Author Topic: Reader Case Study - Pay auto loan or save for home down payment?  (Read 2517 times)

MrSteward

  • 5 O'Clock Shadow
  • *
  • Posts: 16
  • Location: Modesto, CA
All reoccurring amounts are monthly and we are both 24.

Take Home Income
Myself $4,128.00 + $4000 yearly bonus
Wife $3,990.00 This is a 6 month average as it fluctuates with hours worked and overtime
Total: $8,118 Per Month

Current Expenses
STABLE:
Rent $1,050.00
Charity $975.00 This will reduce in the next few months as need goes away
Auto Payment $400.00
Auto Insurance $160.00
Cell/Internet $125.00
Gym $80.00 Going away in January next year when term is up.
Hulu/Prime/Live $20.00
VARIABLE
Groceries $350.00
Utilities $200.00
Gas $300.00 Planning to reduce this by biking
Misc $200.00
Total Exp ($3,860.00)

Left over: $4258.00

Assets:
2004 330xi BMW (Fully Owned) worth ~$6500
Combined 401(k)'s $7,771.53 We are both putting in 6% to reach employer match.
HSA: $562.39 Had a skiing/mountain emergency that resulted in an ambulance ride last winter (Ouch on our HSA)
Lending Club: $564.32
Total: $8,898.24
 
Liabilities:
2015 Subaru Forester 2.5i Premium $21,170.42@3.75 I know (Facepunch) We paid $24,678 + taxes. Plan to drive this car for a loooooooong time if it's not a lemon as I don't see any reason to sell it since we will eat a pretty large loss on the taxes portion. Maybe you guys will advise me otherwise. Also insurance on it is pretty amazing for being brand new. I guess it has something to do with safety. It's less than my 11 year old BMW which I want to sell and buy an old small truck as I plan to ride my bike to work most of the year.

We have $7,642 In student loans but that is going bye bye next week! We have paid off $34,473.89 of student debt since December 2013 which makes us pretty excited!

No CC debt ever! :-)

Specific Question: We want to buy a house next year and if we keep up saving we think that by summer/fall 2015 we could have at least 20% down for a 200k home or possibly a duplex for more. Basically what I am wanting to know is should we pour that monthly extra into our auto loan and pay it off in the next 5 months and then only have 10-15% down for the house? Maybe we should give up on the idea of buying a house next year altogether until we have the car paid off and more saved up. I am just worried about interest rates as they are bound to climb eventually and housing prices are already rising in my area although they are expected to plateau for the next year.

Related question: Where should we put the money we are saving for the down payment either after the car loan or now? 1% Online Savings account? Vanguard? Betterment? Hole in the back yard?

Thanks in advance for your input. We are just starting a MMM way of living so we have a lot of learning to do.
« Last Edit: August 21, 2014, 05:39:52 PM by MrSteward »

justajane

  • Handlebar Stache
  • *****
  • Posts: 2146
  • Location: Midwest
Re: Reader Case Study - Pay auto loan or save for home down payment?
« Reply #1 on: August 21, 2014, 05:19:41 PM »
What are your ages? Unless you are in your early twenties, your 401k amount is quite low. Since you are reaching the company match, have you considered at least opening and maxing out one Roth each year?

This is the order I would address your debt and use your monthly surplus -
#1 pay off car
#2 pay off student loans
#3 accelerate retirement
#4 save for down payment

In our thirties we bought with 10% down. I don't regret it per se (since we had a "piggyback loan" and didn't have the hassle of getting out from under PMI), but now I ask myself - why were we in such a hurry?   With your income and relatively low mortgage, you should save 20%.

Also, it would be helpful to know the interest rates on all your loans.

MrSteward

  • 5 O'Clock Shadow
  • *
  • Posts: 16
  • Location: Modesto, CA
Re: Reader Case Study - Pay auto loan or save for home down payment?
« Reply #2 on: August 21, 2014, 05:51:17 PM »
Thanks for the reply justajane,

We are both 24 (updated first post with age) even at 24 I also think that our 401(k)s are low. I started my career around 18/19 and didn't save anything until I was 22/23 but on the plus side I also didn't live over my means aka no credit card debt and no student debt. My wife just graduated last spring and started her career in the fall so she hasn't had much time to contribute to 401(k) and we have focused on her student debt instead of investing outside the employer match. I have considered opening a Roth but I would rather buy a home and build equity there rather than put $1050 a month into rent.

The car is 3.75% and the only student loan left is the lowest interest of all of them at 3.15% the others where 6% and 7%.

As I am typing all of this out I kind of am answering my own questions. Why would I pay a 3.15% loan off before a 3.75% loan... I wouldn't! Although that might bum my wife out a little bit as the psychological effects of being done with student loans is kind of big.

Maybe we shouldn't be in a hurry with the house it just bugs me to pay rent when buying is so much cheaper in our area and the longer we wait that differential will change as prices go up.
« Last Edit: August 21, 2014, 05:53:19 PM by MrSteward »

justajane

  • Handlebar Stache
  • *****
  • Posts: 2146
  • Location: Midwest
Re: Reader Case Study - Pay auto loan or save for home down payment?
« Reply #3 on: August 21, 2014, 06:10:36 PM »
Quote
when buying is so much cheaper in our area

I would say that changes the equation somewhat, although I'm not sure how that applies to your case. I imagine the mortgage/taxes/insurance on a $160,000 loan (with 20% down) will be more than your current rent? But I also imagine the home you plan to buy is larger and nicer than your apartment. Don't underestimate the costs associated with owning a home, though. There are ladders, tools, etc. that often need to be purchased, even if you don't succumb to the temptation to buy new furniture.

I think you should remove at least one of the loans from your expenses before you buy a home. In that case, I would suggest the student loans as planned, since they are smaller. This would improve your monthly cash flow. The percentage difference between the two is not stark enough to matter in the long run. Plus you could see this as the Dave Ramsey/snowball approach, i.e. to pay the smallest loan off first in order to keep yourself motivated.

Chock the car loan up to a bad decision and just commitment yourself to paying it off as soon as possible and never having a car loan again. You're still very young and are allowed a bad decision to learn from :). All things considered it's not a tragic mistake, and your student loans are comparatively low in this day and age, so bravo for that.

Retirement is still the elephant in the room, but it sounds like you know that already and are planning to accelerate that. I myself can't imagine owning a home by 25, but I wasn't married yet and not nearly as together financially as you and your wife are.

MrSteward

  • 5 O'Clock Shadow
  • *
  • Posts: 16
  • Location: Modesto, CA
Re: Reader Case Study - Pay auto loan or save for home down payment?
« Reply #4 on: August 21, 2014, 07:16:40 PM »
Yeah a $200,000 house would be a little more than current housing cost but we may be able to find something as low as $150,000. I am a big DIYer so maintenance cost would be as low as possible. We already have nice furniture most craigslist or inherited so hopefully that would not be an issue. We have also talked about getting a duplex and renting out one side. Duplexes around here are 300-400k when they pop up for a short time.

Anyways thank you for your input and encouragement! I think we will end up paying the student loan just for the affect of being student debt free, it will make my wife very happy.

Any input on where to put the money for the short term saving?