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Please help which loan to pay off first.

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  • Please help which loan to pay off first.

    Hello,
    I just found out about this website at the dental convention.
    I am embarrassed to say it but I am very late to the “saving for the retirement” road. I have been out of school for 10 years but have not accumulated wealth nor have paid off my student loan.

    I need advice on what I should do at this time.
    I have:
    Student Loan $36K 1.625% fixed
    Mortgage $382K 2.75%(15 year loan), Equity $150K
    Business Loan for practice $492K 5.25% variable
    (Just purchased the practice less than a year ago)

    I do max 401K.
    I do have 6 month emergency fund.
    I have $45K disposable cash that I would like to pay against Mortgage or business loan.
    What would be best course of action for me?
    Should I put any extra income I get toward the business loan or put some against mortgage? The interest on student loan is so low, I think it is best to leave as is until I pay off the other loans.
    Also, Should I take money out of home equity to pay toward the business loan?

    I would welcome any advice you have for me.
    Thank you in advance for your time.

  • #2
    Not sure on the term of your student loan but I can't think of a reason I'd hurry to pay off a loan that was probably below inflation.  The mortgage is also very low and after the deduction I can't see why you need to pay it off quickly either.  So if you want to target a loan, I guess I'd go after the business loan.

    I don't know what the ramifications of taking out a home equity loan are vs a business loan.  Can you use pretax dollars to pay the business loan but have to use after tax to pay the home equity?

     

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    • #3
      Definitely the business loan.  What is your plan to have it paid off? Is 5 years possible?  Be as aggressive as you can to get it paid off then take the amount you were using to pay it off to really start building wealth for yourself.

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      • #4
        Thank you for your advices. I did equity loan estimate through Costco on-line and banks offered around 4.5%. I thought that it maybe better to take that loan out then 5.5% for business loan. Yes, business loan is planned to be paid off in 5 years.
        It has been scary to take on half a million dollars loan for the office and the office is not as stable or established yet. I still have ups and downs and managing employees are harder than I thought. Learning to be “boss” is harder than studying.
        I was leaning toward putting extra $45 K toward business loan but I still have self-doubt “what if office doesn’t do well” and was debating to keep it in the savings.

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        • #5
          I agree that your mortgage and student loan are nothing to worry about (those are excellent rates).  That massive, high interest business loan seems like a problem though, especially since the rate is variable.  What kind of income are you pulling in?  What are the terms of that loan?  You need to throw everything you have at that loan IMHO.  Its good you're maxing your 401k.  If you feel bad about not saving better, you could open a back door roth and start contributing 5500/yr.

          I wouldn't add any more debt to your home.  But, if I were you, I would consider refinancing your mortgage to a 30 year loan and direct the extra cash flow to your business loan.  It seems silly to be paying down a mortgage with ultra low rates that are tax deductible when you have a 500k loan with a high interest rate.  You can always make bigger payments later when your business loan is gone.  Even if you get a higher rate of say 4%, with tax savings you'd only be paying around 2.5% on that loan.  That's nothing.  Your business loan is 5.25%, not tax deductible (right?) and you're paying off your mortgage more aggressively, which makes no sense.  Something to think about.

          Don't beat yourself up about where you're at.  You just need to focus on getting your business off the ground and getting rid of that business loan asap while  continuing to save. Everything else is absolutely fine.

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          • #6
            Thank you, Hightower. Your advice means a lot. Makes good sense to me. I will start looking into refinancing my mortgage to 30 years and paying more against the business.

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            • #7
              Another perspective - the interest on the biz loan is deductible against the profits of your business 'above the line', so to speak. The rate isn't horrendous, but you might be in a position to refi it or shop it out to another bank and get a lower rate. I will presume that the rate was higher than market because you were going into business, so you should be able to make a better deal now with proven success. And after tax, you should be able to handily beat what the loan is costing you by investing in a properly-diversified equity portfolio of index equity funds or ETFs.

              You mentioned that you 'have not accumulated wealth'. This is where I believe your real focus should be, 10 years out of school: building up wealth for retirement. Psychologically, it's a bummer to have student loans 10 years out, but I understand why you haven't focused so much on them, with such a good rate. Same for the house.

              Of course, we have no idea of your long-term goals, income, prospects for the future, the value of the business (I.e. Did you put down another 1/2 million on it?), long-term revenue projections, tax bracket, and so forth. Value this advice at what you paid for it.

               
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8
                Thank you jfox for your insight on the alternate view.

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                • #9
                  My thoughts are as follows:

                  1. You need to determine how the practice is doing as a business (not as a dentist). Expenses, revenue, profit (loss), risks, etc. Do you own 100% of it? What is the business really making (after everyone, including your salary) is paid? Losing money? due to depreciation and interest? (that might be good for a year or few), or making $300k+/year?  I'd want to know how well it is functioning to better plan for paying off debt, building wealth, saving (more) for retirement.

                  2. What are you goals? Retire at? Work more/less? Hire others? Grow the practice? Go hiking? New car? Teach? etc. Having these written help.

                  3. Consider a larger emergency fund, based on the risks of the practice. Do you have other providers who might leave? Do you have sufficient cash flow to pay the bills for a while? How long do most of your collections take from insurance?

                  4. I think the business paying off debt seems wise.

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