Personal Financelopnik

"J. Walter Weatherman" (J-WalterWeatherman) 09/27/2013 at 17:53 • Filed to: None

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Personal finance question after the jump for all you money whizzes. Some sexy Mopar for the rest of you.

The current balance on my student loans is a bit over $50k, and they have an interest rate of around 5.5%. Mortgage rates are in the low 4% range right now, and the wife and I are thinking of refinancing our house. If it appraises where we think it will, we would have the opportunity to pull out $20-30k (while keeping the loan-to-value under 80%). While I would normally be very against pulling money out on a house refi, it seems to me that I could pull the money out from the mortgage and pay it straight to my student loans, thereby keeping my overall debt the same, but lowering the effective interest rate.

It seems like a no brainer to me, but I am worried that I might be missing something. Thoughts? Any of you with more of a math brain than me see any flaws in my reasoning?

jlmounce > J. Walter Weatherman 09/27/2013 at 17:59

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I'm not a financial consultant, but the theory is sound. So long as the increase in monthly outlay does not put you in a situation where you can't make your liabilities and still put some cash away for emergencies.

One thing to also keep in mind is loan term. If you've only got 10 years left on your student loan, but you're going to be putting 20-30K on your mortgage for 15 or 30 years, the interest rate savings may not offset how much longer you'll be paying the loan. In that case it might make more sense to simply add to what you're already paying on your student loan/s.

I'll see your Dodge and raise you my Pontiac! Cheers!

desertdog5051 > J. Walter Weatherman 09/27/2013 at 18:06

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The first place I would go is to a tax lawyer or something, Oh, I forgot, you are a lawyer. How about a CPA or good accountant. You never know what you can trust on the interweb. Just saying.

J. Walter Weatherman > jlmounce 09/27/2013 at 18:13

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Thank you, good sir! Good points about term and monthly payments - I should have added more detail in the first place:

(1) the home refi/student loan paydown will actually reduce my minimum monthly payments by about $100/month; and

(2) while the refi/paydown would technically extend the term of the debt if we only made minimum monthly payments, we plan on making more than the minimum monthly payments whether we refi or not, so, effectively, I don't think the term would be extended.

Also, it appears you are trapped behind the greywall. Is there a mod around that can give this man some author privileges?

Oh, and beautiful car!

J. Walter Weatherman > desertdog5051 09/27/2013 at 18:15

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Yeah, I do know some CPAs that I was going to ask, but I thought asking on here couldn't hurt too. Sometimes the CPA types will give you an answer that, while correct in the abstract, might have some downsides in reality. I thought that there may be some people on here with some practical experience that might see things from a different angle.

jlmounce > J. Walter Weatherman 09/27/2013 at 18:19

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I'd say crunch the numbers and do an amortization on each option. Choose the one that's the cheapest and pays down the debt the quickest. Of course factor in the amount extra you'll be putting towards principle as well.

Thanks for the compliment! 14 years and still working on it sadly. I should really be working on her instead of typing this reply!

Good luck!

deadpedal > J. Walter Weatherman 09/27/2013 at 18:38

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I largely concur with jlmounce.

But I see it as a bit more nuanced than straight mathematics. I think you are on a good path and have the right idea to be paying down aggressively. Keep that going. But I'm always cringy when I think of people mortgaging a car for 30 years or a credit card for the same. You effectively lien your law school debt against your house.

I get that it makes some sense and it simplifies things. And it's not the end of the world, but I would personally refi, not cash out, and split any extra funds to favor paying the school debt off ASAP.

You will be able to get a tax-time deduction of the mortgage interest, which will not happen with school debt. But that is, again, at the cost of stretching it back out and putting your home in the crosshairs.

Talk with someone and look at the options. There are other considerations depending on your tax details...

