Pay down debt or save?

[taubel]

First off, we would like to buy a different, slightly larger house in the next year or two, so we are trying to save for that and make some upgrades to our current home. In the meantime, I'm wondering if we should be paying down any of our debt.

Including the company match, about 19% of both DH's and my salary goes into our respective 401(k)s. (I work PT, though, so it's not a huge amount in my case). So I think we are set there.

We owe just over 100K on our mortgage at 5.25%.

DH has one student loan with a balance of nearly 19K at 3.875%.

Would it be more important to pay down this debt - or are we OK with saving for a different house? 

And if we were to pay down one or the other, which one should it be? Obviously we are paying more interest on the mortgage, but we're taking deductions on the interest paid for our tax returns.

[JElaineB]

Do you have an emergency fund or any savings besides retirement? If not I would definitely save a bit as an emergency fund. Are all other debts paid off? If no, I would pay off any credit card debt first. After that if your income level is decent and jobs are stable I personally would be comfortable carrying that student loan debt and a mortgage to save for another house. I know some would say to pay off the student loan first however. Can you open a high interest checking account? I have one at a local bank and sometimes get a higher percentage rate in interest than you are paying on the student loan.

[sunnysandiegan]

Both!

[taubel]

Thanks for the response!

We do not have any other debt, luckily (recently paid off our car loan).

We have a lump sum of cash in the bank. I think of it as our new house fund/emergency fund. So the money is just sitting there, which is why I'm always tempted to use it to pay down debt. But of course if we DID find another house, we'd need a good portion of that money for closing costs, the possibility of paying two mortgages for an extended period of time, etc.

We have a little bit of leftover money each month, which goes into the bank savings, but if we bought a more expensive house, money would be a lot tighter, and we would put very little into the bank each month (although we'd keep our retirement amounts the same).

So I guess I really want to save/put most of the money towards another house, but I feel guilty about not paying down the debt first. We could really use the $200+/month we pay on that student loan!

I wish we had bought a "forever house" the first time around. We would be in much better shape if we didn't buy want to buy another house, but for many reasons I feel that buying another house is our only choice (lots and lots of factors have gone into this decision). 

[sunnysandiegan]

Depending on your lump sum amount (related to your expenses AND related to your potential down payment), I would divert that monthly extra towards the student loan. At the very least, I would put an extra $25 to the student loan each month and keep building the savings. All the details would depend on the situation and exact dollar amounts.

[taubel]

Originally Posted by sunnysandiegan 

Depending on your lump sum amount (related to your expenses AND related to your potential down payment), I would divert that monthly extra towards the student loan. At the very least, I would put an extra $25 to the student loan each month and keep building the savings. All the details would depend on the situation and exact dollar amounts.

Maybe I will try $50/month toward the student loan. At least then I'll feel like we're doing something! So it would be better to pay down the student loan (as opposed to the mortgage) even though the rate is lower?

Does anyone ever recommend contributing a bit less to retirement (like doing 15% vs. 19%) and putting that extra money towards loans? At this point, we're paying a lot more interest on our loans than we're earning on our 401ks.

Thanks for everyone's thoughts.
 

[sunnysandiegan]

Well, it really depends on details, but I look at it as getting rid of the student loan payment to free up that monthly cash (shorter-term obligation) to prepare you for the next mortgage. (Technically, I would create an amortization schedule in Excel and figure out what it would take to get the student loan paid off by the time you want to buy a new house. I'd reduce expenses and/or take on additional employment to make that happen in that order...payoff student loan before buying new house...not for loan purposes but for living purposes. If you have excess items, you could sell those for the cause, too.)

Also, if you weren't planning to buy a new house, my strategy would be different. I would put a percentage of the "extra" each month towards the mortgage, student loan, and savings. I would reduce expenses in order to get the amounts to a decent level to make a difference (read amortization schedules in Excel and adjusting amounts to meet deadlines that were important to me/us).

No, I would not drop the retirement savings percentage. In fact, I would increase it. Too many people underestimate the importance of retirement savings at ALL ages.

[les_oiseau]

Pay off the debt. If you let the debt accumilate interest while saving $ your savings will be reduced by at least the amount of interest owed on the debts. 

[taubel]

Thanks for the responses. We're going to keep saving for the house, but throw any additional money we receive (from selling things on eBay, birthday gifts, work bonuses, etc.) toward the student loan.

[sunnysandiegan]

Sounds good. Best wishes!