This isn't debt I should pay off - is it?

[taubel]

I think we're doing the right thing with our debt, but I just want to make sure! 

I've finally gotten us on to a budget plan where we have $100 to $300 left over each month. This money goes into a savings and is used for birthday gifts, car repairs, camping trips, etc.

We have 10K in an emergency fund.

DH and I both contribute to retirement savings through our employers. 

We have a mortgage, at 5.25, which won't be paid off for 22 more years.

We owe just under 8K on our car (rate is 4.99). (Our other car is paid off, but is nearly 10 years old).

DH has about 19K in student loans. I think the rate is 3. something, but I can't remember.

I would love to start paying down some of this debt, BUT we want to buy a different house in the very near future. The house will probably be $75K more than our current house, so our taxes and mortgage payments will go way up. (We are hoping to be able to afford the bigger house once I start working more hours within the next two years.)

Should we just keep doing what we're doing? Or is there a better plan?

Thanks! 

[crazyms]

Well if it were me I would think about paying off the car. I don't think I would feel comfortable buying a larger, more expensive house if I only had $100-300 extra each month. I would hope that the current house could be sold and would at least give enough money to get into the new house but that is going to probably up your house note, expenses, and it's going to extend the loan time.

You said you have 10K in an EF and owe just under 8K on the car. I would probably pay off the car - it would still leave $2-3K in the EF which is a good starting point and then you would have one less note and have that much extra each month ( I would guess that is probably a couple hundred dollars). That would allow you to put money back into the EF quicker. Once that was done I'd try to get an estimate on what the monthly budget would look like in the new house and try to start living in that budget (taking out the extra money to save for now) to see if I could afford the new house. This will help to see where adjustments need to be made. Depending on what the student loans run you each month it may be better for the budget if they were paid off before trying to get a new house just to have that money extra each month. I'd keep in mind that although it may not be ideal if the car is paid off you could always drop to state minimum insurance if money got tight where if it's still on a loan you'd have to have full coverage. That can make a big difference in insurance costs each much. I would think that the possible savings (pay off car, maybe paying off student loans, and then being able to lower insurance costs) could be a good bit each month and get you to having (just guessing here) $500-1000 extra each month instead of $100-300. That's just what I would do though.

[zebra15]

Im not sure I would be looking at buying a bigger home.  You can basically pay off the car loan (which is what I would do) with your EF then start to rebuild the EF.  No sense in paying interest when you have the cash! Then start chipping away at the student loans and current mortgage as well as saving for the next car you will need.  If you only have $100-$300 each month that is NOT enough to cover the cost of a bigger house, which will have larger utilities, taxes, etc.

When you say you 'hope to be able to afford the house in the next 2 years', do you mean you dont plan on buying for 2 years?  Honestly in 2 years with serious planning and dedication you could make some serious headway into those student loans and have your EF built back up!

[taubel]

Thanks for the ideas! I didn't think I would get any votes for paying off the car. The car is a 2009 so it we wouldn't be able to reduce the insurance on it. The monthly payment is just under $300, so it wouldn't even be that much extra a month. 

As for the bigger house, we technically can't afford it. HOWEVER, we do usually get about a 6K tax refund each year, so I think of that as a $500/month cushion. Is it wrong to think this way? We usually end up spending that money on home repairs, improvements, etc.

We won't need the larger home for another two years, but we are very picky, and we are looking within a very small area, so if the "right" home happens to come along before then, I don't want to pass it up. The larger home (including the higher taxes, etc.) will cost us between $300 and $400 more than our current home.

I was thinking we could use our tax refunds and/or some of our savings to pay the difference if we weren't able to afford the home right away.

I'm going to take the PP's suggestion and pretend we already live in the bigger house, putting that money into a savings to see if we can swing it. 

If we don't buy a house for two more years, I'm going to be kicking myself for not paying off the car though! It's so tempting to erase a debt...

Thanks for everyone's continued advice.

[crazyms]

If your estimates are that the house will cost $300-400 more a month and the car note is just under $300 a month then erasing the car note would give you the money each month the afford the house. I still suggest pretending to be in the house now just to get a feel for the budget and I'm glad you like the idea or it may help you. I definitely understand not wanting to lower insurance on a new car and I don't suggest it but if the car was paid off it would be possible if you really felt you had to if things got tight.

I understand wanting the new house but I would caution against getting one if you can't afford it. Situations change and I would hate to see you get the new house and something happen to cause you to lose it. I say that because I did it and it was depressing. We actually could afford the house we bought when got it and still had money left over in the budget. We had started making a little more money at the time but I still felt comfortable since we had been making enough for at least 2 years to afford the house. It was a dream and I loved it only right after we got in the house (within a couple of months) my income lowered, dh's job started cutting hours then they cut his pay before finally laying him off altogether. We of course had to let the house go. It was very upsetting for me especially since I thought I'd been careful with planning in getting the house. I'm still upset about having lost that house but there's nothing I can do about it now. I would hate to see that happen to anyone else.

