lovinglife Posted December 17, 2014 Share Posted December 17, 2014 I wanted to crowdsource a financial question. Dh and I have been through the wringer financially the last few years, beginning with a stint of unemployment that began three years ago. We have always focused on frugal living and trying to make good use of our resources, and living with as little debt as possible. We are lucky enough to both have advanced degrees and no student loan debt! My question is this- we had to short sell our house this year, but are looking into purchasing the house we are currently renting in the next 18 months or so, when we are able. We will be receiving a sizable tax refund due to a number of tax factors, and are torn between putting it away in savings towards our down payment or paying off the last debt we have- a low interest rate loan for our van. Which should take priority? It would be so nice tone debt free again! But if we payoff the van, it will certainly make saving the money for the down payment in the time frame we would I like much more difficult. WWYD? Quote Link to comment Share on other sites More sharing options...
TranquilMind Posted December 17, 2014 Share Posted December 17, 2014 I wanted to crowdsource a financial question. Dh and I have been through the wringer financially the last few years, beginning with a stint of unemployment that began three years ago. We have always focused on frugal living and trying to make good use of our resources, and living with as little debt as possible. We are lucky enough to both have advanced degrees and no student loan debt! My question is this- we had to short sell our house this year, but are looking into purchasing the house we are currently renting in the next 18 months or so, when we are able. We will be receiving a sizable tax refund due to a number of tax factors, and are torn between putting it away in savings towards our down payment or paying off the last debt we have- a low interest rate loan for our van. Which should take priority? It would be so nice tone debt free again! But if we payoff the van, it will certainly make saving the money for the down payment in the time frame we would I like much more difficult. WWYD? I would pay off the van. Debt-free makes everything easier. Then get creative about your down payment. Maybe you can sell a lot of furniture or things you don't really need, and pocket all that. Maybe you can offer your tutoring services, since you have advanced degrees, and make some money that way. Good luck! You can do it. Quote Link to comment Share on other sites More sharing options...
Aiden Posted December 17, 2014 Share Posted December 17, 2014 I also would pay off the van. I look at it from a reverse standpoint: if I already had no debt, would I go into debt using my van as collateral (assuming that was even possible, which it probably wouldn't be) in order to get enough money for that down payment? I wouldn't, so I wouldn't stay in debt for that down payment either. Quote Link to comment Share on other sites More sharing options...
SparklyUnicorn Posted December 17, 2014 Share Posted December 17, 2014 I would save the money and use it as the down payment. If you were going to save extra, pay extra towards the van. And this way you have a cushion of money if something goes very wrong from now until then. Quote Link to comment Share on other sites More sharing options...
gardenmom5 Posted December 17, 2014 Share Posted December 17, 2014 What is the interest rate on the van vs what you could earn on it? Can you put the money in some 18 month cd thing? Quote Link to comment Share on other sites More sharing options...
SparklyUnicorn Posted December 17, 2014 Share Posted December 17, 2014 What is the interest rate on the van vs what you could earn on it? Can you put the money in some 18 month cd thing? Hahaha...interest rate on savings? What's that? Quote Link to comment Share on other sites More sharing options...
5of5 Posted December 17, 2014 Share Posted December 17, 2014 Would not having any loans (i.e., paying off the van) affect your credit score? I don't know, but it might be a consideration as you'll need a reasonable score for your future house loan. Quote Link to comment Share on other sites More sharing options...
Lawyer&Mom Posted December 17, 2014 Share Posted December 17, 2014 My rule of thumb. If the interest rate of the debt is less than the rate of return I can earn on investing the money I invest the money. I have a stupidly low fixed interest rate on my student loan. Therefore I'm voluntarily paying it back over 30 years instead of 10 years. My extra money should be in my mortgage payment or my 401(k) not my student loan payment. I know a lot of people try to pay debt off at all costs. I disagree. If the rate on your car loan is really that low, it may make more sense to save the money rather than pay off the loan. Quote Link to comment Share on other sites More sharing options...
Annie G Posted December 17, 2014 Share Posted December 17, 2014 How long does it take for your credit to recover from a short sale? Quote Link to comment Share on other sites More sharing options...
SamanthaCarter Posted December 17, 2014 Share Posted December 17, 2014 Assuming you can't make any money on savings, pay off the van. Quote Link to comment Share on other sites More sharing options...
