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Selling House - do we payoff student loans vs. use profits as down payment?

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  • Selling House - do we payoff student loans vs. use profits as down payment?

    Hey all!

    Here is the skinny:

    Our family is expanding and our house will no longer be big enough for the whole family.

    House is worth $550,000 to $575,000 and have a 14 years and change left on mortgage ($267,000 balance @ 2.75% fixed).

    If we sell our house and fetch around $567,000, we will about $300,000 give or take with closing costs, etc.

    Together, Physician wife and I have about $302,000 remaining in student loans between, mostly, federal loans ($175,000 for her; $83,000 for me) with a fixed interest rate of 2.875 and 4.500%.  We also have some private loans ($16,000 @ 5.12% variable for her; $27,000 @ 4.75% variable).

    Because of our potential family expansion, we have been looking for homes in our area that range from $600,000 to $800,000.

    My question is, if we are able to fetch $300K after our house is sold, do we turn around and payoff all of our student loans or do we use it towards the next house as a down payment?

    A little additional information:  we do not get the student loan interest deduction, but we itemize deductions and do get the mortgage interest deduction.  Also, Physician wife's federal loans are in PSLF, but won't be "forgiven" until 2026.

    Honestly, I'm leaning towards paying off the student loans and then utilizing a "Physician/Doctor Mortgage" to purchase new house with little to no money down.  The same amount of money that we'd be putting towards monthly student loan payments would then go towards paying off the mortgage.  Of course, we'd have to switch to a 30 year mortgage, but we'd be able to make extra payments and/or refinance to a 15 year later on.  Not gonna lie, but the satisfaction of not having student loans is very satisfying.

    What do you all think?  I'll provide additional information as needed. I'll shut up and listen.

  • #2
    Don't forget realtor fees are around 7% in most cases.  Therefore if you sell your house for 567000, subtract 7%, then pay off your balance of 267000, you will be left with around 260,000.  Unless you plan to sell yourself, which can sometimes be difficult depending on how aggressive realtors are in your area (some of them are very good at shunning DIY sellers).

    But, in answer to your question, yes you need to get rid of some of those loans.  Those rates are too high to keep around for any longer.  You could hold on to the 2.8% loan though. But 175k is a big number.  I personally would want to see that lower if it were me.

    In order to fully answer your question, we're going to want to know your approx. annual income and the status of your retirement savings and any other savings you may have.  Also, do you contribute the maximum amount to tax advantaged accounts each year?

    A 100% loan to value loan on a 600-800k home is a very LARGE monthly payment and likely comes with high insurance and taxes.  Will having a payment that large allow you to 1. Save for retirement by maxing out tax protected space 2. saving at least 20% of your yearly income for retirement 3. pay off your loans in a timely manner?  Those are the kinds of questions you should be asking yourself.

    If you make something like 800k a year, I'll shut up.  But, if you're making less than 300k a year, you might need to re-think your plan.  Anything in between is up for debate

    Comment


    • #3
      Hey hightower:

      Here is a quick rundown:

      Physician wife (36 yo) brings in about $225,000 per year (gross); I (36 yo) bring in about $33,000 per year (gross), however I am 1099 and work part time as a sole proprietor/attorney. I could shift to full time and earn close to $60,000 (gross), if needed.

      Physician wife maxes out her TSP at $18,000 and gets about $9,000 in match = $27,000 ($175,000 saved already).

      We began a backdoor Roth IRA for her and myself, this year = $5500 x 2 = $11,000 per year.

      I began a solo 401k for myself and anticipate putting in $18,000 for 2017 (in April 2018) + a little extra for employer contribution = $18,000 plus or minus

      Taxable Schwab Joint Account is $500 per month= $6,000 per year ($14,000 balance today)

      Robinhood Stock App is $100 per month = $1200 per year for now ($560 balance today with 3 Vanguard ETFs - VTI, VXUS, BND).

      Altogether, we will be socking away $63,200 per year towards retirement in pre-tax and after-tax accounts.

      We also pay $250 towards our daughter's 529 = $3000 per year ($6000 saved already); and $200 towards Florida Prepaid College Program (locks in rate for 4 year public university).

      Physician Spouse will get FERS (Pension) after working at VA for 20 years (2032).  She will most likely go part-time at that point.

      No credit card debt; one car payment which will be finished next month (July). No other debt, besides mortgage that I mentioned in initial post.

      Thanks in advance.

      Comment


      • #4
        Nice to see VA paying a bit more now than prior years.

