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I am in the process of moving and stand to profit close to 100k on my current home sale. I also owe approximately 200k in student loans.

The interest rates on mortgage and loans are within 1% of each other (although student loans are on a 7 year payment schedule and the house is 30).

Should I use the profit to pay down student loans or just roll it into my next house in order to have a lower mortgage amount?

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    Which country is this in? – Tim Feb 3 '17 at 18:06
  • How much will the next house cost? Do you have a 20% down-payment independently of proceeds from this sale? PMI? – Nathan L Feb 3 '17 at 18:15
  • Is in US. Yes I have the down payment this is extra. The math I am doing becomes wow the interest I will pay on the mortgage over 30 years far exceeds the student loan interest total over 7 years. But if I just roll the amount over to save on interest the student loans still feel like a bigger 'burden' – wally Feb 4 '17 at 0:27
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Should I use the profit to pay down student loans or just roll it into my next house in order to have a lower mortgage amount?

Calculate the amount of interest in each scenario, where the two scenarios are:

  1. Use extra cash to pay down student loans, take out a full mortgage.

  2. Use extra cash to make a big down payment on the next house, keep paying down student loans at normal rate.

In both scenarios the student loan rate will stay the same. However in the second scenario you may get a lower interest rate from making a larger down payment. So then calculate the total interest resulting from each scenario:

Scenario 1 Interest

student loan rateXremaining student loan balance=student loan interest

new mortgage rateXnew mortgage balance=mortgage interest

scenario 1 interest = student loan interest+mortgage interest

Scenario 2 Interest

student loan rateXstudent loan balance = student loan interest

new mortgage rate with large down paymentXnew mortgage balance after large down payment = mortgage interest

scenario 2 interest = student loan interest+mortgage interest

Whichever scenario's interest is lower will save money.

  • Is this entirely accurate considering amortization schedules and tax advantages of interest deductions for taxes? – wally Feb 4 '17 at 0:28
  • @wally, an amortization schedule tells you how much of your fixed-monthly payment goes to principal and interest, but the interest rate determines how much interest you pay. As you pay down both loans, the amount that you're paying interest on decreases. To get a less-simplified calculation you could calculate the month-by month interest – Nosrac Feb 4 '17 at 1:27
  • @wally The interest on each loan can count as an itemized deduction, but you're still going to want to minimize the amount of interest paid. – Nosrac Feb 4 '17 at 1:28
  • There are income limits to deducting student loan interest, and given the size of the loans, I suspect that wally has a high paying job and won't be able to deduct student loan interest. – gaefan Feb 4 '17 at 14:30
  • what i meant to say was the flaw with this calculation is it negates the amount of time. For example even if the mortgage interest value is lower, it is a 30 year payment schedule compared to a 5,7,or 10 year student loan schedule – wally Feb 5 '17 at 16:37
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You didn't answer my questions above, but the biggest factor if the two interest rates are similar is what it will cost you for mortgage insurance if you do not include a 20% down-payment on your next house purchase.

I would take the extra money from the proceeds of the other sale to get to a 15-year loan on your next house, then put all of your extra money into paying down the student loans ahead of the 7 year schedule.

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So one approach would be purely mathematical: look at whichever has the higher interest rate and pay it first.

Another approach is to ignore the math (since the interest savings difference between a mortgage and student loan is likely small anyways) and think about what your goals are. Do you like having a student loan payment? Would you prefer to get rid of it as quickly as possible? How would it feel to cut the balance in HALF in one shot?

If it were me, I would pay the student loan as fast as possible. Student loans are not cancellable or bankruptable, and once you get it paid off you can put that payment amount toward your house to get it paid off.

  • Interest rates are only one factor there is also the principal amount they are being paid on and the number of years. – wally Feb 4 '17 at 0:29
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We don't have all the relevant numbers to give you the perfect answer. Knowing your income is pretty important for this question, but, since you have 200K in student loans, I'm going to guess (and hope) you probably make more than 80K/yr which is the cutoff for deducting student loan interest. (It starts phasing out once you make over 65K and fully phases out at 80K, or 160K if you're married.) Even if you make less than 65K, you can only deduct a max of 2500/yr in student loan interest and you'll be maxing that out for at least the next 4 years. So, my take is:

Throw it at the student loan.

Your mortgage interest is (probably) fully deductible, which means your mortgage interest rate is effectively reduced by your tax bracket. E.g. if you are in the 28% tax bracket a 4% mortgage rate would effectively become 2.88%.

Outside of that, if you were to make minimum payments on your mortgage and student loans starting now, as soon as your student loan is paid off I would start making that same student loan payment amount towards your mortgage. This way you won't have any change in cash flow, but it will significantly lower the term of your mortgage. (Which is what would happen if you choose to pay down the mortgage now, but then you don't get the tax advantage on the difference.)

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If it is US, you need to take tax implications into account. Profit taken from sale of your home is taxable. One approach would be to take the tax hit, pay down the student loans, rent, and focus any extra that you can on paying off the student loans quickly. The tax is on realized gains when you sell the property. I think that any equity under the original purchase price is taxed at a lower rate (or zero). Consult a tax pro in your area.

Do not blindly assume buying is better than renting. Run the numbers. Rent Vs buy is not a question with a single answer. It depends greatly on the real estate market where you are, and to a lesser extent on your personal situation. Be sure to include maintenance and HOA fees, if any, on the ownership side. Breakeven time on a new roof or a new HVAC unit or an HOA assessment can be years, tipping the scales towards renting. Include the opportunity cost by including the rate of return on the 100k on the renting side (or subtracting it on the ownership side). Be sure to include the tax implications on the ownership side, especially taxes on any profits from the sale.

If the numbers say ownership in your area is better, then try for as small of a mortgage as you can get in a growing area.

Assuming that the numbers add up to buying: buy small and live frugally, focus on increasing discretionary spending, and using it to pay down debt and then build wealth.

If they add up to renting, same thing but rent small.

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    THe first paragraph is mostly incorrect: If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free. If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. – Pete B. Feb 3 '17 at 19:27

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