My math skills aren’t amazing and I’m not sure how I would figure this out anyway, so maybe someone can help me. This is a real life question. We have about 60 or so thousand dollars in private student loans and then maybe 10 in federal loans. If you’re not familiar with private student loans, skip to the bottom and I’ll explain them. The rate for the student loans is currently about 9%.
We are selling our house and if we sell the house for the amount that we paid (we’ll probably get a little more), we will net about 35,000 after commissions. We’re planning on buying a small fixer upper for 75-100,000 and getting a 10 year mortgage. Mortgage rates look like they’re about 4 or so percent. I was planning on getting the 10 yr mortgage, paying it off in about 4 years and then taking out a home equity loan and paying them off. My dad said that I should either put down less and pay down the student loans even though it doesn’t pay them off or take out equity as I go and pay them down.
My hesitation to do this is that my payment on the student loans won’t go down just because I owe less, but with a HEL, I will be paying more for the time being (mtg + HEL+ student loans at the same time). It’s still doable, but I’d rather not be paying more than I have to.
So my question is this:
if I pay down as I go, will my student loans skip ahead so that I’m paying a higher percentage of my payment to the principle than interest? Or is the percentage of principle vs. interest determined by time rather than how much you owe?
What do you think the best strategy for paying off these loans quickly and for the least amount of money?
*************************************
Private student loans: they were offered for a short time while lenders were lending money like crazy and they’re not federal loans, so they don’t have the low interest rates. The interest rates on private student loans are variable, currently at about 9%, but it’s been as high as 11.5%. No one is offering them anymore so you can’t refinance them, lock in a rate, file for bankruptcy, or in any way alter the loan terms. No matter what, the loans will be at that rate and you can’t get rid of them. If our credit scores go down or we don’t pay on time or whatever, the rates can go up to whatever they want. So as you can imagine we are dying to pay these off and get them out of our lives.
“The value of the “fixer upper” is based on the market. Planning to take a heloc to pay off the student loans is not necessarily a workable idea.”
thanks. The market here is extremely stable, so I wouldn’t expect for the house to gain equity through fixes (although it probably would). The equity would come through buying a cheap house and paying it off cheaper. The logic is that fixers are cheaper and thus easier to pay off. If I sell it later, It will be worth the same or a little more than I paid for it. I’m not expecting to make a profit on the house, just pay it down and then use what I’ve paid off as equity. The market won’t go up, but it also won’t go down either. (most likely)
“Have you talked to a banker to determine if there is a different type of loan that you could use”
I haven’t. I should do that although I’m doubtful. That’s a lot of money and I can’t imagine having that much borrowing power. Hmm…maybe, I’ll look into it. I don’t have many assets outside of the home equity.
“This provides you cash to pay off student loan faster and allows for interest deduction for longer period of time”
So take out a second mortgage to pay off the student loans? I’m actually not sure that the interest will be high enough to be tax deductible. The houses we would buy are less than 100K, so the payments would be very low.
Jeff