        She's in first year, so check out EDRP -- https://www.vacareers.va.gov/assets/common/print/EDRP_VA_Careers_Page.pdf

        Payoff private loans and your loan.  HOPE that PSLF is there in 9 years, but that's a pretty low interest rate to pay down and nearly equal to a 30y mortgage post deduction rate so that is roughly a wash -- pin the hope on the payoff IMHO.

        Get house that's reasonable 600-800 is wide range.  Don't skimp on school district and house location - smaller home is worth the location exchange.

        30 yr -- why build equity when you have loans and unfunded retirement and 529.  Lock in low interest rates and ride that out as long as possible while piling on savings for higher interest rate earnings with your 30+ year horizon.

        MRA is at least 57 for early and 62 for full (at least for me before I separated VA) --- she'll be fully vested at 5 years.

        Comment


        • #5
          !. Pay off all loans that won't qualify for PSLF.

          2.  Put rest toward house.

          3. Aggressively pay down house as you mentioned.  It can serve as a kitty from which you can pull out equity to use toward her loans if PSLF doesn't work out.  You could invest in a side account for the same purpose instead of paying down mortgage, but I would prefer loan payoff at your income.  It protects you from poor returns or behavioral issues with investing it.

          4. Get income up as much as possible.  A bigger shovel early on makes a huge difference.  You talk about potential family expansion.  Do you have an ETA on the plan?  If not, can you hold tight where you are as you are making great progress with that income.  I would be slow to add to debt without a concomitant plan to up income.

          Comment


          • #6
            If your wife qualifies for PSLF and plans to retire from VA, I don't understand why you would want to give up free money by paying off your loans. I agree with @StarTrekDoc to pay off/down the private loans; leave the $175k alone.

            To me, worrying that PSLF won't be there in 9 years is akin to worrying that Roth IRAs will be taxable at retirement (many more years away for most) yet everyone is still contributing to their Roths. You have to make decisions based on the reality that you know, not all of the iterations of what "could" happen.

            Get a doctor loan and try to pay enough to make it a 15- or 20-year mortgage, assuming this is your final home and your family is finished growing. Financial planning wouldn't hurt, either.
            Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #7
              You could consider having an emergency fund too.

              Comment


              • #8
                Thanks for all of the responses!

                StarTrekDoc: Physician wife has been working for the VA since 2012, as a result she is vested. They did not offer EDRP at that time.

                Dr. Mom and jfoxcpacfp: PSLF - We only discovered it a few years ago and didn't qualify for previous payments because the loans weren't in an income based repayment plan. That was my fault as I should have been more cognizant of these programs. If I had to do it again, her loans would be part of the first wave of PSLF forgiveness. That being said, we had to consolidate her federal loans and switch to REPAYE last year. When all the calculations were done, the REPAYE plan had her paying off her student loans after 132 months. If she does PSLF and makes 120 payments as prescribed by the program, then she is only leaving 12 payments at the table. Hence, my plan to use our house sale proceeds to pay off those loans too. Yes, a small amount will be forgiven, but not having FedLoan take money out of our checking account every month sounds appealing to me.

                As far as the family expansion plans are concerned - it's early but we are expecting twins ? In December. That's why we are looking for a larger house or at least for one that has a few more bedrooms.

                The homes that we are looking at are in the same school zone as our current home (10.0 for elementary, middle, and HS).

                Comment


                • #9




                  Hey hightower:

                  Here is a quick rundown:

                  Physician wife (36 yo) brings in about $225,000 per year (gross); I (36 yo) bring in about $33,000 per year (gross), however I am 1099 and work part time as a sole proprietor/attorney. I could shift to full time and earn close to $60,000 (gross), if needed.

                  Physician wife maxes out her TSP at $18,000 and gets about $9,000 in match = $27,000 ($175,000 saved already).

                  We began a backdoor Roth IRA for her and myself, this year = $5500 x 2 = $11,000 per year.

                  I began a solo 401k for myself and anticipate putting in $18,000 for 2017 (in April 2018) + a little extra for employer contribution = $18,000 plus or minus

                  Taxable Schwab Joint Account is $500 per month= $6,000 per year ($14,000 balance today)

                  Robinhood Stock App is $100 per month = $1200 per year for now ($560 balance today with 3 Vanguard ETFs – VTI, VXUS, BND).

                  Altogether, we will be socking away $63,200 per year towards retirement in pre-tax and after-tax accounts.

                  We also pay $250 towards our daughter’s 529 = $3000 per year ($6000 saved already); and $200 towards Florida Prepaid College Program (locks in rate for 4 year public university).

                  Physician Spouse will get FERS (Pension) after working at VA for 20 years (2032).  She will most likely go part-time at that point.

                  No credit card debt; one car payment which will be finished next month (July). No other debt, besides mortgage that I mentioned in initial post.

