Pay off Mortgage or Student Loans First?

[TXDoc21]

I have been thinking about this and am not sure what to do.
I refinanced my student loans with Sofi from the federal loan program (6.8% down to 4.177%) late last year. I also paid off about 80k in the first 3 months of the year.

Now, my current situation is I owe about $300,000 in student loans and also about the same on my mortgage (home value of about $475,000). I refinanced again with Laurel Road and now my interest rate is 1.99%.

Student Loan: ~300K at 1.99% variable -- 5 year term
Mortgage: ~300K at 4.35% -- 27 years to go with ARM starting year 10 (House is worth 460K)

My plan was to pay off the student loan by summer of 2021. When COVID hit, I just stopped making any extra payments and let things play out a bit. Cash is King. Now, I have 90-100K in the checking account earmarked to go to one of these two. Other than mortgage interest tax deduction I don't see a good reason to keep the mortgage. Once one is gone I will pay off the other is the plan.

Which one would you pay off first?

I think I'm going with the mortgage with the interest rate twice as high and that I can have it paid off by mid next year. We are planning to get it appraised again and refinance it to get a better interest rate.

[wideopenspaces]

Definitely refinance your mortgage.

Where are you in terms of retirement savings?

[Tim]

Definitely refinance your mortgage.

Where are you in terms of retirement savings?

Retirement savings at 20% of past gross earnings? Catch up, even in a taxable.
LTDI Insurance?
”We” indicates term life.
EFund? Particularly in Texas.
Refi mortgage.
YOUR plan was to pay SL first. Why would you change? Taxes would be the only reason. With the standard deduction vs itemized, much difference?

[TXDoc21]

Definitely refinance your mortgage.

Where are you in terms of retirement savings?

Currently saving just under 20%. Maxing out all tax deferred accounts, Roth IRA x2, and we opened a taxable last year. Once debt is paid off we will be saving 40-50% of gross before tax. We have term life and I have long term disability. Yes, the cash on hand does not include our e-fund in a money market account.

[TXDoc21]

Retirement savings at 20% of past gross earnings? Catch up, even in a taxable.
LTDI Insurance?
”We” indicates term life.
EFund? Particularly in Texas.
Refi mortgage.
YOUR plan was to pay SL first. Why would you change? Taxes would be the only reason. With the standard deduction vs itemized, much difference?

Yes I think we do need to refi. See other post for answers to questions. The only reason to adjust the plan was that the interest rate is more than double now on the mortgage and it seems like the right thing to do because of that.

[Peds]

Student Loan: ~300K at 1.99% variable -- 5 year term
-- i think anywhere from 2-5 years is fine to drag this out. you might be able to refinance again a few times and get a few bonuses.
-- i would not pay it off in <1 year at 2%, but thats me.
Mortgage: ~300K at 4.35% -- 27 years to go with ARM starting year 10 (House is worth 460K)
-- this needs to be refinanced (already mentioned mult times). should be able to get ~3% or less.

Other than mortgage interest tax deduction I don't see a good reason to keep the mortgage.
-- are you sure you are even getting a deduction?

Which one would you pay off first?

I think I'm going with the mortgage with the interest rate twice as high and that I can have it paid off by mid next year. We are planning to get it appraised again and refinance it to get a better interest rate.

in summary, a little extra to the mortgage, a little extra to the student loans, but honestly neither i would put ahead of a solid 20% to retirement and other savings for goals (car, vacation, etc).
i would invest that money Monday....

[Brains428]

why does he need to refi mortgage if he's planning to pay it off next year?

I believe he is going to pay off the student loans, not the mortgage.

I would see what the best rate you could get for a mortgage refi.

[Peds]

why does he need to refi mortgage if he's planning to pay it off next year?

?....
SL....

[TXDoc21]

in summary, a little extra to the mortgage, a little extra to the student loans, but honestly neither i would put ahead of a solid 20% to retirement and other savings for goals (car, vacation, etc).
i would invest that money Monday....

Thank you for the thoughtful post. We are on vacation right now and have another one booked for later in the year. I think you’re right about not even having a tax deduction for the mortgage interest. I’ll check with our tax guy on this.

