Yet another debt payoff question

[zedpol]

I'm curious to hear other thoughts on our debt situation.  I earn too much to deduct student loan debt interest but those loans are so cheap i'm just paying the prescribed amount.  The car loan is also pretty cheap so I've just been paying that set amount on that also. I was just going to buy the car with cash but then this loan was so inexpensive, near inflation. The home equity loan I was paying off quickly but i've backed off lately because i've been investing that money.  We have enough money set aside to comfortably pay off everything but the mortgage but I feel like our money is better off invested

How would you guys tackle it?

99k Student loans at 1.99%
25k car loan at 2.59% c
45k Home equity loan at 4.5% (3.2% after tax credit)
994k Mortgage at 3.65% (2.6% after tax credit)

Thanks,
Z

 

[pbnj]

Sell the house and pay off the mortgage and heloc.  Next ditch the car that is a lot to finance on something that depreciates.  You carry a lot of debt.  How many pay checks can you miss before you would be on trouble?

[MustachianAccountant]

Sell the house and pay off the mortgage and heloc.  Next ditch the car that is a lot to finance on something that depreciates.  You carry a lot of debt.  How many pay checks can you miss before you would be on trouble?

Agreed. Close to $1 million house? How many square feet and how many people live there?
You can probably downsize and invest the difference.
You paid too much for your car. Sell it and get something used in the $10k range (or less).
Student loans are fine to leave at that rate, as long as you're also investing any money you would otherwise put towards the loan.

ETA: I see from your other posts that you live in the Bay Area where million dollar mortgages are the norm for small houses. Which, to me is insane, and I would move somewhere else.

[Fishindude]

In my opinion that is an insane mortgage amount unless you have a reliable annual income well north of $500K.   And if you make that much $$, why in the heck are you borrowing so much?
I'd work hard towards paying off anything and everything and seriously consider some cheaper housing.

[Bateaux]

With a million dollars of debt, any interest rate is too high.  What is your insurance bill on all that debt?  Some people here could probably live on your insurance payments alone.

[Tjat]

The numbers say that if you have the money and can earn greater investment returns than the interest rate, then you'd be better off investing. However, I'd be uncomfortable carrying that much debt for myself.

[marty998]

In my opinion that is an insane mortgage amount unless you have a reliable annual income well north of $500K.   And if you make that much $$, why in the heck are you borrowing so much?
I'd work hard towards paying off anything and everything and seriously consider some cheaper housing.

Curious to know why do you need to earn $500k a year to service a loan that costs only $36,000 a year in interest?

Possible to do it while earning a lot less, especially when paying it off over 30 years.

[MustachianAccountant]

Curious to know why do you need to earn $500k a year to service a loan that costs only $36,000 a year in interest?

Possible to do it while earning a lot less, especially when paying it off over 30 years.

LOL. I'm sorry, did you just say *only* $36k of interest per year?
That's more than most of us around here live on, in total, every year. (...and families without kids live on much less)

[Slow&Steady]

Making a few assumptions:

99k Student loans at 1.99% - 10 years left
25k car loan at 2.59% c - 5 years left
45k Home equity loan at 4.5% (3.2% after tax credit) - 5 years left
994k Mortgage at 3.65% (2.6% after tax credit) - 30 years left

I calculate that you are going to end up paying $660k in interest if you keep all of these for the remain life of the loans.  If you take out the mortgage that is still $17k ($1.6k on the car, $5.3k on the HEL, and $10.2k on the student loans).  That is a lot of money on the SLs and the HEL, I would probably try to pay those off very quickly.  After those are paid off I would probably split the difference in the extra cash flow I had, half to investments and half to mortgage but I will admit that is mostly due to my dislike of interest and having debt.

[Shiernian]

Making a few assumptions:

99k Student loans at 1.99% - 10 years left
25k car loan at 2.59% c - 5 years left
45k Home equity loan at 4.5% (3.2% after tax credit) - 5 years left
994k Mortgage at 3.65% (2.6% after tax credit) - 30 years left

I calculate that you are going to end up paying $660k in interest if you keep all of these for the remain life of the loans.  If you take out the mortgage that is still $17k ($1.6k on the car, $5.3k on the HEL, and $10.2k on the student loans).  That is a lot of money on the SLs and the HEL, I would probably try to pay those off very quickly.  After those are paid off I would probably split the difference in the extra cash flow I had, half to investments and half to mortgage but I will admit that is mostly due to my dislike of interest and having debt.

I agree with this above post, however I would probably keep the primary mortgage and just save up enough to pay it off (but keep the money in the market).

