Financial advice

[sti_lin]

I am posting this on the assumption that there are smart people in here and perhaps a few with money management background.

Anyways my question is in regards to prioritizing what debt to pay off and what debt to let roll. I have no credit card debt or car payements.
I do have:
Primary residense- owe $200,000, current apr is 3.625%, 25 yrs left on loan
Investment property- owe $220,000, house is worth $140,000 with an apr of 5.75%, 22 years left on loan
Student loan debt- $30,000 with an apr of 2.9%, 25 yrs left on loan
Currently I have $11,000 in the bank which I am using to pay off my wife's masters program she is currently enrolled in. By her December graduation the total program cost will be $15,000.
I do have savings of $3500 for emergencies. I invest $200 per month into my defered compensation account to add onto my state CALPERS defined benefit and my wife's STIRS. I also set aside $400 per month for my 2 children's college savings.
I am 32 years old and our household income is $105,000. So, what should I be doing with any savings after I am done paying for wife's master's? Pay off student loans or investment property or primary residence or invest more into defered comp?

 

[Architect]

These kinds of calculations are so dependent on the variables and assumptions you use in making them as to be generally useless.

My recommendation, it comes down to your personal preference. Pay off the loans that bug you the most.

Comment on the investment property, since you owe more than its worth it doesn't sound like much of an investment, you might reconsider that.

 

[ProxyAmenRa]

That is quite an amount of debt for such an income.

I would say deleverage but I am not qualified to give advice. ^_^

 

[Ex-User (5841)]

I am posting this on the assumption that there are smart people in here and perhaps a few with money management background.

Anyways my question is in regards to prioritizing what debt to pay off and what debt to let roll. I have no credit card debt or car payements.
I do have:
Primary residense- owe $200,000, current apr is 3.625%, 25 yrs left on loan
Investment property- owe $220,000, house is worth $140,000 with an apr of 5.75%, 22 years left on loan
Student loan debt- $30,000 with an apr of 2.9%, 25 yrs left on loan
Currently I have $11,000 in the bank which I am using to pay off my wife's masters program she is currently enrolled in. By her December graduation the total program cost will be $15,000.
I do have savings of $3500 for emergencies. I invest $200 per month into my defered compensation account to add onto my state CALPERS defined benefit and my wife's STIRS. I also set aside $400 per month for my 2 children's college savings.
I am 32 years old and our household income is $105,000. So, what should I be doing with any savings after I am done paying for wife's master's? Pay off student loans or investment property or primary residence or invest more into defered comp?

I have no formal money management background, but I gross 1/4 of your household income yet save nearly half of it, so this is my view at least...

What are the interest rates in the deferred comp account and college savings accounts, are they more than the 5.75% that is charged to the investment property loan, how long until the kids are in college, and do you sincerely believe that you are fully responsible for your children's college education as opposed to them working their way through and/or receiving partial financial support from you? (My personal preference would be to reimburse college costs after graduation with certain GPA and experience requirements depending on their chosen field, but hey, that's just me, and I'm childless as of now).

If the accrued interest rate is higher in the deferred comp, your money goes there. If you're dead set on giving the kids a free ride and the interest rate is higher than the 5.75%, put it there because if you're committed to the free ride, then it's going to cost you less in the long run.

Otherwise you should pay off the investment property first, followed by the primary residence and student loans.

You should also consider investing in something with higher returns or performing some sort of entrepreneurial act with less turnover time than say, trying to sell a random extra house if the shit hits the fan. At the very least shoot for an apartment complex if you're going for the super long haul, and for entrepreneurial ideas, you're in the right forum.

And of course it goes without saying that you should cut costs/utilities/food/etc when possible.

 

[dala]

As a general rule, you want to pay off your highest interest loans first. The reason for this is that, dollar for dollar, you are paying more to carry that loan than the others, and the quicker you pay it down the more money is going toward your principal.