{not a professional, cash out to 90% LTV and bet on black}

chato > J. Walter Weatherman 09/27/2013 at 18:43

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one thing to consider is if you lump your student debt into the house, you are eliminating some flexibility to pull money out of the house for emergencies or further investment (think major repairs, medical expenses, the Plymouth GTX or your dreams, or even buying a second home, or investment property) and also potentially limiting your ability to refi in the future because of the overall loan-to-value ratio is now bumping up against the limit. This is especially risky if you live in an area with a volatile real estate market where a slight decline in values would eliminate your ability to refi in the future, even for rate/term. But making extra payments on a mortgage is one of the best tricks out there. One extra monthly payment a year towards principle will shorten your mortgage by about 7 years.

J. Walter Weatherman > deadpedal 09/27/2013 at 18:50

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I understand that. Basically, you are saying that, if I swap a shorter-term, but higher-interest loan for a lower-interest, but longer-term loan, I don't really come out ahead in the end because I spend more time paying interest, thereby negating the benefits of the lower rate. But as long as I have the self-control to be aggressively paying down debt (i.e., I am using the interest savings to make accelerated payments instead of blowing it on cars and whatnot) isn't that problem eliminated? The only risk in that situation is that I don't have the self-control to use the savings to retire additional debt (which is a problem that, at least currently, I don't seem to have).

J. Walter Weatherman > chato 09/27/2013 at 19:00

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Those are all good points. We do have a decent sized "emergency fund" though. And here in Tucson, the really volatile prices are in the suburbs, but in the middle of town right near the university where we live, prices have been pretty stable. I completely agree that making extra payments are the way to go, but shouldn't I be focusing those payments on the highest interest debt first (i.e., the student loans)?

deadpedal > J. Walter Weatherman 09/27/2013 at 19:03

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Yes.

And you get to claim that added mortgage interest at tax time.

In the event you are in a tight spot in the future, they can take your home. They'd can't take your degree/JD. It just gives you more options in my book. Your idea is sound on paper, I just see a couple extra wrinkles that would make me think twice.

As much of an asshole I feel like saying this though...it's only 20-30K. In the grand scheme of hundreds of Ks and decades, it's laughably minor.

Good on you for parsing out the whole deal. I'm appalled with the general "fuck it" attitude most folks have towards these things.

Lets Just Drive > J. Walter Weatherman 09/27/2013 at 19:09

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I read this and thought, "How am I an adult, how have I made it this far in life, how did I make it through school and yet feel so dumb?"

This, this right here, is why I think we need to add a fourth "R" to the three we teach in school and that's; "Riches" because so many kids are coming out of school without any comprehension or understanding of the financial world they're being swept up in. Sure, you can calculate the area of a square but can you calculate how much that credit card they're offering you, at 18 years old, is going to cost you ten years down the road if you don't get-the-fuck-smart?

Anyway, no help. Just a rant.

Good luck.

(I thank the Gods my Wife is the money wizard!)

J. Walter Weatherman > deadpedal 09/27/2013 at 19:13

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In the event you are in a tight spot in the future, they can take your home. They'd can't take your degree/JD.

Yeah, this is honestly my biggest hangup. The mitigating factors, however, are (1) my mortgage is still really cheap - we bought well under what "conventional wisdom" said we could afford, so things would have to get really bad for us to get in trouble on the mortgage; and (2) although they could take our house for a default on the mortgage, that is a debt that we could actually get away from if things got really bad, but a student loan is forever - there is no escaping it, and it is not dischargeable in bankruptcy (again this is really worst case scenario ).

deadpedal > J. Walter Weatherman 09/27/2013 at 19:19

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Yep. I'm with you on all of that. We're really into the true affordable lifestyle. Again, it's about having more options.

I'm of two minds about debt being dischargable. It's a sticky wicket.

More than anything, the fact that you're concerned about all of this and the moving parts is really important. Whichever way you go will work out. Even if you spend 12K plus or minus on the debts. I would be lobbying very hard if you had a six digit school loan with anything less that your MD.

I love this crap, sorry.

chato > J. Walter Weatherman 09/27/2013 at 20:43

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totally, in general, pay higher interest debt first, but with long terms like a mortgage, amortization begins to matter more and more, especially with such a small point spread of 1.5%. if you just made extra principle payments towards the student loan, you could make it go away completely, long before you mortgage is paid, without increasing the principle on the house. hard to call without actually crunching the numbers.