Author Topic: Payoff Debt & Rent or Buy a home/Save  (Read 4377 times)

burly

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Payoff Debt & Rent or Buy a home/Save
« on: October 15, 2012, 05:28:37 PM »
Hello all!

So, my Wife and I have been tossing a few ideas around and I'd like an outside opinion. Firstly, I believe our debt IS an emergency and HAS TO GO, however, do we use our savings to pay down loans & rent, or buy a home.

Here's some numbers:

Total student loan debt (both): 95k (35k of this is to my father-in-law @ 0% as he financed my wife's masters)
Car Loans (combined): 35k @1.9% - '11 Corolla & '12 Nissan Rogue

Rent/Mortgage: $0 (we have free rent for min 1yr until my parents house sells - they do not live here)

Savings per month ~3,500

Current savings: 20k

Estimated annual bonus - 30k

House budget ~300k

Interesting facts:
1. Wife is due in February with first child - will not work till ~May, would like to be out of this house by August.
2. Current commuting - me 60 miles round trip, wife 200 miles round trip 3x a week. (free rent!) - We're working on one of changing jobs to be closer however it has not been too easy in this job market.
3. We have 2 dogs - so renting can be a hassle.

Suggestions?



AJ

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #1 on: October 15, 2012, 05:46:29 PM »
At $0.51 a mile you are spending about $1800 a month in car costs for your "free" rent. Just something to think about. It sounds like the real reason you don't want to move is the hassle factor rather than any compelling financial reason. Which is fine, as long as you know the opportunity cost of the convenience.

I assume you're expecting to hear that you should sell the cars and buy older ones.

Other than that, did you have a more specific question?

fidgiegirl

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #2 on: October 15, 2012, 05:47:46 PM »
When you say "savings per month" is that going to your debt, or to your savings account?

When you say "house budget" is that the amount you intend to finance or the amount you intend to save up?

According to AAA http://newsroom.aaa.com/2012/04/cost-of-owning-and-operating-vehicle-in-u-s-increased-1-9-percent-according-to-aaa%E2%80%99s-2012-%E2%80%98your-driving-costs%E2%80%99-study/ the cost to operate the Rogue alone is about .75/mile, or 200*.75*3 days a week * 4 weeks a year = $1800!!!!!!!!  The free rent is not making up for this!!

You didn't say if this is the vehicle she takes to work.  If it's the one you take, then 60*.75*5 days a week*4 weeks=$900.  Then her costs with the Corolla would be 200*.45*3 days a week*4 weeks = $1080.  So best case scenario = $1980 on vehicle operation per year.

I'm sure better mathematicians can get it down to better numbers than me, but in short, the free rent is not making up the cost of just the operation of the vehicles.

Congrats on the baby!

burly

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #3 on: October 15, 2012, 05:59:31 PM »
Yes I expected someone to say something about the cars, the fact is, the .51 cent per mile is over estimated in my opinion. I get 36mpg, the Rogue gets 28. I drive the Corolla. Currently, we spent $600 a month on gas. I do all maintenance myself, so of course wear and tear and cost of oil etc.. However, the commute is not a long term thing as in one year we are either renting or purchasing a home, so a move is imminent.

We are currently putting about $3500 into a saving account every month, so by the time the baby is here, I expect to have ~60,000. The 300k is our budget in terms of sale price, so 20% down would be 60k. My wife will not be going  back to work until at least May, so that will give us perhaps another 7k of savings. While my wife is not working, our savings rate is pretty much 0, as is her commute.

As for the .75c per mile, It's a 4 cylinder, so not the same as your typical SUV. Regardless, she spends ~ 400 a month on gas + $300 loan pmt, so that would mean 900 a month in maintenance?? that's not right. These are 100% highway miles. I'm all for math and reason, but we do not spend anything near that a month, hell, that'd be a new car every year?


As for my question, it was to pay down debt & pay rent. OR, purchase a home and keep the debt.
« Last Edit: October 15, 2012, 06:05:57 PM by nathanc »

AJ

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #4 on: October 15, 2012, 06:18:50 PM »
As for my question, it was to pay down debt & pay rent. OR, purchase a home and keep the debt.

