Was going to make an alt for the sake of personal information, but then I realized I can't really think of a reason for any of you to not know these details, so, here you go!
So I started a new job 9 months ago that has allowed me to start saving away money every month. Unfortunately my mom's finances collapsed somewhere in there so I've been paying her mortgage for awhile. She's about to be back on her feet thanks to a lawsuit that just settled and plans to pay me back what she owes me in one fell swoop. So I've got about $5,000 coming my way in the next couple weeks. I also usually save about $500 a month.
I'm also in line, if the stars align, for a promotion that will bring in an additional (estimated) $1,000 a month. Much of that would go into savings, but it would also increase my student loan payment since I'm on an income-based payment plan for my federal loans. This promotion is sort of wishy washy though on timing. It could happen as early as September, or take as long as a couple years. My boss wants it to happen soon, but there are a lot of approvals from a lot of people that have to happen, so while it's likely, it's not something I can count on happening in the next 12 months as guaranteed.
So my question is this...what's the best use for the little nest egg coming my way and the savings I continue to generate?
Most people I talk to say pay off student loans first. But even if I put every extra dollar I have into my loans, it'd be a decade until I could pay them off entirely. Less with the promotion, but several years. I owe approximately $50,000 between federal and private loans, with interest rates ranging from 3.2% to 10.99% (the majority of them average about 8% probably).
To me, it makes more sense to put that money into a down payment for a house and get in while there's still a good entry point in the market. Home prices are still very reasonable in the parts of Metro Detroit I want to live, and interest rates are low. My credit is also pretty good.
I think it makes more sense to get into a house I can afford with my current salary, live with room mates to help make the payments for a couple years, and build equity in the house, then in a couple years, take out a home equity loan and pay off or seriously pay down the student loans. By then my promotion should kick in, but even if it doesn't, it still strikes me as a better use for my money.
Home prices are rising, rents are rising, and interest rates are set to rise. All of which means I'll throw more money away in rent and buying a house will only get harder. If I set myself to pay off all my loans now, it'd be at least five years until I did it. By then, it would be twice as hard to actually save for a downpayment, and when I did, rates would be much higher and homes less affordable.
So, what do you all think? Keep the money as a solid start toward a down payment for a home? Or pay off a chunk of student loans with all future extra money going to that (and at least tacitly admitting I won't be buying a house until I'm 40).
Posted by TomDavidson (Member # 124) on :
How much of your loan amount is nearly 11%? Can you get that paid off?
Posted by Lyrhawn (Member # 7039) on :
There's a single loan of about $5,000 that's at 11%. There's another loan of about $6,500 at 10%. Those are the private loans I have. The rest are federal loans the majority of which are at 6.8%.
Posted by AchillesHeel (Member # 11736) on :
If you don't have tier one credit it can be good get into a new vehicle loan. The payoff of the old one gives you a bump and the effect of twelve on time payments can change a lot for people. Stay away from all "buy here pay here" stores, no matter what.
Did I ever mention on here that I've been selling cars for the last ten months?
Posted by TomDavidson (Member # 124) on :
You're right that mortgage rates are probably going to go much higher within a year, so locking down a rate now will almost certainly save you money over the life of the loan -- and since the loan will be so much bigger than your current high-interest loans, you might see a benefit in grabbing a home sooner rather than later. On the other hand, paying off even one of those high-interest loans will drive down your monthly expenses, improve your credit score, and save you cash overall. One thing you might consider if you have an excellent credit score is finding a home that's for sale under its appraised value and rolling that $11K in loans into the mortgage; you'll drop the interest and monthly payments considerably. (This is a bit of an "if;" banks are less likely to permit this sort of thing for first-time homebuyers nowadays.)
Posted by Lyrhawn (Member # 7039) on :
quote:Originally posted by AchillesHeel: If you don't have tier one credit it can be good get into a new vehicle loan. The payoff of the old one gives you a bump and the effect of twelve on time payments can change a lot for people. Stay away from all "buy here pay here" stores, no matter what.
Did I ever mention on here that I've been selling cars for the last ten months?
What number actually counts as top level credit?
I figured I would have to do a little work on my credit score to bring the number up. When I bought a car last November my number was in the low 680s.
I think 720 is the baseline for "great" credit. Not sure if I can boost my score 40 points over the next few months.
Tom - How much of a credit score bump do you think would come from paying off a relatively small chunk of my loans? Or does the boost coming from having fewer loans or from lower interest rates on my active loans?
There's also a small possibility I can borrow 10-15% of a downpayment from my mother when her second lawsuit settles later this year. So I might be able to have my cake and eat it too, but I'm assuming that won't be an option.
It just seems like the window to take advantage of low home prices and low interest rates is rapidly closing.
