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Pay down mortgage or pay off student loans--?

Posted by demeron (My Page) on
Sun, Mar 18, 07 at 15:39

DH and I planned to use the proceeds from the sale of our old house to get to 20% equity on our new house. Alas, things did not go as smoothly as hoped and if we used all the proceeds we'd only have about 15% equity (drat!) We could get a home equity second, but that doesn't seem to save any money (unless I'm figuring it wrong). If we put the ten percent we have down we will save about $300/month on the mortgage vs $550 a month if we pay off two student loans. This will leave us with about $1500/$2K a month after necessities are paid for other goals. We are hovering around the phase outs so we don't get any significant tax advantages with the student loans. They are also at a higher rate than the mortgage, although they are insured against death/disability. My questions are:

1. Is disability insurance for mortgages available? Is it very expensive?

2. Is there something I'm missing?

Appreciate the help! Thanks!


Follow-Up Postings:

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RE: Pay down mortgage or pay off student loans--?

Hi demeron,

My questions are:
1. Is disability insurance for mortgages available? Is it very expensive?

Yes, it's known as "mortgage decreasing term" and you can get it from the same agents that you have your regular life insurance with. It's not necessarily too expensive (it is bascially regular term, but for only the amount of the mortgage as a death benefit, and reducing benefits as the mortgage is paid down, so the subsequent periodic premiums are reducing also.)

2. Is there something I'm missing?

I'd recommend laying out all of your debts, along with all their various interest costs, and cash-flow consumption (the amount of principal you are required to return each month.) If you know how, calculate your family "average cost of funds" (the weighted average of your interest costs,) and your family negative equity cashflow (the total of the demanded returns of principal.)

THEN, look at your new financing options in light of the above spreadsheet. You can plug in various "what if" scenarios to see which way reduces your total family interesst (cost of funds,) and increases your family equity control (more cash from your paychecks available to go toward retirement investments.)

This is a good full-afternoon exercise... but really, in my opinion, the only way to truly get a full grip around your family financial funds balance sheet. It's good to review this at least twice a year... every quarter is better (along with your current credit reports to check against identity fraud and credit theft.)

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

PS.... ughhh... just re-read this post... and I acknowledge it looks kinda complicated. If it seems too much, take it all slowly, and ask any questions you need to here.


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RE: Pay down mortgage or pay off student loans--?

Thank you for trying! I have to chuckle as it is indeed a bit of a brain-buster for me. I got to "weighted average of interest costs" and decided to go with my gut :)

I see what you're getting at and we have tried to give it a stab, but when you figure in the tax stuff it starts to get beyond me. Our debt consists of the mortgage and three student loans, and having the opportunity to knock out two of them is tempting. It seems to me that a tax-advantaged mortgage loan at 6 percent beats a no-breaks student loan at 7 percent, which is about as far as my poor brain can take it.


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RE: Pay down mortgage or pay off student loans--?

Hi demeron,

It seems to me that a tax-advantaged mortgage loan at 6 percent beats a no-breaks student loan at 7 percent, which is about as far as my poor brain can take it.

Yup... that's very simple, and accurate enough.

Cool!
Dave Donhoff
Strategic Equity & Mortgage Planner


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RE: Pay down mortgage or pay off student loans--?

You can get either death or disability insurance on your mortgage, or both. There's about four times the possibility of disability for an extended period that there is of death ... and, while a funeral is expensive, dead people don't eat, but disabled people do ... and may need medical/rehabilitative costs, as well.

Some prefer to buy a term policy for one or both, themselves, for if the bank sets it up, they are the payee, not the person(s) purchasing the home, whle if the homeowner purchases it, they are the payee and it will be their responsibility to pay the lender. Some prefer to have coverage at a specific level throughout, rather than the decreasing value as the principal gets paid off, as usually there is little difference in premium, and as the debt is reduced through regular payment down of principal, there is some extra available to support the family in a difficult time.

When paying student loan, usually one knows what portion of the payent goes for interest and which goes to pay down principal owing.

But the level of mortgage payment remains level throughout, which means that in the early days of the loan, when the balance owing is high, the amount that goes to interest each year must be high, meaning that little of each payment goes to pay off principal.

Many people pay little attention to the amount of principal that is paid off annually through the first few years, though many of them received a schedule showing what the ratios were at the time of each payment, throughout. They are greatly surprised when they find out how little of the principal has actually been paid, at the end of each year. They are suprised to learn that, in those early years, if they made an additional payment of an amount equal to one of the month's payment, designating it as to reduce principal only, it would reduce the balance owing by a larger amount than did all of the other 12 monthly payments.

With student loans, the amount allocated to principal and to interest is more easily identifiable, I think.

Good wishes.

ole joyful


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RE: Pay down mortgage or pay off student loans--?

Most people who are below 20% in equity on their mortgage have to pay PMI insurance, basically insuring the mortgage in the event of death. This is usually more expesnisve the a similar term policy and only covers the mortgage. This is the reason most people want to be above a certain amount of mortgage equity, otherwise it does not matter. Although I agree with Olejoyful, there are benefits to paying down your mortgage in the early years. However it does not have to be some large amount, it can be an extra 100 a month too, whenever you have it. Just make sure to designate it as additional principle. I started doing this and my 30 year mortgage is down to about 19 years

If you have PMI insurance because of the low equity that should go into the calculation too. If not, then rather than getting insurance specific to the mortgage, what about a nice regular term policy that the survivor can use for whatever they see fit at the time. Same thing with a disability policy, you should have one anyway in addition to whatever you may have through your job, if anything


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RE: Pay down mortgage or pay off student loans--?

Thanks, guys! Even after figuring PMI, it looks like we'd save more at least monthly by paying off the student loans. DH works in rehab and is very conscious of disability-- he's the only 42 yo I know with long term care insurance, hehe. We joke that he will visit me from his luxury nursing facility when I'm in the county home. My thought was to save chunks of several thousand and then apply them all at once to the mortgage. DH does have short and long term disability, we both have term life insurance and will for some time. I will check with our insurer to see if they offer life or disability on the mortgage.


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RE: Pay down mortgage or pay off student loans--?

Update: we decided to pay off the larger student loan and keep the smaller amount for our e-fund for a while. The plan is to pay off extra from our income to the student loan-- I decided with the bigger mortgage I like the idea of having a little more cash on hand.


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RE: Pay down mortgage or pay off student loans--?

I still think it may be worth sending in the extra odd 50 or 100, it does add up


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RE: Pay down mortgage or pay off student loans--?

Yes, I think that's good advice. I was talking to DH about the biweekly mortgage-- supposedly an extra payment a year to principal, well worth doing.


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RE: Pay down mortgage or pay off student loans--?

Demeron,
If you can afford the equivalent of an extra payment per year, you'll get far more mileage & eliminate your debt faster if you send it to compounding-growth investments than if you bury in non-growing real estate equity.

Every extra dollar you can send to your "net worth" is beneficial... just be cautious to send it where it benefits you best and keeps you safest.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner


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