Pawz4me Posted December 17, 2014 Share Posted December 17, 2014 My rule of thumb. If the interest rate of the debt is less than the rate of return I can earn on investing the money I invest the money. I have a stupidly low fixed interest rate on my student loan. Therefore I'm voluntarily paying it back over 30 years instead of 10 years. My extra money should be in my mortgage payment or my 401(k) not my student loan payment. I know a lot of people try to pay debt off at all costs. I disagree. If the rate on your car loan is really that low, it may make more sense to save the money rather than pay off the loan. Yes to the bolded. Being debt free doesn't impress me. It's often a poor financial choice. Quote Link to comment Share on other sites More sharing options...
lovinglife Posted December 17, 2014 Author Share Posted December 17, 2014 How long does it take for your credit to recover from a short sale? Annie- ours should be recovered within two years, but it can vary. We never missed a payment until we moved and started negotiations with the bank (we didn't want to but were told they would not consider it unless we stopped payments). All of our other credit has remained clear despite the financial duress we experienced with the unemployment and then reduction in income. Again, the experience will vary depending on individual circumstances. For some of the other posters: the interest rate is 2% I believe? I'm not sure what sort of rate we could get on a CD. It wouldn't free up that much money each month- 5-10% of our average monthly income (it varies as we have multiple adjunct faculty positions). Quote Link to comment Share on other sites More sharing options...
Reefgazer Posted December 17, 2014 Share Posted December 17, 2014 Do you have access to emergency funds (credit cards, savings tucked away for emergencies) if necessary? If not, I would save money for that first. Otherwise, What interest are you paying on the van note? I'd take those things into account first, and only alter my plans if an exceptionally good house buy appeared. Quote Link to comment Share on other sites More sharing options...
Jane in NC Posted December 17, 2014 Share Posted December 17, 2014 Yes to the bolded. Being debt free doesn't impress me. It's often a poor financial choice. I think being debt free is psychological important to some people. But you are right--the big picture is the more important one. Quote Link to comment Share on other sites More sharing options...
Annie G Posted December 17, 2014 Share Posted December 17, 2014 Since your credit will have recovered by then, I vote to save the refund for the down payment. A decent down payment saves you lots of interest since the home loan is usually quite long. And when your car loan is paid, you can just have that same amount automatically transferred into a savings account for emergencies- a replacement car, home repairs, or whatever. Quote Link to comment Share on other sites More sharing options...
TranquilMind Posted December 17, 2014 Share Posted December 17, 2014 Yes to the bolded. Being debt free doesn't impress me. It's often a poor financial choice. Conversely, I think it is ideal. Not quite there, but it won't be long. It's freedom. Quote Link to comment Share on other sites More sharing options...
lovinglife Posted December 17, 2014 Author Share Posted December 17, 2014 Emergency fund is definitely very important! We are working on building that currently and also have a very low interest line of credit through USAA in case a very dire situation arose. Like I said, the car interest rate is around 2%, very low. The reason we are anxious about the down payment is because we really love our rental, perfect location, close it family, etc and it meets our needs well and the landlord is willing to give us a very good deal if we would like to purchase it from him. We would also like to be saving money to remodel the tiny kitchen as it is the only downside to this otherwise perfect house. We would want to ideally use cash for that as well. Quote Link to comment Share on other sites More sharing options...
Ottakee Posted December 17, 2014 Share Posted December 17, 2014 First I would see if you have an adequate emergency fund in place. If not, put the money into that. Then, while I am all for being debt free. If the van loan is at only 2% then likely I would save the money for a down payment and just try to add anything extra you could do the van payment. Even $5-10/month on the principal will help. Quote Link to comment Share on other sites More sharing options...
Arcadia Posted December 17, 2014 Share Posted December 17, 2014 It depends on the interest rate of the loan. Also a short sale supposedly affects the credit report for three years. Having the car loan paid monthly might boost up the credit score compare to no car loan.. Quote Link to comment Share on other sites More sharing options...
LucyStoner Posted December 17, 2014 Share Posted December 17, 2014 I think the regular car payments will help boost your credit in advance of getting a mortgage again. I would save the money for the down payment and keep paying the car monthly. FWIW, I am debt averse and would usually lean towards the opposite answer but based on the short sale to recover from and the loan interest being low, I think carrying a small amount of regularly paid debt has a benefit for you. Quote Link to comment Share on other sites More sharing options...
SparklyUnicorn Posted December 17, 2014 Share Posted December 17, 2014 I agree that the car payment will boost the credit score. And the interest rate is not bad at all. If it were something crazy like 15% then of course paying that off sooner would be better. I once went a bit crazy paying off a bunch of debt without considering some extra cash in the bank account. That was not a good idea because I actually ended up taking on credit for emergencies. So it would have probably been better to save some of it. Quote Link to comment Share on other sites More sharing options...