Posted by dkw (Member # 3264) on :
If you receive money from a family member for a downpayment (or for anything that shows up on your bank statements in the 3-6 months before you take out a mortgage) the family member will have to sign a statement that the money is a gift and doesn't need to be paid back, or it will count against you on the mortgage application.
Posted by Lyrhawn (Member # 7039) on :
That's good to know. I'll have to make sure to ask her if she's willing to do that.
Seems like kind of a weird standard though. I mean, I get their point of view, they're trying to evaluate your cash flow and what you're on the hook for. But when any family member can just say "oh it's a gift!" that seems like a pretty big loophole that's easily jumped through.
Posted by dkw (Member # 3264) on :
Semi-easily jumped through. When we refinanced our house a few years ago the bank wasn't happy with just the signed statement and wanted six months of my Mother-in-law's bank statements because she'd given us a cash gift that showed on the statements we'd submitted. We weren't even buying a new house, and we were refinancing with the same bank that already held the mortgage.
We told them no, and they decided that they maybe didn't need that after all.
Posted by tertiaryadjunct (Member # 12989) on :
My mom's mom gave my parents 100k for their down payment. 20 years later when they divorced, grandma decided my dad (who kept the house) needed to cough it up "because it was a loan, not a gift." I never bothered to ask how that lawsuit went (not my business) but the fact that it became a thing at all is unfortunate. For your own sake, especially if you have a spouse, I'd certainly recommend making gifts/loans of large sums of money from family (or anyone) very clear on paper regardless of whether the bank requires it or not. And whoever is doing the lending should be aware that saying "oh it's a gift!" When it's not could have repercussions on their ability to collect later.
Posted by King of Men (Member # 6684) on :
quote:10.99% (the majority of them average about 8% probably).
Aaah! Aaah! Aaah! Get it off you, quick!
Please, please pay off these loans. That's getting on for credit-card rates. If human emotions were evolved for modern economies, you'd be feeling roughly the amount of panic about these things that you actually feel if a scorpion crawls over your foot. If you're saving 500 per month, you should be able to kill these fairly quickly, and it's a great investment; there's nothing else in the world that will give you an 11% guaranteed return. (Not even lending to suckers to pay for college; some of them default.)
If nothing else, refinance them. Get a bit more mortgage than you need, if you can, and use that extra; the difference between 11% and 3% is immense.
Posted by Lyrhawn (Member # 7039) on :
That's roughly my feeling. I COULD kill them off pretty quickly. Within a year and a half at most I bet.
Bet that sets me back on buying a house by several years, meaning a couple extra points of interest on a loan that dwarfs what I owe on these couple loans. Long term I lean toward getting the house first as.a better investment.
I'm not even sure how to go about refinancing a student loan. Given current rates I'm sure I could save a bundle, but who offers lower interest long term refinancing on student debt?
Posted by TomDavidson (Member # 124) on :
Note his last sentence. His suggestion there is the same as mine: try to roll those loans into your mortgage.
Posted by King of Men (Member # 6684) on :
Both Tom and I suggested the approach of bundling them with your mortgage. But aside from that, have you tried actually talking to a bank? For all either of us knows, they might offer some reasonably good rates on refinancing loans that have been serviced faithfully for years.
What are you putting your monthly savings into? I bet it doesn't return any 11%.
Have you considered Lending Club? If you qualify for their top credit rating they'll lend you money at six percent, which while not great is at any rate an improvement on eleven.
Posted by Lyrhawn (Member # 7039) on :
I'll look into the mortgage bundling thing for sure as an option. But I feel like that requires a certain specific set of circumstances, i.e. buying a house with equity already in it that the bank might allow me to tap into immediately.
I have not talked to a bank yet. Normally I deal with my credit union. They have good rates but don't offer any sort of student loan option. Only short term personal loans. So I'm not entirely sure where to start.
Posted by Lyrhawn (Member # 7039) on :
Took a look at Lending Club. They offered me two thirds of what I need to pay off my highest interest loans at 16.55%.
I'll have to shop around some more.
Posted by Orincoro (Member # 8854) on :
quote:Originally posted by Lyrhawn: There's a single loan of about $5,000 that's at 11%. There's another loan of about $6,500 at 10%. Those are the private loans I have. The rest are federal loans the majority of which are at 6.8%.
Bingo. Pay it off. If you don't have an investment that appreciates at over 11% a year (which a house won't, even a fictional future house), you are throwing good money after bad.
Posted by theamazeeaz (Member # 6970) on :
quote:Originally posted by dkw: If you receive money from a family member for a downpayment (or for anything that shows up on your bank statements in the 3-6 months before you take out a mortgage) the family member will have to sign a statement that the money is a gift and doesn't need to be paid back, or it will count against you on the mortgage application.
