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Hey all, just wanted to get some opinions here; any advice would be appreciated.
My wife and I are hoping/planning to move in about three years, and I'm undecided about how I want to best set us up financially to do so. The three year time period is my own deadline; our oldest child is slightly more than two years old and I'd like to not move her once she gets into a school system, making friends and getting into a routine, only to move her away. My wife says I shouldn't be worried about things like that and that kids will adjust (she was a military kid) but I'd still like to pull the move off in this timeframe if possible. Also, it doesn't hurt that our intended destination has a better regarded school system and would reduce my commuting time.
Anyway, from a financial perspective, I don't know how much you're supposed to share when asking these questions as this is my first time on the Finance forum, but I'll use general numbers. Combined, pre-tax and everything, we make about $140,000. If a few things broke right career-wise, that could be closer to $160,000 in three years, but we aren't counting on it. We have all the usual expenses. Mortgage, day care, power, cell phone, credit card (paid off each month), etc. Those expenses aren't going away anytime soon.
We have some shorter term expenses that I've been focused on recently. We've gotten to the point where we can start paying ahead on things, and I've mostly focused on our student loans.
We still owe about $5,000 on my wife's undergrad loans. Payments are a little less than $200/month, interest rate is practically non-existent due to a combination of auto-pay, payments on time, etc. It's under 1% and the payments are mostly principle. This loan would end on its own in about three years.
We also owe about $48,000 on two different loans from when I got my MBA; about $40,000 on one and about $8,000 on the other. Interest rates are around 6%, payments are around $500/month and $100/month, respectively. These loans are finished in about nine years.
So this is part of my question, which order to tackle them in. I know most conventional wisdom is to go after the highest interest rates first, but part of me wants to go after my wife's loans first, even though they're practically zero-interest, so that I can free up the cash flow from those loans to use against the others. The snowball down the mountain theory. Her's would be finished off the quickest; it would actually feel like a tangible result was accomplished, that sort of thing.
The other thing is, I've been focused on paying this stuff early rather than saving for a future downpayment. We only have about 6K in savings currently, about two months worth of expenses, but when I plug numbers into a financial calculator, it seems to me that having more free cash flow skyrockets how much of a home you can qualify for, much more so than having more money for a downpayment. It doesn't hurt that we have potential downpayment help (grandparents who want us to live closer to them). But ignoring that, would you increase your savings over paying off debts early?
Finally, there's our current residence. Nice little townhouse, it was great when we were first married, but the addition of two dogs and two kids have made us want a little more space. We are very underwater on this townhouse and wouldn't be able to sell it for close to what it's worth. Luckily, we used the HARP 2.0 program a few months ago to drop our interest rate from 6.25 to 4.5%, and we could probably rent the place now for enough to cover the mortgage payments. Paying ahead on the house is another option, and would probably save the most money in the long run, but it would feel like throwing money away as far as seeing any short term results, and wouldn't free up any income for house qualifying. Ultimately, we'd like to rent it until our kids are ready for college, if they go, and sell it then to help defray costs.
Also, I may have misread this, but is it possible that paying ahead on loans could actually harm our credit rating, since it would mean we have less accounts open? I thought I saw that somewhere but didn't think much of it at the time, figured I'd ask.
We are looking at cutting back where we can; we both have a bad Starbucks habit and could do better using coupons for groceries/eating out; we're trying where we can.
Anyway, I'm open to any and all advice/questions. The area we want to move to is a bit expensive, but it has a nice combination of being safe, managable commutes, good schools, very quiet but with a lot going on 15-20 minutes away.
The kids and school change will be fine ONCE... 3 years is 1st grade. It'll be fine.
Start trying to sell the house so you can relocate unfettered.
Little debt is good.... cash reserves are more important.
Why would we go the short sale route? We can afford our current mortgage; we want to rent the place out and have it available to sell years down the road. Also, having that on my record would make it pretty hard to qualify for the mortgage on any new house we found.
It is very difficult to say what the lending requirements will be in 3 years. Right now, as I understand it, you can't count the income from the rental unless you have been picking it up on your tax return for 2 years already. So you couldn't just qualify for the new house, and pick up the potential income from the old house against your debt/income ratios when qualifying for the new house. You would have to be able to qualify for the new mortgage while still paying the old mortgage with no rental income. So owning the house still is problematical. You would have to move out of the house soon, and rent it out for 2 years if you wanted to include that income on your application. Of course, the rules could change in the next three years.