For this reason, I would prioritize your payments as investment property > primary residence > student loan debt, assuming you have some flexibility in your payment schedule. I would also consider refinancing the investment property at a lower rate (if that is possible considering it is underwater) or, if you have a reasonable amount of equity in your primary residence, taking out a home equity line of credit and applying it to the higher-interest mortgage. a $50,000 HELOC at 3%, applied directly to the investment property principal, would save you around $1400 on interest in the next year alone.

As for whether to pay down debt or invest, I would recommend paying down debt in this case. The reason for this is that your 'return' on debt repayment is a guaranteed 5.75%. The market's risk free rate is nowhere near that.

 

[sti_lin]

Thanks for the feedback dala and doctor.

Architect the investment property I am stuck in unless I want to foreclose which is not something I am considering.

I guess the bulk of my uncertainty had to do with the market and thus paying off debt would seem to be the superior idea to investing.

I can't refi the investment property because of negative equity. Additionally my primary is close to 100% loan to value so can't get money from there. So I guess I will focus on the investment property but that's a hard pill to swallow considering it feels like I am dumping a bunch of money into that it's not worth. QQ

 

[EditorOne]

Whether the investment property is temporarily or permanently "under water" is a question worth exploring. If it's just a momentary victim of the recession, grind it out. If it is in a neighborhood with houses vacant, vandalized and nobody left there except people too old or too poor to escape, maybe walk away.

I think I read somewhere that one mortgage in four is under water right now, but most of them are going to be OK in the long run. The people who got killed financially are the ones who expected a flip to happen fast.

I agree with the advice to simply pay off the most expensive debt first. And be flexible. It sounds like you are pretty disciplined with money, but sometimes a month comes along when the dishwasher breaks, the transmission needs replacing and somebody throws a baseball through a window. That's the month you make minimum payment on something instead of "paying it down."

 

[MissQuote]

I think you should just send me your money. I'll take care of it.

 

[BigApplePi]

Without thinking, pay off the highest interest rate first as has been said. Walk away from the property? I've heard of that but don't know how to do it. First try googling that. Is your tax interest deduction worth anything? Probably doesn't matter. Pay off even more of that property loan in advance if you can. Look up the walk away.

 

[EditorOne]

We had a lot of walkaways here in northeast Pennsylvania even before the 2008 recession, much of it due to real estate fraud and some of it due to idiocy. A lot of first-time home buyers bought property that had its value inflated by phoney appraisals. Other manipulation produced a situation in which a homeowner found out what his real payments were going to be -- back payments on deliberately unpaid taxes by the corrupt lender, etc., -- exactly when the waiting period for Fannie Mae to buy the mortgage from the corrupt lender ran out. I think it was 16 months. Anyway, a lot of people found out they couldn't pay their mortgage after all, and thought "well, we'll just sell." But when they put it on the market, it turned out to really be worthy about 60 percent of what they paid.

They walked away, most going back to their pre-existing family and social support network in the greater NYC area. It will wreck their credit for awhile, especially if they walked away after it became harder to discharge debt through bankruptcy.

Whether the OP walks away also depends on how much equity he/she has in the property, too.

The biggest tax deduction for most folks is on interest paid on the home mortgage. I'm not sure how it works for an investment property. Interesting question. Perhaps the entire mortgage payment becomes a business expense if you handle it properly?

I've never had to worry about much more than not exhausting the bank account while at the grocery store. :-) Journalists take a vow of poverty just like some priests. Not so much on the celibacy thing, though.

 

[Architect]

Whether the investment property is temporarily or permanently "under water" is a question worth exploring. If it's just a momentary victim of the recession, grind it out. If it is in a neighborhood with houses vacant, vandalized and nobody left there except people too old or too poor to escape, maybe walk away.

I think I read somewhere that one mortgage in four is under water right now, but most of them are going to be OK in the long run. The people who got killed financially are the ones who expected a flip to happen fast.

The question then is; what do you mean by "the long run"?

If you study historical bubbles and financial crisis you might notice that the long run can be long indeed. Here's a simple one, think of the dot.com bubble. How many dot.com companies have even reached their 2000 peaks after 12 years?

