Better Option in Terms of Repaying Debt?

Question

Hello All,

I have a general question in regards to what debt to pay down first. Currently my largest sources of debt are my condo I recently purchased in April 2018 and my student loans.

At my current payment rate my mortgage will be paid off in 10 years, but as a young professional I realistically won't have the mortgage for the life of the loan. My question is would I be better off putting the additional payment to my student loans instead of the mortgage? Currently leaning toward putting the payment toward my student loans as the mortgage will be paid off once I sell the place and I would still have the student loans.

Mortgage interest rate is 4.75% and the student loans work out to be around a 3.78% interest rate.

Any thoughts would be greatly appreciated.

Thanks,

Scott

Account Closed · Answer

I would pay off the student loans first if you have to decide. That is debt that will not ever go away (even if you had to declare bankruptcy-God forbid). Also, as you pay down your condo, you will be gaining equity in the property. Have you thought about renting the condo out down the line? If you think you might be able to generate positive cash flow from it as a rental, then I would definitely pay the student loans first. Hope this helps.

JD Martin · Answer

Given the choice between those 2, I would pay down the student loans as they're virtually impossible to discharge in any way. Not that you want to default on anything, but in a bad situation bankruptcy and foreclosure would get you out of the mortgage, while the student loan will just chase you around until you're dead.

However, as RAF stated, with such a low interest rate you can probably make a better rate of return elsewhere, especially when you factor in the tax value of the student interest which likely makes that an effect rate of 2% or thereabouts. If you don't have a year's worth of living expenses on hand (meaning cash in the bank or in something easily to liquidate, like a CD), I would focus on that before paying off paltry interest loans.

Scott B. · Answer

@Alexander Felice I've been considering just making the minimum payments, and increasing my cash on hand. Currently don't have any rental properties but would be good to have cash for a 20-25% down payment in the near future (1-3 years.)

Scott B. · Answer

@Alex Weissgerber The idea of having the student loans paid off really appeals to me. Currently that's my only source of consumer debt outside of my cheap car and it'd be great to have that off my shoulders.

I've considered renting out the condo down the line, but the #s don't really add up to me and more than likely would be 4+ hours away from the unit in the next few years so would need a property management company which makes cashflow that much worse.

Alexander Felice · Answer

both are low rates, I wouldn't pay either off. Focus on making money instead

Better Option in Terms of Repaying Debt?

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