Pay down mortgage or school loan?

[docnews]

First some background: no other debt, maxing out i401k/Roth/HSA, marginal tax rate of 25% primarily due to high charitable givings leading to high itemized deductions. I know many would invest in taxable over paying down this debt but when I'm already passively investing >$70k tax advantaged, I'm leaning towards eliminating debt.

Which would you pay down first?

~$340k mortgage at 4.125% or ~$150k student loan (5yr refi) at 3.49%.

#1 consideration: Is it accurate to say my post tax mortgage interest rate is 3.094% [4.125-(4.125*.25)]?

Also the school loan is not able to be wiped in bankruptcy but it is wiped in the event of my death and I am married.

 

 

 

[Passive Income MD]

The amount of tax-deductible interest you pay on the mortgage depends on where you are in the life of the loan - the interest is front-loaded. So it might make sense in the early life of the mortgage to keep paying that interest while paying off the student loan. I'm assuming you're paying a fixed mortgage.

Dave Ramsey would also say start by eliminating the 150k Student Loan. You'll be able to see bigger chunks of it diminish which should only encourage you to keep throwing money at it and reducing it quickly. I also find that Student Loan debt weighs on people's minds more heavily. Mentally, having debt on a house is so normal and standard where student loan debt feels so burdensome.

One argument for paying the mortgage down is that the extra payments will go towards the principal and if needed in a desperate situation, you could tap that equity in the form of a HELOC or HEL. Whereas with the student loan, that money is gone and used.

However, with these numbers though and tax implications, it's so close where you can't go wrong either way. With the savings, the investments, the charitable giving, and money left over to throw at debt, sounds like you have a dilemma most docs in your position would love to have.

[Decapolis]

I'm in a similar position. Student loans of 180k at 1.875% and a mortgage of 375k at 3.9%. We chose the mortgage bc when it's gone it frees up the most monthly cash flow. Should be gone in the next 6 months. Can't wait.

[Zaphod]

Should have refinanced that mortgage in the last 3 months, they were about as cheap as theyve ever been.

 

Otherwise, if you must do debt, the student loans make sense due to their zero advantage status. Why dont you do a little bit of everything focusing on whats most important to you first? like 50/30/20 for student/mortgage/taxable. I would do taxable myself and let inflation and time take care of the debts but everyone is entitled to their own plan.

[docnews]

PI MD: Good points. You are right: both are fixed. I like that the equity is still there. But it would be great to be done with student loans.

Decapolis: well done. Wish I could get student loans that low. Now 3.5 is basically the bottom for student loan refis for (check out the advertised fixed rates).

Zaphod: Hard to refi a doctor's loan with zero down. Plus mortgage refis COST MONEY (unlike student loan refis). I hate how much the bank made on setting up the mortgage. I can't wait until the 21st century hits the mortgage market. Taxable is tempting but I like the idea of paying down debt so I can simplify my financial picture.

[Decapolis]

Yeah I lucked out on the rate. They were at 5.25% when I applied for them and then I consolidated my 4th year at the 1.875% rate. Don't know if we will ever see rates that low again.

[Zaphod]

docnews wrote:

PI MD: Good points. You are right: both are fixed. I like that the equity is still there. But it would be great to be done with student loans.

Decapolis: well done. Wish I could get student loans that low. Now 3.5 is basically the bottom for student loan refis for (check out the advertised fixed rates).

Zaphod: Hard to refi a doctor’s loan with zero down. Plus mortgage refis COST MONEY (unlike student loan refis). I hate how much the bank made on setting up the mortgage. I can’t wait until the 21st century hits the mortgage market. Taxable is tempting but I like the idea of paying down debt so I can simplify my financial picture.

Click to expand...

It shouldnt be that hard to see how long it would take to make it worthwhile and while it does cost something its usually not as bad as advertised and many are very low priced compared to long term savings. I think Financial Samurai has quite a few refi articles, and though your situation isnt the same, it will still give you lots of tools.

I just bought a house myself and while their were origination costs, due to credit score and other factors (like wife having some accounts at the bank) we ended up getting a credit instead of any origination cost and other savings as well. You dont know until you try. I also cannot wait until the internet catches up with real estate in general, its so long over due and mortgage costs are not even a big part of these way overblown fees. Agents and such are the worst offenders. The last 3 houses I bought I ended up telling my agent which one I was choosing, a glorified paper pushing intermediary taxing your transactions heavily. *end rant*

[jfoxcpacfp]

docnews wrote:

First some background: no other debt, maxing out i401k/Roth/HSA, marginal tax rate of 25% primarily due to high charitable givings leading to high itemized deductions. I know many would invest in taxable over paying down this debt but when I’m already passively investing >$70k tax advantaged, I’m leaning towards eliminating debt.