Also if you are from the Bay Area, you can have a million dollar mortgage and still not live a reasonable distance from work. Knowing that area, I don't think that mortgage is unreasonable.

[Slow&Steady]

Making a few assumptions:

99k Student loans at 1.99% - 10 years left
25k car loan at 2.59% c - 5 years left
45k Home equity loan at 4.5% (3.2% after tax credit) - 5 years left
994k Mortgage at 3.65% (2.6% after tax credit) - 30 years left

I calculate that you are going to end up paying $660k in interest if you keep all of these for the remain life of the loans.  If you take out the mortgage that is still $17k ($1.6k on the car, $5.3k on the HEL, and $10.2k on the student loans).  That is a lot of money on the SLs and the HEL, I would probably try to pay those off very quickly.  After those are paid off I would probably split the difference in the extra cash flow I had, half to investments and half to mortgage but I will admit that is mostly due to my dislike of interest and having debt.

Also you might be a good fit for the Boglehead forums too.

[boarder42]

sell the car. max retirement accounts 401k hsa ira - pay down the heloc. keep the SL and the mortgage.  those rates are crazy low. invest the rest. maybe even try to refi that mortgage down to a lower rate i just got a 3.25% on a 30 ... you're a jumbo loan so may not get as good but worth a shot.

to those using "cumulative interest" its a terrible mathmatical way to analyze debt. you analyze debt by looking at interest rate / fixed or variable in relation to what expect gains could be if money were invested else where.  and even over 10 years a 1.99% you should invest vs pay that down and definitely over 30 years you invest vs pay down that morgage.  once you hit taxable account investing with that HELOC at 4.5% and the 10 year yield at 1.5% it really makes sense to pay it down.

[zedpol]

lordy lordy,  so many replies.  I'll do my best. Sorry if I missed something

RE: How long can we survive without a paycheck. 
Probably about 2 years not changing anything (daycare/college savings/etc etc), much longer if we cut back.

RE: The house
House is worth about 1.5 million we paid 1.25million.  It is a very modest house, its 1450 square feet and we have 4 people living there.  AFter tax credits I figure it costs us about 3.5k to live there. Renting would be a minimum of 4.5k a month.  We live in an incredibly HCOL area.  To sell and move closer to work I'd pay the 6% transaction cost  (90k) and then figure out somewhere else to live.  Moving close to work would mean buying a house in the 2 million dollar range...maybe 1.7.  Or rent in the 5.5 to 6k a month range,  and these are not for fancy places to live.  I guess we could cut down to a 2/1 house but I don't think we would be paying much less than 1.3 million and then there are all the transaction costs. 


Re: The car
I financed it only because it was so inexpensive to finance.  I figure 25K @ 2.59% isn't hard to beat in the market.  Heck this has been one of my worst years in the market since 2008 and I'm now up 4% from the start of the year.  I don't love debt either but at the same time we have the cash reserves to make this go away if need be.   I can't sell the car as I have to be able to get to and from work.  I kept my previous car from 2001 until 2015. I'll do the same for this and drive it into the ground.  Just out of curiosity I looked around for what kind of car I could get for 10k, honestly impressed. We will do this for when my wife's prius gives up the ghost.

RE: how much debt for income
 Yes, i'm lucky to have an income north of 500k, I have a great job. I enjoy it and I enjoy the people I work with. We are able to save a ton of money with our current set up.  We will be able to be FI at a nice level in a few years and do whatever we want .  Just not here in the bay area because it is crazy.

RE: NicoleO and Tjat
  I agree the debt has increased more than I like.  I'll probably pay off the home equity loan. Personally I think paying of the student loans isn't a good idea because those are basically getting cheaper every year due to inflation.  The car loan is the one I still struggle with.  It is a low interest rate but I never have loved the idea of financing a car.

I'll check out the boglehead forums, thanks

RE: Boarder42
thanks for the advice.  401k already maxed, also do backdoor roth conversions. Total of 82k a year goes into tax advantaged accounts.  Your thoughts really mirror what I have been mulling over.   You think just let the car loan ride?   I'll look into refinancing. 

 Anywho.  Thanks for the comments.

[Dicey]

I am not the least alarmed about your debt levels. Yet. I want to know more about your income and savings levels. I suspect you've some ballast on the other side of the teeter-totter, er, balance sheet. Care to share so those of us mustachians who understand living in HCOLAs may provide helpful Information? Those shoot from the hip sell-sell-sell people are best ignored until we have a fuller picture.