You need to be upfront with your lender about this. They will give a paper for all parties to sign, and may require proof of where the money came from (i.e. a bank statement from the person who gave it to you that shows the money leaving the account).
The reason this exists is that realtors/the mob could be putting money in your pocket so it looks like you can afford a place (and then demand it back, so then you can't pay your actual mortgage), but they get something out of the sale and you are in trouble.
The actual paperwork associated with a gift letter is super minimal. You just get in big trouble if you don't do it.
Also in this letter, YOUR FAMILY MEMBERS ARE NOT ALLOWED TO LEND YOU MONEY FOR A MORTGAGE AND THEY HAVE TO SIGN A STATEMENT SAYING THEY NEVER EXPECT TO SEE THAT MONEY BACK. Now, if you were to say give to your mother one day coincidentally the amount she contributed toward your downpayment, well the mortgage company might not know.
Because of this my parents were going to lend me money for a dp, and decided they genuinely didn't need it back, so it became a true gift.
[ July 18, 2015, 06:27 PM: Message edited by: theamazeeaz ]
Posted by theamazeeaz (Member # 6970) on :
You need to pay the highest interest loans, stat.
If your income supports it, there's nothing wrong with paying PMI, especially if you are facing an upward market. With 10% down, PMI is 2/3 as much as less than 10%, and if you have a less than 4% loan, it's like having a 4.5% loan. Not so bad.
A mortgage is a loan on your income. I would talk to a lender NOW, and get a loan preapproval before you get your raise, and only buy within your pre-raise limit.
I don't know a lot about Detroit (except you could get land/houses for very very little during the recession), but if it has a renaissance, the time to buy was yesterday.
[ July 18, 2015, 06:32 PM: Message edited by: theamazeeaz ]
Posted by Lyrhawn (Member # 7039) on :
quote:Originally posted by theamazeeaz: You need to pay the highest interest loans, stat.
If your income supports it, there's nothing wrong with paying PMI, especially if you are facing an upward market. With 10% down, PMI is 2/3 as much as less than 10%, and if you have a less than 4% loan, it's like having a 4.5% loan. Not so bad.
A mortgage is a loan on your income. I would talk to a lender NOW, and get a loan preapproval before you get your raise, and only buy within your pre-raise limit.
I don't know a lot about Detroit (except you could get land/houses for very very little during the recession), but if it has a renaissance, the time to buy was yesterday.
Depends entirely on the suburb. Detroit itself it's almost impossible to buy within the downtown/midtown area it's so expensive now. Between that and the property taxes I'd never be able to afford. But different suburbs are coming along at different rates. The city I grew up in is already back out of my price range, but some of the neighboring cities are still on the cusp of coming up.
If I pay off the highest interest loans, I'll have nothing for a downpayment, and I still wouldn't pay them off, most likely, until after my raise comes.
Orincoro -
I'm beginning to see the wisdom in that, but I wonder if the math holds true over the life of the loans considering the sums involved. If I bought a $150,000 house at 2% vs. 5% interest, you could say, well, it's only 3%, the much higher 11% should go first. But the 3% is on a loan that would literally be 30 times the amount of the 11% loan, on a 30 year span vs. a 10 year span.
Doesn't the math mean that the lower house interest rate is more important than paying off the higher relatively small amount of the 11% loan?
Posted by Lyrhawn (Member # 7039) on :
I would, however, be more than willing to aggressively attack the loans if it meant boosting my credit score enough to get me a better interest rate in the long run. That way I feel I'd be getting the best of both worlds.
How much does the amount of debt you carry (and what kind of debt) and the interest rates of those debts matter in figuring your credit score? If I spend the next year paying off $10k in 10% loans, does that get me a much higher credit score?
Posted by TomDavidson (Member # 124) on :
quote:If I bought a $150,000 house at 2%...
You won't. The best you could hope to get on a traditional mortgage, even with a 780+ credit score, is around 3.25% right now. I would expect that to be around 5% by the end of next year.
Posted by theamazeeaz (Member # 6970) on :
I have no idea how credit scores work. I'd been paying my bills on time for the better part of a decade and tried to never have my final bill over 50% of a single card if that month had heavy work reimbursements. The first time I'd heard my credit score was when my broker pulled it.
Lowering your credit score or having a higher downpayment won't bring you from 5% to 2%, it will bring you from 5% to 4.5%. Buying property before a neighborhood gentrifies will get you more money when you sell.
I went to excel and calculated the total cost of two loans: a $10k at 10%/year for 10 years and a 150k at 5%/year for 30 years. Including principal, you pay about $16k for the first loan and $290k for the second, assuming you'd never pay more than the minimum payment.