I guess I just want to pay off one of the two quickly and let the other drag out a little longer. That extra money in cash flow after the mortgage is gone will all go to retirement savings going forward. Even though it’s a mortgage it feels like an invest vs pay off debt situation and I’m going to go for the debt at >4%.

[TXDoc21]

In summary, I would say that the plan was always to pay off the student loans. Meanwhile we have a mortgage that is almost identical in principal (double interest rate). Thus, I’m going to pay it off instead of over 30 years and then treat the student loans like my mortgage that is only on a 5 year term. Thus, debt free in a maximum of 5 years and hopefully before I turn 40!

[Zaphod]

I am not paying anything off with gusto this year, it makes no sense. Unless you're critical care/EM/ID/IM you cant really be sure of what may happen in the immediate short term or your job security.

Cash and liquidity are insurance and king to a lot of circumstances that may happen and its extremely cheap to wait until things are more stable, its just not that big a deal.

Rarely ever makes sense to pay off a mortgage rather than invest, but plenty of folks do it.

[wideopenspaces]

In summary, I would say that the plan was always to pay off the student loans. Meanwhile we have a mortgage that is almost identical in principal (double interest rate). Thus, I’m going to pay it off instead of over 30 years and then treat the student loans like my mortgage that is only on a 5 year term. Thus, debt free in a maximum of 5 years and hopefully before I turn 40!

I mean, I can't fault your plan. But you are young and probably don't have a ton in retirement? 300k invested now will be a lot of money in 30 years. I'd get the retirement nest egg in place so it has as much time to grow as possible. Refinance the mortgage to under 3% for 15 years. Pay off the student loans. In 5 years you can decide if you still want to pay off the mortgage if everything else is where you want it.

But of course you'll be fine no matter what you do, it sounds like.

[Tim]

The numbers say Refi or payoff the mortgage. The tax benefits of the interest rate difference is pretty small (30%x 2%= .6% if you are even itemizing).
Zaphod mentioned, keeping the cash in a HYSA wouldn’t be a bad choice until the whole C-19 thing runs its course. The interest/tax benefits are small compared to the current economic risk and your are looking at a 2-5 year period.

[hightower]

I would also say refinance that mortgage to a fixed term (personally I'd go for a 30 yr fixed, but to each their own).
I would ear mark that cash for paying off your student loans first for sure. Whether or not to hold on to it for the next year or two while waiting for the covid 19 thing to play out a bit more is a personal question
Once student loans are gone, then you can attack your mortgage if you feel so inclined. Why? Because student loans will follow you wherever you go, no matter what you do, you have to pay that debt and you can't get out of it. The mortgage is easy to get out of if needed...just sell your house. And if you can't sell your house for any reason (the market crashes badly and doesn't recover, etc), then just mail your keys to the mortgage company and walk away...no consequences to you and you'll be debt free.
You're getting hung up on the interest rate too much. Your student loans are variable right? so that 1.99% is actually not that great since it could go up at any time. And your current mortgage terms are terrible. There are people refinancing to 2.8% fixed for 30 years right now. For a mortgage, that's crazy. Especially if you also are able to take advantage of the mortgage interest tax deduction.

[Balance1969]

Ah emotions... Gotta love them.

Like hightower mentioned, student loans follow you wherever you go. The only way to get rid of them is by paying them off. From an emotional standpoint, it feels nice to get rid of that anchor and be free.

Like Zaphod mentioned, it doesn't make as much sense to pay off a mortgage instead of using it as leverage for investing when the interest on the loan is relatively low, especially when you can write it off (same could be said for student loans). That's the intellectual side. From an emotional standpoint, it feels nice to get rid of that debt. For example, I was talking to a banker and he said that his clients who have their mortgages paid off have more of a sense of calm and well being than those who don't. Good to have that nice feeling.

I like your idea of paying off one aggressively before the other. Going after the mortgage with the higher interest rate makes sense.

Personally, I'd put some of that 100k into taxable. Over the long haul you will likely get a better return. However, it won't feel as nice as paying off one of the loans quicker.

Then again, I like to balance paying my mortgage off with investing. We've got the same balance as you in our mortgage and could pay it off in a little over two years, but are instead taking about 4.5 years, while balancing the mortgage payments with investing. Oh wait... What's my username?