how to spend an extra 20k

[beth928]

So, after discovering WCI website, I came to appreciate the joys of refinancing.  I refinanced the last two of the three large loans I have left.  I got the business loan (I am a sole practitioner and took out a loan of 535k to open the business) down to 4.5% from 6.5%.  I also started throwing money at it and now the principle is at 278k.  I did not refinance the student loan (205k) since the principle is fixed at 2.62% and I have yet to find a better rate.  I am putting an extra 1500$ towards it a month.  Once the business loan is done (I am anticipating before the end of this year), I will throw money at the student loan to get rid of it.  I just finished refinancing the mortgage.  I think I got a really good deal from the local bank.  The rate was 4.5% and we got it down to 3.375% fixed rate for 15 years.  In order to do that, though, the bank agent said we needed to do sort of a home equity loan.  So, the principle owed before the refi was about 603k.  The bank made me take out the extra equity and then rolled that back into the principle.  With closing costs and escrow, the new principle is about 632k.  There is no pre-penalty.  I walked away with an extra 23k in cash.

What should I do with the extra 23k?  Should I just pay the principle back (with extra to get the principle back to 603k)? Should I use it to help pay down the business loan (technically paid from the business accounts and pre-tax, but since I work for myself I would just use the extra in my personal account in lieu of paying myself for a couple of months)?  The business loan has a higher interest rate, so that kind of makes sense to me.  I don't think I should pay down the student debt until the business debt is done since the rate is so much lower.  The business interest is deductible, but that doesn't seem to make that big a difference now.  Should I use the extra in an after tax account?  I am already putting 73k into 401k every year.  I already have an emergency fund of about 6 months in pure cash and don't really want to add to that.  I hate to have extra cash sitting around that could be put to better use.

I am still really new to this finance stuff and really appreciate any insight that is offered!!

[adventure]

beth928 wrote:

the bank agent said we needed to do sort of a home equity loan

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So you do have a second home equity loan? Is that where the 23k came from? Do you have any limits on how long you have to keep that account? Or do you have to keep it drawn to a certain level, for a certain time frame?

 

beth928 wrote:

What should I do with the extra 23k?

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Math says, pay off the highest interest rate loan - or invest in something that gains a higher return, and is within your risk tolerance.

I'm not sure the business loan is the best use of funds, because the business can write the interest off. Doesn't this help?! Maybe I need to check the math here.

Or, you can order the combo platter. Set the math aside, and send: 6k (start taxable account), 6k (student loans), 6k (mortgage), 5k, business loan!

[beth928]

Thanks for your response! I don't have a second loan on the house. It is all one loan now, paid at a fixed interest over 15 years with no pre-payment penalty. I am not actually sure I understood fully what he was talking about, but I think he said that the bank would not refinance that low without increasing the principle a little bit. Basically, I shopped around a little and asked the bank to match the lowest offer I found online. This is how they were able to do it.

I know math says pay off the highest interest rate loan first, but I get really confused with the deductions. The business loan has the interest deductible, but that is only a few thousand dollars a year at this point. I honestly don't know how much interest the mortgage gets yearly, but I assume it will be higher now since the loan is brand new again. But that is personal account (after tax) dollars and not pre tax dollars like the business. Does that change things?
Maybe a combo is the best way to go. That way I feel good about getting everyone's principle down a little bit.

[Zaphod]

beth928 wrote:

Thanks for your response! I don’t have a second loan on the house. It is all one loan now, paid at a fixed interest over 15 years with no pre-payment penalty. I am not actually sure I understood fully what he was talking about, but I think he said that the bank would not refinance that low without increasing the principle a little bit. Basically, I shopped around a little and asked the bank to match the lowest offer I found online. This is how they were able to do it.

I know math says pay off the highest interest rate loan first, but I get really confused with the deductions. The business loan has the interest deductible, but that is only a few thousand dollars a year at this point. I honestly don’t know how much interest the mortgage gets yearly, but I assume it will be higher now since the loan is brand new again. But that is personal account (after tax) dollars and not pre tax dollars like the business. Does that change things?
Maybe a combo is the best way to go. That way I feel good about getting everyone’s principle down a little bit.

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Math does say highest interest first. However, student loans come with onerous terms and that should be taken into consideration as well. Its also unsecured which your business and home arent, and the interest deduction, etc...