense given the interest rate. Obviously your house's current value vis-a-vis the mortgage is somewhat beyond your control (you could pay down the difference and then the house could decrease in value... or you could make minimum payments and it could increase). So the saving in interest is a more reliable benefit than the freedom to move. Still, can't hurt!

Some random observations:
*Your current savings rate is about 5%. If you don't want to increase work hours, you need to be thriftier.
*If your jobs are somewhat secure, you could probably get away with less in cash/savings and dump the difference toward the mortgage... assuming you have some kind of springy debt that you could use if needed.
*If you don't want to replace the work hours you lost this year, it's irrelevant who or what is to blame for their loss.

I think my tone here is a little bitchy, and I apologize for it. But it's sometimes useful to see what aspects of one's situation jump out to a random dude on the internet. :-)

 

[Cheddar Stacker]

Tambo - do you have PMI, because that would make your home loan rate even worse? It will take a long time to get out from under the PMI, and to get to a point where you aren't underwater and could possibly refinance, but it may be better to pay the mortgage quicker. Have you looked into HARP. This program allows underwater homeowners to refinance, and you might be able to get a much better rate than 5%.

Both types of interest offer tax breaks but they are very different in some circumstances. SL interest is limited to $2,500/year (this won't affect you) while mortgage interest is limited to something more like $50-100K. What might affect you is SL interest is a Pre-AGI deduction, while mortgage interest is an itemized deduction. If you are not itemizing your deductions because you don't have enough, that means you are using the standard deduction and you don't really get a benefit for the mortgage interest. If that's the case, the SL interest has a better tax advantage.

[Numbers Man]

You'll have to pay a real estate commission of $9k ($150k times 6%) plus an additional $20k to get even on your house value. Not to mention closing costs and the expenses of another place to live. I suggest that you pay off the student loan first and don't get too wrapped up in the home being underwater unless you really hate living in your current home.

[tambo]

Cheddar Stacker:  Thanks - good food for thought.  No we do not have a PMI, we put down 20+% to start.  We can not use HARP b/c we already refinanced down to the 5% using the fed. program at the time and can't use those options twice. 

We have been itemizing, so that does help me decide.  Thanks for breaking that down for me. 

Gerard: Yeah, a little bitchy, but I'll take it.  And good point that the market will do what it will do with house value.  On your random observations...
*  Yes our current savings rate is low and for this time in our lives we are fine with that.  Other than the fact that we use a mechanic when needed there isn't much room for improvement at the moment.   Last year we had to spend $10k in car and home repairs, so that is savings this year but with my income loss, it will be a wash.
*  I agree about the savings, I may use 1/2 of it for debt, but I've been a little nervous about one of our cars, so I might hold off a little bit before I decide.
*  And yes, it is irrelevant how the income was lost.  But I mentioned and was asked for an explanation, so I explained.  I didn't mean for it to be some sort of policy debate or kvetching.  Point noted. 

So is it the general consensus to focus on the debt before contributing to an IRA - or is this too general of a question?  Since the mortgage is at 5% and I could figure 6-7% on retirement savings over the long haul.  I'm just wondering if I should switch to investing once I have the equity build up.  I know my savings are meek but they will go up each year (my husband's pay increase is guaranteed at a decent percent each year and I will work more as the children grow).   

[Cheddar Stacker]

Most people will say the math starts to make sense when interest rates are 4% or lower. I would keep doing what you're doing and pay down the mortgage since it's at 5%, but you would lose out on the window for IRA's (use it or lose it) so you can make a compelling argument for them.

IRA contributions also reduce your current tax bill, and you are likely close to the range for the savers credit, and possibly the EIC if you really push hard toward tax deferred savings. Check out this thread: https://forum.mrmoneymustache.com/welcome-to-the-forum/optimize-your-taxable-income/msg156362/#msg156362 to see a few tricks some others are using to get all the tax benefits they can. Good luck.

[tambo]

Numbers Man you are making me think.  My brother is our agent, so we don't pay his commission, but yes we need to get $20k just to break even, not to mention what we would need to save for a down payment.  I don't know that we will move, but I would like to know it might be possible in 10yrs.  And I'm trying to determine the best way to make that possible.  Our move would be in part to save money - get close to my husband's work and lower taxes.  But mostly because we've outgrown our home.  We may just add on here though (my family does all the work, so it would just be material costs). 

On a pure numbers game, why do you say pay down the student loan first?  Because the market may take care of the house being underwater itself and it is then a gamble??  Would you suggest investment before paying mortgage at all?

[tambo]

Cheddar Stacker, thanks.   We're new to the mustacian way, but working hard to make changes.  We haven't qualified for EIC this last year, but I follow what you are saying and that may be the way to go.  I have been torn over taking advantage of the IRA while we're still relatively young and paying down debt, so I'm taking this all in.  I may look into a refi one more time and see if it is feesible, though I think the fees would still be too high to make it worthwhile.  I'd love to get to 4% and then wouldn't be so stressed about it.  In today's market, 5% seems so high.  Thanks for the suggestions. 

[Numbers Man]

The student loans are minuscule in the grand scheme of all of your debts. So why not pay it off. After it's paid then full speed ahead on the retirement savings and a rainy day fund. Your mortgage is relatively low and you have a terrific interest rate; don't be in such a hurry to pay the mortgage off. You'll have cash to bring to the closing if you start accelerating your 'stache. I personally would rather have a cash/investment portfolio cushion.

[Thegoblinchief]

Your savings rate is really low for your combined income, debt load, and number of kids.

I have three kids, also homeschool, with basically the same combined income. Our debt load is a lot higher than yours and we're on pace to have $10-15K extra savings.

Perhaps a full case study, or at least further details on your budget are in order.