So, let's compare a 5% loan and a 10% loan in a different way. Every $100 you still have on the 5% loan costs you 42 cents THAT MONTH. Every $100 you have on the 10% loan costs you 83 cents THAT MONTH. You will have more of the loan units that cost you 42 cents, and they will be around longer, still costing you 42 cents a month, but it's better to make the 83 cent loan units go away first. It's also silly to hold out for a loan where your loan units cost 37 cents each (4.5% loan) if you are losing money renting.
When you have a loan, you have a monthly payment calculated magically by the -PMT function in excel. It stays the same over the life of the loan (barring refi). The amount you owe is multiplied by 1/12 the interest rate, and you pay that interest off *immediately*. Whatever is leftover in that monthly payment goes toward the principal.
Think of paying your loan like dealing with a big email inbox from the newest stuff onwards. Imagine every day you must get through today's emails, but you answer exactly 100 emails per day, so you get to some of the older ones too. The next day, you start over-- you got more new emails to deal with that morning, but there were fewer of them, so you manage to clear out even more of the old emails that you did yesterday.
Now imagine you still work the same way, but you have decided to answer 125 emails per day. Not only do you get to more of the old emails, you actually start receiving even fewer emails because answering those old emails meant you stopped getting up follow-up nags, or you got yourself off a mailing list.
Posted by GaalDornick (Member # 8880) on :
quote:Originally posted by TomDavidson:
quote:If I bought a $150,000 house at 2%...
You won't. The best you could hope to get on a traditional mortgage, even with a 780+ credit score, is around 3.25% right now. I would expect that to be around 5% by the end of next year.
How do you get a 3.25% rate? I'm trying to buy a home, I have a 790+ score, and I've spoken to mortgage consultants from 3 major banks and a mortgage broker and the lowest quote I got was 4.125%.
Posted by theamazeeaz (Member # 6970) on :
Also, remember aggressively attacking a loan doesn't mean taking every cent you currently have and sending it off to sallie mae. That's stupid. However, look at the email analogy, anything you can add to your monthly payment is useful because you have to get over that interest hump every month, just as if you looked at the new email first.
I would take a significant chunk of the $500/month and add it to the 10% loan, and put maybe $200 of it toward the downpayment fund.
Here's how I would allocate things (and what I'm personally doing to pay my mortgage early, because big loans are money pits):
Figure out your emergency fund/"money floor". I'm very liberal with my politics but conservative with my money, so this number for me is $10k. Even when I moved and spent a bunch of money at once, and went on multiple work trips with prolonged reimbursement, this was more than enough to cover everything. Next figure out how much per month you want to contribute toward the DP fund. It shouldn't be the whole $500/mo, and you might want to stick it into a separate account so you can keep track of it or not accidentally spend it. Or just raise your "money floor" if you have one big account. For me, instead of a down payment, this is the number I'm contributing to retirement investments, which grow at a much higher rate than I lose in mortgage interest-- between my IRA and work retirement plan, it's about 20% of my gross salary.
Now, whatever is left over above your money floor, pay toward the loan. If your balance is below your floor, stop paying extra toward the loan until it is back again, and maybe be extra frugal that month (but not in ways that cost you more money). Personally, I'm supremely lazy, don't set a budget for personal expenses, have irregular travel reimbursements, and buy things in bulk up front, so I figure that as long as my bank balance is hovering around my 10k "floor", the extra money I've been paying was a good enough guess, and I'll readjust in six months or so. This is the same as saying that you allocated 200/500 toward the downpayment fund, so you pay 300 extra to the loan. If you screw up or have unexpected expense, that's what your floor is for, and that's why it's high.
Posted by theamazeeaz (Member # 6970) on :
quote:Originally posted by GaalDornick:
quote:Originally posted by TomDavidson:
quote:If I bought a $150,000 house at 2%...
You won't. The best you could hope to get on a traditional mortgage, even with a 780+ credit score, is around 3.25% right now. I would expect that to be around 5% by the end of next year.
How do you get a 3.25% rate? I'm trying to buy a home, I have a 790+ score, and I've spoken to mortgage consultants from 3 major banks and a mortgage broker and the lowest quote I got was 4.125%.
Timing the market and luck. I had scores between 750 and 790 and got 3.875. When I called 4 months earlier, the same guy offered me 4.5
Posted by TomDavidson (Member # 124) on :
Gaal, most of it is in the timing. We locked down right before the last Fed announcement. It really helps to have a lender in your corner who's going to watch the market for you. I believe rates change in four hour increments during the business day; we told him to lock the instant he saw it hit 3.25, and he did.
Posted by theamazeeaz (Member # 6970) on :
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