And before the pushback begins, please note two things:

1. OP did not mention how much equity he has in his (or her) home or how much was put down. 3.65% is pretty darn good for a jumbo loan, so I suspect there was a significant DP. If you can't wrap your head around a million dollar mortgage, but feel the need to comment anyway, pretend OP lives in BF Nowhere and lop off a zero. But expecting OP to actually move there to fit your personal paradigm isn't particularly helpful.

2. Remember that the great and powerful AREBELSPY achieved FIRE with multiple mortgages AND student loans. Now he's a world traveler and proud papa of the adorable Annabel. Please don't think it can't be done. ARS and his lovely spouse were teachers, and they made it happen.

Also you might be a good fit for the Boglehead forums too.

Yeah, no. That once great site has turned over and the strings are being pulled by new hands. Sad to see. Much better to get acquainted with jlcollinsnh's stock series.

Back to OP, I see our posts are about to cross, so perhaps you've added more info. Off to read more...

[Dicey]

Yay, all good answers. I'd say you rock! The only hair I'd split is the car loan. Patelco, for example, usually offers 1.99%, sometimes loss and almost anyone can join. In the grand scheme of things, not a significant savings. And do look for a solid used car when your wife needs another one, but keep this one. Buy-maintain-hold is also a winning strategy. If your day-to-day expenses are equally optimized, I'd say all you need to do is stay the course and stick the landing. Kudos to you, sir!

[boarder42]

lordy lordy,  so many replies.  I'll do my best. Sorry if I missed something



RE: Boarder42
thanks for the advice.  401k already maxed, also do backdoor roth conversions. Total of 82k a year goes into tax advantaged accounts.  Your thoughts really mirror what I have been mulling over.   You think just let the car loan ride?   I'll look into refinancing. 

 Anywho.  Thanks for the comments.

i'd sell the car but if you're gonna keep no need to pay down a 2.59% rate i'm not paying down a 3% rate i got on my car i have the cash i had it when i bought it i'll live leveraged on that.

[boarder42]

you need to index your money.  if this is one of your worst years.  last year was the worst year in the market since 2008 you're wasting time and energy and likely losing to the general market overall in the long run.

[tonysemail]

Yeah, no. That once great site has turned over and the strings are being pulled by new hands. Sad to see. Much better to get acquainted with jlcollinsnh's stock series.

what's this part mean?  What changed?

i don't know that i would keep the mortgage for 30 years.
It's a great hedge against inflation, but I would think about paying it down until you get below the conforming limit.

btw, i thought itemized deductions start phasing out at 300k income.

[EnjoyIt]

My personal opinion.

pay off the HELOC my personal view is that 4.5% guaranteed return is good enough to pay off as soon as possible. I would t sell assets to do it, but I would divert any additional cash in that direction as long as I was maximizing all my tax deferred space which sounds like you already are doing.

Next I would pay off the car. Not because the interest rate is too high but because it is a depreciating asset losing value and you are paying interest on top of that.

School loan. Honestly I would leave these alone. Yes together that is a lot of debt, but you make a good income and can easily afford that debt. Only caveat would be to sporadically through a few bucks towards you school loans just to cut down its duration. My goal would be to make sure it is paid off when I retire.

Mortgage. Since you eventually plan on moving once retired to a lower cost of living area, I would not touch the mortgage for many many more years to come.

Bogleheads is an awesome forum for investing. It is not a forum to retire early. Many posters there are extremely conservative who think they can never retire with $1million. Use bogleheads for investing and use MMM for frugal happy living and retiring early.

[tonysemail]

Why would the mortgage be a hedge against inflation?  If you have a $1M dollar home and sell it in 20 years, isn't the inflation baked in to the sale price, regardless of whether you have a mortgage or not?

because it's fixed rate and you would be re-paying your obligation with cheaper dollars

[boarder42]

Yeah, no. That once great site has turned over and the strings are being pulled by new hands. Sad to see. Much better to get acquainted with jlcollinsnh's stock series.

what's this part mean?  What changed?

i don't know that i would keep the mortgage for 30 years.
It's a great hedge against inflation, but I would think about paying it down until you get below the conforming limit.

btw, i thought itemized deductions start phasing out at 300k income.

Why would the mortgage be a hedge against inflation?  If you have a $1M dollar home and sell it in 20 years, isn't the inflation baked in to the sale price, regardless of whether you have a mortgage or not?

b/c its a fixed cost set at today's prices.  your mortgage payment unlike other goods and services doesnt increase with inflation where as your salary or FIRE earnings typically do.

a mortgage actually held in FIRE historically increases your chances of success and your money not running out.  1.2MM in the bank with a 200k mortgage spending 40k on everything outside of the mortgage is ~3% more successful than someone with 1MM in the bank and a paid off 200k house spending the same 40k.