Then, pondering further, you might consider what the price of houses is long term. You know that houses don't follow the same curves that say, a stock or a bond do? Stocks and bonds are ultimately based on human labor, and one one way or another follow GDP growth. What is a house? A bunch of dirt with some stuff on it. It doesn't create anything. Anyhow, we have house data going back thousands of years (what do you think those Sumerian bureaucrats wrote in cuneiform, not poetry surely?), but the last 500 will suffice, I have a study that goes this going back to old Europe. Or even more pedestrian, 150 years of U.S. housing data. Guess what? Houses have appreciated, when corrected for inflation and size, about 0.1% at best. In the 20th century, until The Great Housing Bubble, they've been perfectly flat, having been undervalued prior to WWII and overvalued after (demographic effect).

Frankly we won't see these prices again in our investing lifetimes, the data is perfectly clear on this.

PS. I might add, that in 2000 years of financial crisis, not once has the market involved not gone below 'true' value, and not once has it not taken a long, long time for the market to remotely approach anything approaching 'normal'. Scarred investors might have something to do with it, as it does seem to skip a generation.

There's a lot of research on this topic that is worth reading.

 

[Amagi82]

 

[EditorOne]

It does depend, architect. I think it's possible to look at local growth trends and make a sensible prediction what might happen to property values in a given place over a ten-year period. My experience is colored by living in growth areas much of my life; in 1972 when I was a virtual kid I bought a 100-year-old fixer upper home for $12,300, and when my wife and I amicably divorced 16 years later it was appraised, renovated and with one additional bedroom but one less bathroom, at $98,500. More recently, my second wife and I bought a home on Main Street in a small Poconos town for $77,500; nine years later, when condemned for a school expansion project, it brought us $190,000. On the other hand property in Newark, NJ, and Camden NJ, although physically sound and architecturally attractive, annually depreciates in value simply because no one will buy it. Even so, every now and then a neighborhood in such a town catches fire economically and people start buying and rehabbing like crazy. Right now one of the hottest markets is small towns not ridiculously far from metro centers; main streets that had half their stores closed only ten years ago are filled up, urban residential neighborhoods around them are seeing old Victorians renewed and Craftsmen houses in bad repair the subject of bidding wars, etc. The changing fads of what's "hip" affect real estate just like fashion. So the original poster, I'd say, needs to try to do some estimation of trends liable to have an effect on his/her property over the next ten years. It's one of the times when details and specifics need to be parsed out.

 

[EditorOne]

Addendum to original poster:
Check your state college system for interesting and moneysaving savings program. Pennsylvania, for instance, has a system in which money saved now buys as many credits in the future as it did at the time the savings were deposited. If tuition in 2012 is $400 per credit hour, just to pick a number, and you save $1200 in 2012, that $1200 will buy you three credit hours in 2024 even if the cost in 2024 is $900 per credit hour.

 

[sti_lin]

Addendum to original poster:
Check your state college system for interesting and moneysaving savings program. Pennsylvania, for instance, has a system in which money saved now buys as many credits in the future as it did at the time the savings were deposited. If tuition in 2012 is $400 per credit hour, just to pick a number, and you save $1200 in 2012, that $1200 will buy you three credit hours in 2024 even if the cost in 2024 is $900 per credit hour.

Wow that is great I will have to look into that. I want my girls to appreciate the value of money but I also would like them to not have huge student loan debt upon graduation someday

 

[Architect]

It does depend, architect. I think it's possible to look at local growth trends and make a sensible prediction what might happen to property values in a given place over a ten-year period.

Sure, and it's possible to completely screw that up. How many local RE agents do I know who utterly failed to see the local crash? This is a tony town in Calfornia, prop values never go down ... I don't need to go further then the house I'm renting, after we sold our house 3 months before the peak in 2005. The prior occupant was an agent who went bankrupt playing RE.

My point still stands, unless you buy property specifically for investment, the place you you live in is an expense, not an investment! You may get lucky - as we did - or unlucky as many are now and lose your shirt. Look at the total cost of ownership, I'm not aware that a bond or stock requires yearly ownership tax, upkeep, or can get flattened by an earthquake.