Which would you pay down first?

~$340k mortgage at 4.125% or ~$150k student loan (5yr refi) at 3.49%.

#1 consideration: Is it accurate to say my post tax mortgage interest rate is 3.094% [4.125-(4.125*.25)]?

Also the school loan is not able to be wiped in bankruptcy but it is wiped in the event of my death and I am married.

Click to expand...

You are correct on the post-tax interest rate. If you have state and local taxes, it is even lower. I would recommend paying off the student loans first.

[Decapolis]

Hope you don't mind if I high jack this thread docnews but I wanted to get other opinions.

As I mentioned above we chose, right or wrong, to pay off our mortgage rapidly. Should be done in the next 6-8 months just about 4 years after finishing training. Would anyone redirect that money towards student loans next even at 1.875% or put it in taxable accounts and let it grow?

[Zaphod]

Decapolis wrote:

Hope you don’t mind if I high jack this thread docnews but I wanted to get other opinions.

As I mentioned above we chose, right or wrong, to pay off our mortgage rapidly. Should be done in the next 6-8 months just about 4 years after finishing training. Would anyone redirect that money towards student loans next even at 1.875% or put it in taxable accounts and let it grow?

Click to expand...

I would put it in taxable and let it grow. Is there some reason you are forced to continue paying down mortgage? If your view changes you change change your percent allocation from 100 one way to 50/50 or whatever in between or do it all.

[Decapolis]

Thanks zaphod! No we aren't forced to pay off the mortgage rapidly...it's just we are so close I can almost taste it! My wife and I decided when I finished training we would either pay off student loans or the mortgage quickly....we just weren't comfortable having both and no mortgage frees up the most cash flow and had the highest interest rate(we don't have any other debt). I'm leaning toward the taxable accounts like you suggested...maybe an 80/20 split just so I'm not still paying them when I'm 60.

[Passive Income MD]

Hey Decapolis, I'm guessing you and I came out of med school around the same time. My loans are at a similar interest rate. Personally I've decided to let it ride as long as possible, pay the minimum and divert that cash into investments. Considering the historical rate of inflation is >3%, you're probably best served leaving it.

What I actually did was to take a chunk of cash, purchase a single family investment property and with the cash flow from that property, I pay off my student loans. So essentially I let my investment pay off my loans, while the investment property itself continues to grow in equity while my tenant pays it off. Just another way to look at it.

Congrats on being that close to paying off your mortgage. There's definitely value to the peace of mind you'll have when it's paid off completely.

[Decapolis]

That's a great idea passive income! Actually have a buddy that is using an apartment building he purchased to pay off his loans. So far it's worked out great for him. Something for my wife and I to discuss. Thanks

[Zaphod]

Since money is fungible you can think of a taxable account similarly, although there should be no considerable cash flow for a while. I have a rental...which reminds me I need to go polish it up like hours a go to get it on the market (direct RE is in no way passive btw). I had similar thoughts about my muni funds, after a few years I will have monthly distributions greater than my student loans, so I think of them similarly. Given other benefits like simple vs. compound interest and inflation I try to put everything towards investments over low % debt. My highest non tax favorable debt is a student loan at 3.2%.

The big deal in your case is the cash flow instead of just thinking about what money is going to and from where.

 

Full disclosure I do put a tiny amount extra towards my student loans and mortgages, but its just a nominal amount chosen somewhat at random like what gets the payment to a round number rather than some specified %. But thats the whole point really, we should have enough that even after we choose what is most important to us, ie, overall asset accumulation or debt paydown...we can still do both.

 

[Decapolis]

Very helpful zaphod and appreciated!

Too clarify, although I am a fan, I'm not following a Dave Ramsey plan of all or nothing ie not saving for retirement until debt is paid off etc. I do max out all pretax options...401k and a profit sharing plan totaling ~55k a year, fill up an hsa, fund a couple 529 accounts, and funded a few Disney trips. But I think you're right....as much as I hate debt, 1.875% is nothing and clearly could do better in other avenues.