Ah, in that case there is not *nearly* enough information. Financially, this is a very location-dependent choice (not even regional...like neighborhood-specific). And no one makes that decision based solely on financials anyway. It is a lifestyle decision as much as a financial one.

Also, you can split the difference and buy a starter home while you pay down the debt. $300k buys a whole lotta house in most places in the U.S.

Another Reader

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #5 on: October 15, 2012, 08:58:49 PM »
In your shoes, I would focus on the debt.  It's an emergency because it restricts your choices.  After the baby comes, you and your wife may feel differently about her quick return to work.  In addition, you just have too much debt.  If you insist on keeping these cars, get them paid off with that $3,500 a month and some of that bonus.  Then throw everything at the student loans.

The dogs are an excuse for buying a house when you are not financially ready. 

You don't mention retirement savings.  Is the $3,500 in addition to that?  If not, I would put some of that money there.


burly

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #6 on: October 16, 2012, 07:20:51 AM »
If we're going to live within a decent area with a decent commute, we're looking around 300k.. NJ is not cheap, unless you live in the ghetto. The other option is to continue to live in PA where yes, you can get a home for ~150k, but you're doing the commute.

For retirement, I have a 401k that I contribute 4%, and they match up to 4%. In addition, I have 3% in our employee stock purchase program. My wife currently has a Roth with this year's max contribution, so next year I will put another 5k in there, she is not full time so no employee program is available. I would also like to be able to put 5k in my roth, however, waiting to figure this out.

After more discussion, the idea of a 80/10/10 mortgage seems to be a great compromise - we can pay off at least 1 car, avoid PMI, and pay down some student debt. We don't know where we will be buying, too many variables right now. So that is why we are just saving, saving, saving, rather than paying down debt right now. If we bought a 200k home, put 20k down, that would give us 40k to pay off debt. Which would knock out all of the cars + some student debt savings of ~700/mo. Keep in mind 35k of my debt is interest free and is not reported on my credit report. So our actual debt is ~95k and would be ~55k after the debt payment + mortgage.

Quote
Ah, in that case there is not *nearly* enough information.
Perhaps your right, It just bothers me to look at mint and see my savings rise and my debt slowly go down.

RadicalPersonalFinance

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #7 on: October 16, 2012, 08:10:14 AM »
Yes I expected someone to say something about the cars, the fact is, the .51 cent per mile is over estimated in my opinion. I get 36mpg, the Rogue gets 28. I drive the Corolla. Currently, we spent $600 a month on gas. I do all maintenance myself, so of course wear and tear and cost of oil etc.. However, the commute is not a long term thing as in one year we are either renting or purchasing a home, so a move is imminent.

We are currently putting about $3500 into a saving account every month, so by the time the baby is here, I expect to have ~60,000. The 300k is our budget in terms of sale price, so 20% down would be 60k. My wife will not be going  back to work until at least May, so that will give us perhaps another 7k of savings. While my wife is not working, our savings rate is pretty much 0, as is her commute.

As for the .75c per mile, It's a 4 cylinder, so not the same as your typical SUV. Regardless, she spends ~ 400 a month on gas + $300 loan pmt, so that would mean 900 a month in maintenance?? that's not right. These are 100% highway miles. I'm all for math and reason, but we do not spend anything near that a month, hell, that'd be a new car every year?


As for my question, it was to pay down debt & pay rent. OR, purchase a home and keep the debt.

You're missing depreciation cost in your analysis.

I'm not sure how much you paid for your Nissan Rogue, but let's pretend it's worth $25,000.  You lost more than 20% of the car's value the day you bought it and you'll lose 15% every year for as long as you have it.

$25,000 x 15% = $3,750 in 2012, $3,187 in 2013, etc.

$15,000 (Toyota Corolla) x 15% = $2,250 in 2012, $1,912 in 2013, etc.

So, between your two automobiles you will lose $6,000 in 2012, $5,099 in 2013, etc.

Chances are, your new car won't need any maintenance right now.  And, if it does, it's under warranty.  But, in order to be mathematically accurate, you should account for some maintenance expenses in the future because of wear and tear. (E.g., it would be illogical to purchase a $100k house that needs $50k in repairs and not budget for the $50k. You should budget for future maintenance as part of your current analysis. Hard to do, but it's important to at least think about.)

