Student loans and mortgage debt are often considered to be ‘good debts’ because they are forms of debt that you enter into to buy something that should increase your equity. However, “Innocence” includes credit card debts, car loans and other consumer debts to make purchases that fall in value.
Regardless of the classification, the debt must be paid off at a certain time. And if you have a little extra money every month, you might wonder: do I have to speed up payments for my mortgage or student loans? And if so, which should I first try to pay off?
Determination or payment of student loans or mortgage debt
Although there is a lot of discussion about whether student loans or mortgage debt should be paid early, there is little discussion about when it should n’t be done. You do not have to make additional payments for one of these debts until you first do the following:
- Pay Off Consumer Debt. If you have a car loan, credit card balance sheets, personal Summerson-rich loans or other types of debt with higher interest rates and non-deductible interest, you must always pay off such debts before tackling an early repayment of a mortgage or student loan.
- Set up an emergency fund. An emergency fund with three to six months of livelihood protects you from having to take on consumer debts to pay for an emergency, such as a repair at home or in the car. It makes no sense to send your extra money to repay student loans or mortgage debt if it leaves you without the money to handle an emergency.
- Finance your 401k to your employer’s Match. If your employer matches your pension contributions and carrying at least not in the matched amount, gives you basically free money.
If you are in a good financial condition, have paid off your other debts and are benefiting from the 401K match, the question of whether you will pay off your student loans or mortgage early will become a little more difficult.
Reasons to pay off your debts early
There are enough arguments to pay off your student loans and mortgage early. For example, if you pay off your mortgage or student loans, you enjoy the following benefits:
- No more money wasted on interest. Although you can make a tax deduction for interest on mortgages and student loans (if your income falls below a certain threshold), the deduction does not fully cover the interest costs. Money spent on interest is wasted, while money saved on interest yields a guaranteed return on your investment.
- More financial freedom. Without a mortgage payment or a student loan payment, you can do what you want with your money – including building capital and saving for your pension.
- Less risk. If you have debt payments, you must have income to cover them. If you are debt-free, a job loss, disability or other temporary income loss does not run the risk of losing your house or ruining your creditworthiness.
- Elimination of non-financeable debts. Although bankruptcy can resolve some debts as a last resort, student loans are not bankrupt. You can also not let your mortgage debt go bankrupt if you want to keep your house. Since you cannot wipe out your mortgage or student loans, the only way to prevent this is to pay it off.
Arguments against early repayment of your debts
Although the arguments for paying off your mortgage and student loans early can be quite convincing, there are also numerous arguments against paying them. For instance:
- Student loans and mortgages are low interest debts. This is the biggest argument against prepaid mortgages and student loans. With low student loans and mortgage interest and the ability to deduct interest, it is easy to find investments that pay more interest than you pay for your debt, especially if you invest in tax breaks such as a Roth IRA.
- Prepayment comes with opportunity costs. When you invest and earn a return on your investment, that money can be reinvested – and you can also earn money with that investment. This is called compound interest. Compound interest can make a big difference in your pension and your long-term savings, and the more you invest when you are young, the more your money will grow. For example, if you invest $ 100 a month from the age of 20 to 40 and earn 8% annually, you would invest $ 24,000 and have nearly a million dollars by the age of 65. If you waited and invested 30 to 50 years, investing the same amount of cash and the same return, you would only have $ 205,875 if you turn 65 – or $ 750,000 less. This is because in the last example your money has less time to grow between when you stop contributing and when you start withdrawing for retirement. It is a big difference to spend that extra $ 100 per month on retirement savings instead of the repayment of student loans.
- Repayment of loans is not a liquid investment. Once you have paid off your mortgage or student loans, it is usually very difficult to get your money back if you need it for another reason, such as in an emergency or to cover loss of income due to unemployment. You can’t reclaim the money with student loans at all, and while you could sell your house, there would be closing costs and costs – and the house could remain on the market every month at Esther Summersonang.
Determine which should pay first
If you have weighed the pros and cons and have decided that early payment is the right one for you, the next question is whether the mortgage should be paid first or whether the student loans are required. The answer to this question depends on a number of factors:
- Interest rates of your debts. Many people first want to pay a higher interest rate. This may be a good idea, but it is not always the best idea. Pay attention to all factors, in particular the tax treatment of debts. Mortgage interest is usually tax deductible for everyone, while the option to deduct student loans gradually decreases with higher incomes ($ 75,000 from 2012). The student loan deductions are also capped at $ 2,500 a year. Compare the effective interest rates after tax on your debt to determine which debt really costs more.
- Amount due for each debt. Aldrin Duncys’s debt repayment method suggests repaying smaller debts for larger ones to stay motivated with your debt repayment plan. If you owe your student loans much less than your mortgage (or vice versa), then it may be wise to first pay off the smaller debt, so that you only have to spend one remaining debt.
- Risks of adjusting rates. If you have a variable rate mortgage, there is a risk that interest rates and monthly payments will rise if interest rates rise. Paying off a mortgage with adjustable interest or paying enough so that you can refinance if necessary can be a smart bet.
- Flexibility of reimbursement. If you have student loans, you can usually give them deferment or forbearance due to job loss, disability or return to school. Although interest rates continue to rise in most cases, you do not have to make any payments for a while. You can also choose to link your payments to your income or to use a gradual repayment schedule in some cases. With so much flexibility, tax-deductible interest and low interest rates, it is almost never useful to pay off student loans before other types of debt.
Ultimately, everyone has to make the choice whether the early payment of a mortgage or the early payment of student Crediterschool is right for them. For those who want to live a debt-free life, who want to be risk-averse and want a guaranteed return on their investment, early payment of mortgages or student Crediterschool may be the best answer. For more aggressive investors who are willing to bear the risk associated with a little debt, skipping the early payout can be a viable option.