[TheAnonOne]

Bogleheads is an awesome forum for investing. It is not a forum to retire early. Many posters there are extremely conservative who think they can never retire with $1million. Use bogleheads for investing and use MMM for frugal happy living and retiring early.

To be fair, the general number here isn't LESS than 1M, it generally IS 1M. Though we have people all over from 750k (low end for the most part) to 2M(higher end)

Of course these are indexed amounts, not including non-generating assets.

[Cathy]

Most of the replies in this thread disclose a continued misunderstanding of the fact that decreasing your saving rate can expedite your retirement.

[boarder42]

Most of the replies in this thread disclose a continued misunderstanding of the fact that decreasing your saving rate can expedite your retirement.

this is just a link to another post you made with a link to another post you made. bring some actual data ... every thing you post has a link to something else you posted. whats your data or point behind saving less and retiring faster.

[Cathy]

whats your data ... saving less and retiring faster.

I've never said that saving less lets you retire faster; that would be absurd. I have said, however, that reducing your saving rate (that is, the ratio equal to the amount saved divided by the amount earned over the same time period) can allow you to retire faster, and that is just a matter of basic math; no data is required. My posts fully explain the (very simple) mathematical argument. The most simple example, and the one relevant to this thread but misunderstood by many respondents, is that moving to an area with radically more expensive housing can significantly expedite your retirement even if it lowers your savings rate.

[boarder42]

whats your data ... saving less and retiring faster.

I've never said that saving less lets you retire faster; that would be absurd. I have said, however, that reducing your saving rate (that is, the ratio equal to the amount saved divided by the amount earned over the same time period) can allow you to retire faster, and that is just a matter of basic math; no data is required. My posts fully explain the (very simple) mathematical argument.

yet you fail to post it here and just link back to a chain of posts for people to go figure out what you're trying to say by such a simple equation.  is there a points per clicks leaderboard i'm missing out on.

[Hotstreak]

Zedpol I think you are on a fine track.  Usually a new car on credit would be a red flag, but based on how much you are making, it's not such a huge deal in the long run.  You may work an extra few weeks to cover the difference between a new vs used car; that advice is targeted for people who need to work 6-12+ months to cover the difference.  My advice at this point is to figure out where you want to live when you retire and how much it is going to cost you.  You may be able to retire today, or soon, based on your expected future budget.

yeah go make a shit ton more spend a shit ton more but have the amount being saved be more and move to a lower cost of living area.  thats not in the cards for most people and being all cryptic about it doesnt really add value.

The OP zedpol said upthread that they're going to go somewhere "not in the bay area", so they are probably some of the few folks who are able to accomplish this :).  Cathy's point, to put it simply, is that the savings rate that matters is (amount saved per year / expenses during retirement).

[boarder42]

Zedpol I think you are on a fine track.  Usually a new car on credit would be a red flag, but based on how much you are making, it's not such a huge deal in the long run.  You may work an extra few weeks to cover the difference between a new vs used car; that advice is targeted for people who need to work 6-12+ months to cover the difference.  My advice at this point is to figure out where you want to live when you retire and how much it is going to cost you.  You may be able to retire today, or soon, based on your expected future budget.

yeah go make a shit ton more spend a shit ton more but have the amount being saved be more and move to a lower cost of living area.  thats not in the cards for most people and being all cryptic about it doesnt really add value.

The OP zedpol said upthread that they're going to go somewhere "not in the bay area", so they are probably some of the few folks who are able to accomplish this :).  Cathy's point, to put it simply, is that the savings rate that matters is (amount saved per year / expenses during retirement).

That's super incorrect math. But you also stated you didn't understand the SSA benefit for survivors. Amount saved annually divided by amount of annual expenses in retirement so if I save 400k at my million dollar job annually and plan to spend 40k a year in retirement I have a savings rate of 1000% maths hard much like 75% with the SSA calculation.

Savings rate in and of it self is retarded it's been discussed many times it's a great starting point but in the end it's what you have in savings and how it's invested and if it's projected to support your end goals of spending in retirement.

[MOD NOTE:  There's nothing "retarded" about savings rate.  MMM discusses this exact thing in one of the blog posts.  Savings rate is alll that matters, from one perspective.  In the meantime, mind your language and manners.  This isn't a pig sty.]

[Tjat]

Seems strange to argue this basic point so fervently (and somewhat incoherently). If you move to a HCOL area, you can save more nominal dollars than if you lived in a LCOL area at the same (or even less) savings rate. Once you build up your stache, you move to the LCOL area where your dollars go farther.

[cchrissyy]

in your shoes, I'd pay off the HELOC. That's all.