If you are wanting to try to get a new house in 2 years though I would definitely try to cut all expenses you can for now to save extra money and try to live in a budget that includes the house. If you can live in the 'new house budget' for the next 2 years then you'll be more sure you can afford it when you get it and you'll also have saved up all that extra money to help go towards a down payment and lower your loan on it. Sorry for the long post and probably repeating stuff but I hope it helps.

[number572]

Another vote for paying off the car and then putting that same 275$ (or whatever it is) straight into your EF each month.  Shop around for insurance to make sure you're with the best priced one for your needs, sometimes companies will give you more if you go in with an attitude of "still comparison shopping" etc.  I don't have credit cards but one of my friends told me that she got her interest rate knocked down by 10% just by calling to say she was canceling that card b'c she'd found another company with a lower rate.  Which wasn't even true but she got her rate lowered.  The student loan is probably the most forgiving, lowest rate and also in case of emergency there are usually deferments or wage based payments you can apply for, and they will usually work with you if things ever get truly desperate. 

Also... unless you absolutely fall in love with one particular property, you have a ton of advantage by looking around, not getting your heart set on one property specifically and then making super low offers to many different properties.  We just sold, and since we are already moved out of state due to work, we had to sell right away which meant knocking SO much off of our asking price to get a quick sale.  We took a hit, but the buyer made out great!

Best luck!

[taubel]

Still thinking everything over - I really appreciate all the responses though!

We paid $440 in interest on the car loan last year. The payoff is approx $7700. I would love to pay it off.

My concern is that if I do happen to find the "right" house, we will need cash to get into it. We will end up taking out a new mortgage before we sell this house (most likely, I doubt our house will sell immediately) so I am trying to make sure we have access to enough cash for a 20% down payment on the new house. And then I would replenish that money once we sold our current house.

So that 10K emergency fund might come in handy for that...

Then again, $440 is a lot to waste in a year if we don't have to....

Does everyone still think I should pay off the car?

Thanks!

[taubel]

Oh, and I know we could get in trouble with the bigger house. It's just that our house needs a lot of work. DH and I are neurotic and worry about the impact of house stuff on our kids. So we end up buying more expensive "green" items when we do improvements. These are not things we will see a return on investment for.

For example, we bought expensive countertops because we didn't want anything with formaldehyde. The countertops are beautiful, but we will never get our money back for them. They're on top of yucky old cabinets!

And now we have to re-do our kitchen floor....

We'd have these same problems in a different house, but hopefully it would be a house we could live in until we were ready to retire!

Thanks.

[taubel]

crazyms - I am sorry to hear what happened with your house. That is terrible! I hope you will be able to find another house you love (if you haven't already).

[cappuccinosmom]

If it were me, I'd be pushing hard to get rid of the car debt.  Then I'd be working on student loans.  And if that meant cutting back on gifts and trips and the like, I'd do it.  When you are done, you will have much more money freed up for the fun stuff.  And if you are going to have the same problems with a different house?  I'd wait on that.  Get rid of debt, save up, and take your time shopping houses until you find one that isn't going to require you to constantly "green" it.

[Juvysen]

another vote for paying off the car...

[applecider]

Personally, I would not get stuck in the two mortgages trap.  I have heard of too many folks on this board whose first house took a long time to sell and they had to float two mortgages for a very long time.  That is scary!  Then what happens if someone gets laid off or hours cut?  I always find it is much safer and much better on my sanity if we plan for the worst.  I guess I would just really sit down and think about why you feel you need a bigger, more expensive house.  Is there any way to make your current house work, or at least until you have paid some things off and saved up more money?  I know our house is not ideal, but there is no way we could sell it in this market for what we would want to get.  I figure that families always lived in small houses before, why can't we?  Maybe just a good decluttering would help the house feel larger?  I don't know your situation.  But I would want to be much more financially secure before having to float two mortgages for who knows how long. 

[ChristyMarie]

If you currently have an extra $300 a month + maybe an extra $300 a month if you pay off the car (which will leave you with no downpayment?), how will you afford two mortgages and the upkeep/insurance on two homes?  I'm not seeing that working.

[stanleymama]

I agree with others who are suggesting selling the car.  Free up that money.  Then I would use it to fix up your current home and make it more sellable.  Then sell the house before you purchase another one.  Don't trap yourself, and don't count on "what-if's".  JMHO

[crazyms]

Originally Posted by taubel 

crazyms - I am sorry to hear what happened with your house. That is terrible! I hope you will be able to find another house you love (if you haven't already).

Thanks. We haven't found another house yet but have found land that is great for us. We hope to build or do something with it in the future. I do still miss the house but it was just a house. We'll find something else. What upsets me most about the loss if feeling like I failed and like I failed my family with bad judgment. I thought I was careful with my decision and the unexpected messed it up. I just hate to see that happen to others. It's the emotional/psychological impact of feeling like I failed that hurts more than the house itself.

OP I really understand the house needing work and all being a strain and how a different house would be better. I just really have to agree with the others that a few hundred a month extra isn't enough to cover two mortgages and you won't even have an EF anymore if it's used for a down payment. I would really vote for paying off/down as many debts as possible first. I hope you can decide what is best for your family though.