As for the debt vs savings topic, that is a tough one. There are rules regarding gift funds, too, so if you are in the position to keep paying off debt and get gift funds from grandparents for your down, I would do that, but don't wait until the last minute, as the gift funds may have to sit for a while in your account in order to be allowed as down payment.
I understand the appeal to pay off a low debt first, but since the loan is around 1%, AND will be paid off normally by the time you are wanting to buy, I wouldn't throw any extra at that one. The real question is on the other two. If the interest rate is about the same, then the question is do you pay off the bigger or smaller one first. I would pay off the smaller one first, and get it to go away. Then move everything to the larger one to pay it off next. Let the low interest one pay off in the course of time.
Honestly, though, my opinion is that you need to focus on an emergency fund before paying down debt at all. From the sounds of it, you have multiple small children, so I'm guessing yours is the only income. And it sounds like you only have enough saved to cover expenses for a couple of months. To me, that is insane. Unless you have 150% job security, you really need more in savings before doing anything else. (If you do have an emergency fund in addition to what you listed, and just didn't mention it, then disregard this last paragraph).
It is very difficult to say what the lending requirements will be in 3 years. Right now, as I understand it, you can't count the income from the rental unless you have been picking it up on your tax return for 2 years already. So you couldn't just qualify for the new house, and pick up the potential income from the old house against your debt/income ratios when qualifying for the new house. You would have to be able to qualify for the new mortgage while still paying the old mortgage with no rental income. So owning the house still is problematical. You would have to move out of the house soon, and rent it out for 2 years if you wanted to include that income on your application. Of course, the rules could change in the next three years.
As for the debt vs savings topic, that is a tough one. There are rules regarding gift funds, too, so if you are in the position to keep paying off debt and get gift funds from grandparents for your down, I would do that, but don't wait until the last minute, as the gift funds may have to sit for a while in your account in order to be allowed as down payment.
I understand the appeal to pay off a low debt first, but since the loan is around 1%, AND will be paid off normally by the time you are wanting to buy, I wouldn't throw any extra at that one. The real question is on the other two. If the interest rate is about the same, then the question is do you pay off the bigger or smaller one first. I would pay off the smaller one first, and get it to go away. Then move everything to the larger one to pay it off next. Let the low interest one pay off in the course of time.
Honestly, though, my opinion is that you need to focus on an emergency fund before paying down debt at all. From the sounds of it, you have multiple small children, so I'm guessing yours is the only income. And it sounds like you only have enough saved to cover expenses for a couple of months. To me, that is insane. Unless you have 150% job security, you really need more in savings before doing anything else. (If you do have an emergency fund in addition to what you listed, and just didn't mention it, then disregard this last paragraph).
This is good to know, I wasn't aware of the requirements for claiming rental income. As far as the emergency fund...yes, I wish it was a little higher, but I do have 150% job security, at least I should unless the Federal government collapses. And if that happens, I'm not the only one with major problems.
My wife and I have two kids, 27 months and 7 months, but we use daycare, I mentioned that's one of our expenses in my OP. Our income is approximately an $80,000/$60,000 split; she's a healthy contributor to our household income.
I've looked at your idea as well, that the other loan would handle itself during our timeframe and to go after the one that actually carries an interest rate. It's just tempting to go after the one quickest to pay off from a cash flow perspective, but this is why I posted, I love getting opinions on this stuff from other folks.
Speaking of loans...does someone with better foresight than I have, have any idea how long interest rates are supposed to be this low? Any guesstimates, timetables, etc? Rates were at least 7-9% (or higher) for so many years in the 90's and into the turn of the century....I'd hate to think that I missed out on a great buying opportunity.
Low compared to what? What are deposits or CD's paying out?
If/when mortgage rates come up... it's reasonable to assume that other rates will also.
I thought I made that obvious, low compared to the 90's/turn of the century. A six figure loan is a lot more palatable at the sub 4% interest rates being advertised now than at 7-9% as was the standard awhile back. I'm aware they everything will raise together, I was asking if anyone had a general idea of when that is likely to occur, since I don't read too many economic forecasts.
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