The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: newguy88 on April 27, 2014, 01:21:39 AM
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Hi all,
I've been reading a lot of advice on here about whether it is more beneficial to work on paying off student loans or a mortgage, or invest. But many of the other examples have higher interest rates than we happen to have, so I thought I'd ask the question more specific to our situation.
Here's our situation:
Debt we currently have:
$20k in student loans at 3%
$350k on our mortgage at 4.25%
My question is, do we pay off one of those debts or invest, or some combination?
I'd love any thoughts on this!
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I would guess the rental property is not tax advantaged like the primary dwelling, so it's probably the best option.
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I had a similar debate (but without the student loans) recently and decided to just go 50/50 between investing and the mortgage. The though process I eventually settled on was that regardless of what the market did I wouldn't have massive regrets looking back about which path I took. If the economy peaks and doesn't do anything for 7 years (or even worse: pulls a Japan), at least you put lots of money on paying down debt. If the economy takes off: Hey you were smart enough to put 50% of your savings there instead of putting it all on debt. Good job! As for student loan vs mortgage, I think the mortgage might be the correct answer since IIRC interest on both is tax deductible.
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I think it depends on several factors, like your age, whether you are already investing in retirement accounts, and if/when you want to FIRE. If you think you will/might need to sell your house, and if you're currently paying any PMI.
I'm in a similar situation, though my interest rates are actually lower - 1.875% on the SL, and 3.5% on the mortgage. I also have a car note at 2.79%. I am currently paying off the car note because I just want it gone, and feel that the market is probably over-valued right now, so I am delaying opening taxable accounts until I've killed the car loan. However, I'm still socking money into my 401K. I have no intention of pre-paying on the SL, which still nets me a small tax deduction each year, on top of the ridiculously low interest rate. I will probably kill it eventually when the balance drops below $5K or so, but mathematically, it makes no sense to pay it off instead of investing.
On the house, what is your LTV ratio? I think it's a good idea to have the mortgage balance paid down enough that you can sell should you need to move, even in the case of another housing crash. We paid $180 for our house, and it's currently worth around $260, but I'd really like to get the mortgage down below $100K because that ought to keep us pretty safe from ever being underwater on it. Just something to consider, I've seen many posts here where a poor LTV on a big mortgage was really limiting the poster's options. You wouldn't want to be in a position of having a fire sale on your investments so you could get out of your mortgage to move for a job, for example.