[honeybunmom]

I think it's a matter of the devil that you know versus the devil that you don't with the house.  Unless you are doing new construction, you really don't know what issues a house has until it starts to present them.  And if you've emptied your emergency fund on a down payment and next thing you know you need a new roof, or discover the insulation is less than represented, or the windows actually leak, or a pipe bursts behind the walls, etc., etc., you could bel up a creek quite quickly.  Yes, these are all issues that you could go back to the seller for if they are breaches of the sales agreement, but, you will have had to pay for them first, most likely.

This is from someone who is 1) in the two mortgages trap (fortunately, after 6 years of this, one place is finally rented) and 2) in a new home that, even though we did a full gut rehab on, still needs a lot of stuff that costs a lot of money and 3) lives in a high cost of living city.  Oh, and I've got school loans and kids' tuition now, too!  But, still haven't been able to replenish that EF I spent on the down payment of our house.

[TiredX2]

Given that your mortgage rate is higher than your car loan, is there a reason you would concentrate on your car loan first?  Do you itemize and deduct your mortgage interest (making it, in reality, closer to a 3.75-4% loan).  If not, *financially* you should pay off highest interest first.

How much equity do you have in your current home?  How much will the 20% down payment be on your next home?  Is the equity on your current home more than the down payment will be on your next home?  If not, how do you plan on paying that?
 

Originally Posted by taubel 

As for the bigger house, we technically can't afford it. HOWEVER, we do usually get about a 6K tax refund each year, so I think of that as a $500/month cushion. Is it wrong to think this way? We usually end up spending that money on home repairs, improvements, etc.

YES, it is wrong to think that way.  LOL.  Seriously, though, you are giving the government a tax free loan!  Adjust your withholding so you are are getting back $0-1K yearly.  Then figure that money into your budget in the way that makes the most sense.
 

Originally Posted by taubel 

Still thinking everything over - I really appreciate all the responses though!

We paid $440 in interest on the car loan last year. The payoff is approx $7700. I would love to pay it off.

My concern is that if I do happen to find the "right" house, we will need cash to get into it. We will end up taking out a new mortgage before we sell this house (most likely, I doubt our house will sell immediately) so I am trying to make sure we have access to enough cash for a 20% down payment on the new house. And then I would replenish that money once we sold our current house.

So that 10K emergency fund might come in handy for that...

Then again, $440 is a lot to waste in a year if we don't have to....

Does everyone still think I should pay off the car?

Thanks!

Your 10K emergency fund... how many months of income is that for you?

You say you have $1-300 left monthly.  Is that enough to cover the rotating expenses you mentioned?  Or are you dipping into savings to do so?  Are you actually *saving* any money at this point? (beyond what you will need to spend on expenses in the next year)?

What I would do in your situation is highly dependent on your job security.  If that $10K represents 2 months of expenses and you have no job security it is obviously a very different situation than if it represents 10 months of expenses and you have guaranteed job security, kwim.

It would also depend on the equity you  have in your current home.  If you will sell it and end up with 30% of the cost of your next home that is very different than if you will be looking at a short sale or a sale that you break even with.

Assuming that you have enough equity in your home to make the down payment on your future home (after selling & moving expenses) I would:

Current: EF= $10K, Car Payment=$300, Savings=$0

Pay off Car:

EF= $2K, Car Payment=$0, Savings=$300

Adjust taxes:

EF= $2K, Car Payment=$0, Savings=$300, Additional Savings= $500

Per Year:

Savings= $3600, Additional Savings, $6000

If you put the savings into your EF, in two years you will have $9200 PLUS still be able to grow it at $300/month

You will also have put $12K into "Additional Savings" which it sounds like you end up spending each year on improvements?  If not, you would have over $20K in savings.

[BetsyS]

When you say that you have $100-300 extra a month, you then describe spending it on stuff that you *know* are going to come up.  So, yes, technically it is savings in that you don't need it that month, but really, it is very, very short term savings, or a sinking fund. 

I would be uncomfortable in your situation.  I'd want to be actually saving several hundred dollars a month (as in, we have no anticipated need for this money, but we are going to just save it) before I'd commit to increasing my mortgage/taxes/insurance payment by $300-$400 a month. 

[TiredX2]

Originally Posted by BetsyS 

When you say that you have $100-300 extra a month, you then describe spending it on stuff that you *know* are going to come up.  So, yes, technically it is savings in that you don't need it that month, but really, it is very, very short term savings, or a sinking fund. 

I would be uncomfortable in your situation.  I'd want to be actually saving several hundred dollars a month (as in, we have no anticipated need for this money, but we are going to just save it) before I'd commit to increasing my mortgage/taxes/insurance payment by $300-$400 a month. 

ITA.  I was trying to get at that in my post above.  I don't consider saving for rotating expenses to be "saving" per se.
 

[mnnice]

Well I totally agree with the three previous posts.

I currently have zero debt and a house I would like to sell because it is not a location that works for us anymore. We moved out and moved into a rental in 10-2010 and currently have a good tenant living in the place we own too. We also have enough cash to have a huge down payment in our new location and there still is no way I would want two houses at once. I would like to buy a house where we live know, but we are unwilling to make that big of a commitment due to the general crumminess of the real estate market.