New here. I am hoping some of you can help provide clarity to my situation.
I currently own two homes. One is a rental with about 40K in equity. The other is our residence with 75K equity. I am in my early 30s. My wife has about 75K in student debt. My question is simple... If we sell our primary house, is it better to pay off the student debt or put a nice downpayment on the next house?
I have been leaning towards paying off the student debt, primarily for tax purposes. The student debt only lets me write off a very small amount of interest but the house would let me write off basically all interest. Also, paying the student debt would free up about 500-600 per month.
Now, there is a wrinkle here of course. There is a possibility that about half of this debt could be forgiven after 10 years under PSLF. But that is way up in the air with the new administration.
I struggled with student loan debt for about 20 years. I was on the income based repayment program for years at $720/month and they were earning more interest than what I was paying down. It ballooned to $113,000.
Pay off the student loan debt
Here's the thing - the student loan debt is not forgivable in bankruptcy and if/when times get hard, the first thing most folks do (like myself) is request a deferment, forbearance, or take some community college courses at night when those two aren't available. I have been there. I have done that. It will haunt you.
Being on a plan that promises forgiveness is also no guarantee. I thought I was all set with loan forgiveness based on the original loan origination date, but then I learned that because I consolidated loans a few years after graduating to take advantage of lower rates, the clock restarted.
I also learned that the "income based" repayment program is a scam. They advertise you can use your 1040 "adjusted gross" income or if it "isn't representative", you can use your W-2 income. That works well if you consistently have a job and don't get paid a severance after getting laid off. I got laid off...and was paid a 9 month severance which inflated my 1040 adjusted gross income. I tried to adjust the following year to my W-2 income...they look at gross wages on your W-2, not net (net of 401(k), net of before tax health insurance, etc.) which is what your 1040 adjusted gross income is based on it. I appealed it...and I lost.
I was in this same state. credit card debt or just saving. and I was told to get rid of all debt and start from scratch. one less thing to worry about .
Pay off student debt. Then go invest. This topic has been asked a 100 times on here. Pay off debt In this order: credit card debt, student debt, car debt, real estate debt.
@Arthur Means Historically, the financial point at which the PSLF makes sense, versus paying it off, is $60k in loans or more. When i signed up for it in 2011, their website said as much. A friend of mine had $60k in student loans and he did the math and it would have been a wash. So, PSLF shouldn’t drive your decision. That said, with $75k you’d need to make about 9% cash return each year to cover your student loans. Is that right? Depending on how you invest that money, I think that’s doable. I say buy an asset that will give you a return that covers the student loan. Once the loan is paid off, you still have the asset.
Why not refi you current home to pull out the equity to house hack your new home, then pay off any student debt with the remaining amount and a portion of the rental cash flow each month.
Why not refi you current home to pull out the equity to house hack your new home, then pay off any student debt with the remaining amount and a portion of the rental cash flow each month.
We are getting way of topic here guys... That, or I am super dense. Everyone is talking about "Investing" and "Rental property". I am talking about selling my primary home for a profit. If my new home is 250K, the question is, do I put 75K down on the new mortgage and finance 175K, or pay off the student debt and finance 250K.
Why not refi you current home to pull out the equity to house hack your new home, then pay off any student debt with the remaining amount and a portion of the rental cash flow each month.
We are getting way of topic here guys... That, or I am super dense. Everyone is talking about "Investing" and "Rental property". I am talking about selling my primary home for a profit. If my new home is 250K, the question is, do I put 75K down on the new mortgage and finance 175K, or pay off the student debt and finance 250K.
Thanks again for all of your replies
Arthur, investing IS the topic.
The question was why are you considering selling your current home when you could build wealth by converting it to a rental? Your new home at $250K would only required $12,500 down (5% down owner occupied). Then you could take the remainder and pay off a majority of the student debt. What little is left could be paid back through cash flow on the property.
Sure, you can sell your house. And sure you can take that money to pay off bad debt. However, it wouldn't necessarily be the best investment strategy to take an asset off the table in order to settle bad debt. If you can swing it, converting the house into a rental would provide you a long term investment. Does that make sense?