Two other quick things we can throw in with easy calculations: tires and oil changes.  Your wife is currently driving about 30,000 miles per year (200 miles x 3 days per week x 50 weeks worked = 30,000).  If you change your oil every 5,000 miles, that's six oil changes per year. $25 each equals $150 per year of oil changes.  (You said you do the maintenance--great. Pretend this is the value of your time then.)

She'll need a new set of tires (if you're buying long-life tires and not high performance tires) every two years (60,000 miles). Estimate $800 for new tires every two years and she's spending $400, per year for tires.

Finally, you didn't mention car insurance costs, but on a new, financed car, you're required to maintain comprehensive coverage.  I'll pretend it's $100 per month

So, here is the annual cost for operating your Nissan Rogue:

Total annual car payments: $4,800
Total annual gasoline purchased: $3,600
Total annual car insurance: $1,200
Total annual depreciation expense: $3,750
Total annual tire expense: $400
Total annual oil change expense: $150
Total annual cost NOT including maintenance allowance: $13,900
$13,900 / yr divided by 30,000 miles = 46.3 cents per mile

If you then allow a reasonable maintenance expense (tune ups, timing belt at 100k miles), add in car washes/vacuums, vehicle accessories like cargo trays/floor mats, etc., you'll be at 50 cents per mile without trying too hard.

Remember, the IRS isn't interested in giving away free mileage deductions to business owners.  They know their stuff! :)

You didn't say how much your wife is earning.  Consider if it's really worth all that driving expense for her to go to that job.

That's the math behind why MMM and many people here on these forums don't see the point in long commutes. 

If you're spending $14,000 per year in commuting expenses, your wife needs to be earning ~$20,000 per year (depending on your tax bracket), so seriously consider if the juice is worth the squeeze (i.e., the job is worth the commute).


tooqk4u22

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #8 on: October 16, 2012, 08:34:42 AM »
It seems that you have mostly cheap debt, so saving and investing isn't such a bad choice but buying a house and getting more debt may be tough.  Try to treat your finances as if your wife doesn't go back to work and plan on living and saving on your income.   

Yes, NJ is expensive and keep in mind that property taxes in many parts of NJ will be close to rent in other parts of the country - $300K home will equal about $9000k in property taxes so that means your PITI will be around $1900/month.  The rent/buy analysis is about a wash in NJ so the flexibility with renting wins - remember there are far more costs to buying then just the PITI. 

Done by Forty

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Re: Payoff Debt & Rent or Buy a home/Save
« Reply #9 on: October 16, 2012, 09:22:18 AM »
Yes I expected someone to say something about the cars, the fact is, the .51 cent per mile is over estimated in my opinion. I get 36mpg, the Rogue gets 28. I drive the Corolla. Currently, we spent $600 a month on gas. I do all maintenance myself, so of course wear and tear and cost of oil etc.. However, the commute is not a long term thing as in one year we are either renting or purchasing a home, so a move is imminent.

We are currently putting about $3500 into a saving account every month, so by the time the baby is here, I expect to have ~60,000. The 300k is our budget in terms of sale price, so 20% down would be 60k. My wife will not be going  back to work until at least May, so that will give us perhaps another 7k of savings. While my wife is not working, our savings rate is pretty much 0, as is her commute.

As for the .75c per mile, It's a 4 cylinder, so not the same as your typical SUV. Regardless, she spends ~ 400 a month on gas + $300 loan pmt, so that would mean 900 a month in maintenance?? that's not right. These are 100% highway miles. I'm all for math and reason, but we do not spend anything near that a month, hell, that'd be a new car every year?


As for my question, it was to pay down debt & pay rent. OR, purchase a home and keep the debt.

As a general rule, I'd recommend paying down debt & renting.  It all depends on your particular situation so you should do the math.  But free rent is hard to beat. ;)

To the degree possible, I'd also take the money you're putting into a savings account and the cars, and also apply that to paying down debt.  Downgrading in cars would give you immediate and long term savings.
« Last Edit: October 16, 2012, 03:34:03 PM by Done by Forty »