Pay more towards home loan or invest?

[Goldy]

Hi Guys and Gals,

I recently refinanced our house and now need to figure out whether I toss some extra money at the loan or whether I start investing in something other than the 401k and Roth. Here are the details.

27/28
175k income
Home Loan: 255k @2.5% 5/1 arm
Student Loan: 11k @2% (adjustable up to 6%)
Car loan: 8k @ 0.0%

401k contribution for wife and I are both maxed as are the ROTH IRA contributions.

401k (combined): 150k
Roth (combined): 70k
Misc stocks: 25k
Misc Funds: 23k
Bonds: 15k
EF fund: 20k

We also recently switched banks to Ally so we are now gaining .84% interest on our EF which is mindblowing for us since Wells Fargo was .05%.

Given all this info, would you say that we are invested enough and we should start attacking the home loan? Alternativly, the interest on the HL is deductable whereas the interest on the SL is not due to our income level so maybe it would be best to start paying that off.

Thanks!!

[kv968]

At a quick glance everything looks to be good but I'm just wondering why you got an ARM instead of a fixed? Rates are most likely going to be substantially higher in 5 years.

Also, when is the student loan adjustable up to 6%?

[Goldy]

My understanding is that the SL is free floating and can adjust at any time based on the current market conditions.

The reason we picked the arm is that we might very well move within 7 years due to work so paying the extra 200 bucks in interest for the peace of mind that a fixed rate gives is not worth it. We are keeping the same payments from our 3.625% arm so we are paying an extra 200 bucks towards the principle each month. Also, the rate is capped at 7.5% so I see very little downside to this loan. Even if the loan jumps to the max after 5 years the payment is still reasonable.

[jpg7n16]

Given everything you said above, it's likely that investing is a better option. As long as you are investing mid-long term.

Investing is pretty risky year by year, but historically, the longer you stay invested, the lower the risk. For stocks, no 30 year period in history has ever returned below 5%/year with the average being 9.4%/year. I'd expect to plan long term based on 7-11% returns.

So when you look at it on a per dollar basis, would you rather save 2 cents guaranteed? Or take the risk and try for 7-11 cents?

[dczech09]

I am going to disagree with jpg. Since you are maxing both the 401k and Roth, I would just continue maxing those. Put any extra money above that towards the debts.

I would knock out the car loan and student loans first (while making minimums on the mortgage) just because you can knock those out very quickly with your income. I understand the car loan is 0%, but at least you will free up that cash flow.

The student loan is variable which I am not too concerned with. Student loans are usually variable with LIBOR and have a cap rate.

Once you knock out the car and student loans, kill the mortgage. If you do this while maxing your retirement accounts, you will be rocking!

I make this recommendation because your only other options for investing would be HSA, variable annuities, or taxable brokerage accounts. You are already killing it by maxing the 401k and the Roth so keep it up!

[kv968]

Since you may "very well move within 7 years", I think you'd be better off saving/investing the money or paying off more of the student loan. Or you can do a little of both and split it. One month add to savings/investing and one month add more to the SL. I just wouldn't put too much toward principle if you think you might be leaving. Especially since you're already putting an extra $200/month already. Put the extra money towards your next downpayment.

[jpg7n16]

I am going to disagree with jpg. Since you are maxing both the 401k and Roth, I would just continue maxing those. Put any extra money above that towards the debts.

I would knock out the car loan and student loans first (while making minimums on the mortgage) just because you can knock those out very quickly with your income. I understand the car loan is 0%, but at least you will free up that cash flow.

OP is able to max out both the 401ks and Roth IRAs, and has a 20k EF with other investments besides. I don't think cash flow is a problem.

And you think it would be better to pay off a debt that charges you nothing rather than trying to earn something on investments? You could put the extra money in a CD and earn a spread with no risk at all. Something is better than nothing.

The student loan is variable which I am not too concerned with. Student loans are usually variable with LIBOR and have a cap rate.

Once you knock out the car and student loans, kill the mortgage. If you do this while maxing your retirement accounts, you will be rocking!

I make this recommendation because your only other options for investing would be HSA, variable annuities, or taxable brokerage accounts. You are already killing it by maxing the 401k and the Roth so keep it up!

Even in a taxable account it would be worthwhile to invest.

A taxable 7-11% return is better than eliminating a 2% tax deductible debt.

It may not seem like much of a difference, but that extra amount could easily be worth 10's of thousands of dollars over 30 years.

[bennkar]

I agree with jpg, but I would say that the 0% car loan is probably not forever, but only 0% for a year or two, right? If so, be prepared to pay it off when the special rate is about to end. I say this as I am in that boat, and the 0% will end in another month. I was making the minimum payments up until last month, when I paid 1/3 of the balance, another 1/3 this month, and the remainder next month.

[Slug]

OP is able to max out both the 401ks and Roth IRAs, and has a 20k EF with other investments besides. I don't think cash flow is a problem. You could put the extra money in a CD and earn a spread with no risk at all. Something is better than nothing.

Even in a taxable account it would be worthwhile to invest.

A taxable 7-11% return is better than eliminating a 2% tax deductible debt.

It may not seem like much of a difference, but that extra amount could easily be worth 10's of thousands of dollars over 30 years.

Yeah, that pretty much nails it. That's what I'd be doing. Keep up the good work, and keep an eye on the SL rates.

[Goldy]

I agree with jpg, but I would say that the 0% car loan is probably not forever, but only 0% for a year or two, right? If so, be prepared to pay it off when the special rate is about to end. I say this as I am in that boat, and the 0% will end in another month. I was making the minimum payments up until last month, when I paid 1/3 of the balance, another 1/3 this month, and the remainder next month.

Actually this is a true 0% loan over the entire life of the loan as long as we continue to make the payments on time (yay billpay).

[LivingAlmostLarge]

Bill pay car, why not clear student debt now and then start investing the rest? I'm lazy though and like less bills. I wouldn't necessarily pay off the mortgage over stockpiling taxable account savings in both stocks and bonds.