Lawyer&Mom Posted December 18, 2014 Share Posted December 18, 2014 2% is pretty low. Your future mortgage is going to be at least 4%, if not more. (The Feds have been keeping rates low, presumably this won't continue forever.) A larger downpayment means less of the higher interest to pay. You could earn more than 2% return on an investment. The S&P 500 index is up 8% year to date. Of course the stock market isn't where you put money you need to use in the short term, but it shows you how low 2% really is. CDs can be a good short term option. Bank of Internet is offering .55% on a 12 month CD. And of course the usual disclaimer: I am a lawyer, but I'm not your lawyer. And I'm typing this on my phone while I microwave my daughter's dinner, so take this with a grain of salt and run your own numbers, decide what's best for you. Quote Link to comment Share on other sites More sharing options...
BlsdMama Posted December 18, 2014 Share Posted December 18, 2014 Would not having any loans (i.e., paying off the van) affect your credit score? I don't know, but it might be a consideration as you'll need a reasonable score for your future house loan. Ten points! Yes, getting rid of the installment loan will drop your credit score by small amounts. You get points for diversity. Also, some banks require three positive lines of credit since a major financial problem. Check out the mortgage board on the Fico forums. They are quite knowledgeable. The more you have for a cushion and or down payment that is also something looked at. They don't care about a small installment loan that is current but they might require you to have three to six months of savings. Seriously, go to the mortgage board. So much to learn and so much has changed since you probably bought your last house. ;) Quote Link to comment Share on other sites More sharing options...
lovinglife Posted December 18, 2014 Author Share Posted December 18, 2014 Thanks for the mortgage board suggestion. I'll be checking that out! Quote Link to comment Share on other sites More sharing options...
creekland Posted December 18, 2014 Share Posted December 18, 2014 I'd be keeping the money for the down payment. With the economy getting better, chances are interest rates will rise. Housing prices are already going up in many places (not sure about yours), and, of course with renting you are never assured of what will happen with the property (what happens if the owner falls on hard times or meets an untimely end?). The sooner you can get the house (since you like that one), the better you likely will be - and it could easily be considerably more of a savings than just 2% interest on a car loan. I wouldn't even be thinking twice about this decision to be honest. Quote Link to comment Share on other sites More sharing options...
vonfirmath Posted December 18, 2014 Share Posted December 18, 2014 I think the regular car payments will help boost your credit in advance of getting a mortgage again. I would save the money for the down payment and keep paying the car monthly. FWIW, I am debt averse and would usually lean towards the opposite answer but based on the short sale to recover from and the loan interest being low, I think carrying a small amount of regularly paid debt has a benefit for you. Agreed. My husband had NO credit score when we got married. (NEver having a credit card, taking out a loan, etc) We bought a car on payments instead of paying cash (our normal operation) specifically to start building a credit score for him. Quote Link to comment Share on other sites More sharing options...
kbutton Posted December 19, 2014 Share Posted December 19, 2014 I would save for the down payment as it doubles for an emergency fund. Once you start having house repairs and other big expenditures after a major setback, it can really take a long time to get things back up to a comfortable level. If you pay off the debt, you lose that flexibility of having cash on hand in the meantime and more cash later because of a better down payment. I would humbly suggest one additional step--consider seeing a financial adviser. We are at a point where our only debt is the house (it is re-financed to a great rate, and it's WELL within our means on one higher than average income), and our income has been getting comfortable after years of frugality, job changes, paying for education, LONG commutes, retiring student loans, etc. We had saved some for retirement, but our entire adult investing life has been a roller coaster. We've really found the adviser helpful, and we still hope to pay off our home early at some point. Our bank credit card gives rewards in the form of principal payments on our mortgage, so that does help tremendously. However, we needed to up our retirement contributions, and an adviser helped us to see that and figure out priorities when we hit that fork in the road (she put more practical terms to it that were very persuasive). On top of all that, we will be able to pay (with cash) for some updates that the house needs sooner rather than later, if we do not retire our house payment. (It's not falling apart--we've prioritized big needs like a new roof over attractiveness, but that also puts us in a vulnerable spot if we had to sell quickly for some reason because it needs some "pretty" work.) It's a win-win, and paying the mortgage off early is still not something totally out of sight at this point. Quote Link to comment Share on other sites More sharing options...
maize Posted December 19, 2014 Share Posted December 19, 2014 Emergency fund is definitely very important! We are working on building that currently and also have a very low interest line of credit through USAA in case a very dire situation arose. Like I said, the car interest rate is around 2%, very low. The reason we are anxious about the down payment is because we really love our rental, perfect location, close it family, etc and it meets our needs well and the landlord is willing to give us a very good deal if we would like to purchase it from him. We would also like to be saving money to remodel the tiny kitchen as it is the only downside to this otherwise perfect house. We would want to ideally use cash for that as well. Under these circumstances I would go ahead and save the money for a down payment. Quote Link to comment Share on other sites More sharing options...
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