Why not refi you current home to pull out the equity to house hack your new home, then pay off any student debt with the remaining amount and a portion of the rental cash flow each month.
We are getting way of topic here guys... That, or I am super dense. Everyone is talking about "Investing" and "Rental property". I am talking about selling my primary home for a profit. If my new home is 250K, the question is, do I put 75K down on the new mortgage and finance 175K, or pay off the student debt and finance 250K.
Thanks again for all of your replies
Arthur, investing IS the topic.
The question was why are you considering selling your current home when you could build wealth by converting it to a rental? Your new home at $250K would only required $12,500 down (5% down owner occupied). Then you could take the remainder and pay off a majority of the student debt. What little is left could be paid back through cash flow on the property.
Sure, you can sell your house. And sure you can take that money to pay off bad debt. However, it wouldn't necessarily be the best investment strategy to take an asset off the table in order to settle bad debt. If you can swing it, converting the house into a rental would provide you a long term investment. Does that make sense?
Okay, okay. I'm with you now. First let me say that this reply is from my phone. So forgive me if I'm a little short. Secondly, let me think all of you for being patient with me, I'm clearly new :-)
So here is some more background on my situation. My current rental house used to be my primary house. I bought it for $85,000, I lived there for about 5 years and then we turned it into a rental. It has been a rental for about 3 years with a positive cash flow. The mortgage on that property is about 695, All In. I only charge $800 a month, but for the area, that is not bad. Perhaps I should charge more, however the tenants are responsible for all of the maintenance.
Here's where it gets interesting. The house that I am considering selling is a very large house. It is 5 bedrooms, five bathrooms, and about 3200 square feet and a very desirable location.
That square footage does not include the full basement that is underneath. If it were finished out, the house would be close to 5000 square feet. We bought this house incredibly cheap, I paid $145,000 as a short sale, and the mortgage and taxes are less than $1,300 a month. I do think it is possible to make a lot of money on this particular rental, as long as I could find someone willing to pay 2500 to $3,000 a month. Do people really pay that much for rent? Again thank you all for your reply
They absolutely do. I have an investor client who was looking at a wholesale deal where there was a previous Tenant who was paying $5K per month in rent.
So, it does happen. It all depends on the market rental rate, the size of the house and the demand for rentals of that size in your area. People will pay for what they want. If they want a big house, they will pay for it.
I struggled with student loan debt for about 20 years. I was on the income based repayment program for years at $720/month and they were earning more interest than what I was paying down. It ballooned to $113,000.
Pay off the student loan debt
Here's the thing - the student loan debt is not forgivable in bankruptcy and if/when times get hard, the first thing most folks do (like myself) is request a deferment, forbearance, or take some community college courses at night when those two aren't available. I have been there. I have done that. It will haunt you.
Being on a plan that promises forgiveness is also no guarantee. I thought I was all set with loan forgiveness based on the original loan origination date, but then I learned that because I consolidated loans a few years after graduating to take advantage of lower rates, the clock restarted.
I also learned that the "income based" repayment program is a scam. They advertise you can use your 1040 "adjusted gross" income or if it "isn't representative", you can use your W-2 income. That works well if you consistently have a job and don't get paid a severance after getting laid off. I got laid off...and was paid a 9 month severance which inflated my 1040 adjusted gross income. I tried to adjust the following year to my W-2 income...they look at gross wages on your W-2, not net (net of 401(k), net of before tax health insurance, etc.) which is what your 1040 adjusted gross income is based on it. I appealed it...and I lost.
Same situation. Graduated 2016, I have $90k student debt. Living below our means is key. We are living off of my husband's income, then I'm dumping my entire income to student loan. Will have it paid off by the end of 2019. Doing this has saved over $40k that would have gone straight to interest.
Side note: we kept 10k as buffer for emergency funds for both us and our current rentals. Only time it would change is if we came across an amazing deal that would have greater cashflow than the interest lost on the loan.