# The Money Mustache Community

## Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ctuser1 on June 25, 2020, 10:10:26 AM

Title: What would you do? More loans or just pay off?
Post by: ctuser1 on June 25, 2020, 10:10:26 AM
This is not strictly a math question. What would you do, taking math, emotions, personal preferences - everything into account?

I need to decide before EOD today (my self-imposed deadline) how to pay for my solar panels.

Options are:
1. Cash: \$19,728.00
If I pay cash, I can pay using credit card, earning 2.55% in points.

2. 10-Year Loan @3.99% APR
If I pre-pay them my federal tax credit (26%=\$5129.28) before the 18th month: \$152.28 / month.
If not: \$152.28 for the first 18 months, \$211.66 afterwards.

3. 20-year Loan @4.99% APR
If I pre-pay (like above): \$99.35/mo
If not: \$99.35 for the first 18 months, \$134.78 afterwards.

I have \$45k in emergency fund (had \$48k, just paid off roof+driveway cash -> \$37.XXk, now it has built back up to \$45k).

The other loans I have are:
Mortgage @3.25%, 12 years left. Balance is \$173k. I expect to do a cash out refi of my house once/if the rates go another half to one percentage point lower.
Car note @1.74%, will end sometime in 2021.
ctheatloan (for gas conversion) @0.99%, balance \$9.4k.

Mathematically speaking, option 3 wihtout the pre-pay is the clear winner. Get the use of someone else's money @5%. Pre-pay whenever you want (selling house, maybe just ticked off by the loan, whatever). But I am just a little ticked because I *emotionally* prefer to have no loans, and that I have been collecting all these loans with the same logic. It's up to three now - car note, ct heat loan, and now the solar loan. If I do the cash out refi - that would be a fourth one. At some point of time, it just gets tiring and irritating to manage all these payments every month.

What would you do? What have you done? With so much cheap money around, many of you must have faced this.
Title: Re: What would you do? More loans or just pay off?
Post by: Laura33 on June 25, 2020, 10:50:53 AM
How does the federal tax credit work?  Is that the amount you are saving monthly in the tax credit on the interest you are paying on the loan?  So the tax credit is different depending on whether you finance or buy it outright?  I'm also not quite following why the amount changes at the 18-month mark, or how fast you intend to pay it off.

I'm also assuming that the loan payment is immaterial in terms of your monthly cashflow and ability to meet your other savings goals, right?

Personally, I'd probably just pay cash and not bother with it.  But I'm lazy and don't like having more bills to worry about forgetting each month and loans to track.
Title: Re: What would you do? More loans or just pay off?
Post by: Sibley on June 25, 2020, 11:14:04 AM
Maximize the credit, minimize interest. Basically, minimize cash out of pocket.
Title: Re: What would you do? More loans or just pay off?
Post by: ctuser1 on June 25, 2020, 11:32:19 AM
How does the federal tax credit work?  Is that the amount you are saving monthly in the tax credit on the interest you are paying on the loan?  So the tax credit is different depending on whether you finance or buy it outright?  I'm also not quite following why the amount changes at the 18-month mark, or how fast you intend to pay it off.

I'm also assuming that the loan payment is immaterial in terms of your monthly cashflow and ability to meet your other savings goals, right?

Personally, I'd probably just pay cash and not bother with it.  But I'm lazy and don't like having more bills to worry about forgetting each month and loans to track.

Tax credit does not change based on financing or no.

At any point before the 18month mark, I have the option of handing them a lump sum = my expected tax credit. If I do, payment per month stay the same (=99.35 per mo). If I don't, it jumps up. i.e. the initial payment calculated (\$99.35) assumes I hand over my tax credit to the lender.

I don't plan to prepay. If I take the loan that will be to add leverage, and use the cash to deploy in the market (or to goose up our emergency fund, which I hope to build up to \$100k sometime soon).

Yes, the cash flow is immaterial. I am just bothered at another bill I need to worry about. :-(

Good problem to have, but still a "problem".
Title: Re: What would you do? More loans or just pay off?
Post by: Tester on June 25, 2020, 11:36:39 AM
What if you open several credit cards and pay fractions to get the bonuses?
You could get more than the 2.55 in points that way.
Just need to use the points and close the cards to avoid the fee next year.

Which makes me remember I have to do the same, as with the current situation I won't be travelling and I need to find another way to use the points....
Title: Re: What would you do? More loans or just pay off?
Post by: ctuser1 on June 25, 2020, 07:44:12 PM
What if you open several credit cards and pay fractions to get the bonuses?
You could get more than the 2.55 in points that way.
Just need to use the points and close the cards to avoid the fee next year.

Which makes me remember I have to do the same, as with the current situation I won't be travelling and I need to find another way to use the points....

Chase 2/5 and BofA 2/4 :-(

I'm carefully managing new CC apps due to these. I want to grab a few more of the hotel CC's that offer free nights. Some more airline miles won't hurt either :-)...
Title: Re: What would you do? More loans or just pay off?
Post by: ctuser1 on June 25, 2020, 07:46:13 PM
After much thinking, and being brushed off by DW when I asked for her advice ("I don't have time to think about it, you figure it out!") with DD giggling in the background at the epic snub, I finally decided to do the mathematically optimal thing - 20 year loan @4.99%.

The one time opportunity cost of 2.55% (CC rewards) did not have any significant impact on the APR once it was spread over 20 years. A few basis points.

I don't plan to hand over my tax credit. So the payment will be initially be ~\$100, and then jump by \$35 from month 19.

I'm hoping I will get more electricity savings from this system than the monthly payment.
Title: Re: What would you do? More loans or just pay off?
Post by: Laura33 on June 26, 2020, 07:06:05 AM
Well, personally, I don't know that I'd do a 5% loan -- not enough delta between that and what I'd expect the market to do to merit the risk and hassle.  What about something like a HELOC?  It's not fixed, but you could do minimal payments while interest rates are low, and if they jacked up, you could just pay off the rest.

Agree with not handing over the tax credit.  Your plan is based on the presumption that the market is going to do better than your 5% loan, so no sense pre-paying the loan instead of investing that credit.
Title: Re: What would you do? More loans or just pay off?
Post by: ctuser1 on June 26, 2020, 07:29:32 AM
Well, personally, I don't know that I'd do a 5% loan -- not enough delta between that and what I'd expect the market to do to merit the risk and hassle.  What about something like a HELOC?  It's not fixed, but you could do minimal payments while interest rates are low, and if they jacked up, you could just pay off the rest.

Agree with not handing over the tax credit.  Your plan is based on the presumption that the market is going to do better than your 5% loan, so no sense pre-paying the loan instead of investing that credit.

HELOC itself is a little problematic for me**, but I can do a cash out refi if I refinance at some point of time in future - which I expect to do since I expect mortgage rates to go further down once the current glut in the system eases.

**I need flood insurance. It will cost me \$400/year extra in flood insurance over and above how I have currently optimized it if I had to carry a HELOC, even if I had \$0 drawn from the HELOC.

Let's say I do the cash out refi in 6 months and have \$60k in hand. At that point of time, the decision is again between carrying a 5% APR loan and throwing the money in the market, vs. paying it off - i.e. the same as I have today. So, if I am doing the loan today, there is no logical reason I should pay it off 6 months down. Where the money comes from for paying it off (or throwing in the market) - HELOC/Refi/my emergency fund - it shouldn't matter.