                  Thanks in advance.
                  Click to expand...


                  First of all....Congrats on the twins!!  Wow!  That must be crazy exciting?

                  SO you're doing a good job with saving now.  That' great.  Keep that up.  Have you run the numbers on what kind of mortgage payment you'll have with a new house in that price range?  Just be careful not to bite off more than you can chew. At 285k/yr income (if you work full time) you guys could potentially afford a 570k mortgage as long as you're careful about all of your other spending.  But realize that it would be at the high end of what's considered affordable for your income.  WCI usually recommends keeping your mortgage debt at no more than 2x your annual salary, which I personally feel is a good rule of thumb.    So with a 130k down payment, the most you should be looking to spend on a house would be around 700k.

                  Good luck with the house shopping and with selling your current home!

                  Comment


                  • #10


                    If she does PSLF and makes 120 payments as prescribed by the program, then she is only leaving 12 payments at the table. Hence, my plan to use our house sale proceeds to pay off those loans too. Yes, a small amount will be forgiven, but not having FedLoan take money out of our checking account every month sounds appealing to me.
                    Click to expand...


                    That makes sense - congratulations on the twins! Hope you have plenty of grandparent help nearby!
                    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11
                      Thank you thank you! Luckily, both sets of grandparents are 90 minutes away.

                      Currently, our Mortgage (P + I + Taxes + Insurance) is $2450 per month and our aggregate student loan monthly payment is $1777 per month. I was thinking that if we eliminated the $1777 payment altogether and put that amount towards the new mortgage payment (approx $4200 P + I + insurance + taxes), then we would be able to maintain the status quo and move into a larger house and utilize the doctor loan program and put 5% down with no PMI. I'll be honest, I don't want to go from a 15 to 30 year loan, but these sneaky babies (that's what my wife and I call them) have forced our hand. We probably wouldn't be having this conversation if we were expecting a singleton.

                      To recap, there are a couple of routes that have been suggested:

                      1. Payoff all student loans with home sale proceeds and buy new home with doctor loan.
                      2. Payoff all student loans except those that qualify for PSLF and use remaining amount as down payment.
                      3. Use house sale proceeds as a massive down payment towards new house and continue paying off student loans as planned with PSLF and aggressive payments.

                      Also, something to keep in mind is that Physician wife has a great boss at the VA and he has aggressively tried to retain her. She started out at $162,000 5 years ago and now makes $212,000 + bonus. We expect a steady, albeit, not crazy increase in salary over the next few years.

                      I'm all ears.

                      PS - all these darn kids better get scholarships! ?

                      Comment


                      • #12
                        Congrats on the twins!  With more info I would change my rec to the following:

                        1.  Pay off private loans.

                        2.  Put half toward house down payment.  Go for 30 year.  You can always prepay it and create a 15 year on your own.  The slight increase in rate on the 30 is your cost of flexibility.

                        3.  Hold the remainder until the twins are born, healthy, and mom is back at work.  At that point, pay down loans.

                         

                        Comment


                        • #13
                          Dr. Mom:

                          Hmmm...that's definitely an option, especially having some extra cash for emergency purposes for the newborns. If everything goes smoothly, then we can aggressively pay off loans as needed. I like liquidity! Where would you suggest to park that large amount? We have a Goldman Sachs Savings account that earns a meager 1.05%. We have brokerage accounts as well.

                          You guys have been extremely helpful. Thank you very much!!!

                          Comment


                          • #14
                            That savings account at 1% sounds fine.  It will be a short term park of cash so I wouldn't devote much time to searching for anything else when you have that account already.  Two other bits of advice from our experience starting out many years ago...

                            1.  Nesting behavior during pregnancy is very strong especially if this is your first time becoming parents.  I would challenge you to really consider if a larger house right now is in your best long term interest.  We had 5 kids in a 3 BR/2 1/2BA house for several years while we both worked and got out of student loan debt.  We have very fond memories of those years and our "get out of debt" house.

                            2. Whatever you decide, once student loans are paid off, start investing in 529's for the kids with some of what used to be your loan payment.

                            Best wishes for a safe and uneventful pregnancy and healthy babies!

                            Comment


                            • #15
                              Congrats on the Twins.  VA is excellent option for her as it offers great flexibility if she needs it in the future with 2kiddos in tow.

                              Definitely 30yr IMHO.  You want flexibility at this juncture not equity.

                              I would lock in low interest rates for 30 years, pay off all debt not named PSLF, and max tax deferred accounts as possible.  Then talk about paying down mortgage debt once all the above situated.  12 free payments is still 12 free payments and the rate is low enough to be a wash with mortgage anyways.

                               

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