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When I bought my Chevy Tahoe six years ago, I was excited because the loan was 0% for six years. The finance nerd inside me LOVES getting free money, but the aspiring real estate mogul inside worried what the monthly loan payments would do to my debt-to-income ratio. The loan is now paid off… but what to do with the money I’m saving. As usual, I have a plan.
Paying off my Chevrolet Tahoe Hybrid
When I bought the Tahoe new in 2009, it was the height of the financial crisis, so Chevrolet was offering 0% for six years with no down payment. This made the payment high, but 0% was so attractive!
Every month, for the past six years, payments have been auto-deducted out of my checking account to pay off this auto loan. Mentally, I was in no hurry to pay the loan off since EVERY other option yielded a higher return than 0%… even today’s bank savings accounts paying 0.05%. (I personally use CapitalOne 360, which is currently paying 0.75%)
However, whenever I applied for a mortgage, whether it was to refinance my house or obtain a loan on a rental property, having that large auto loan negatively affected my debt-to-income ratio (aka DTI)(add up all your minimum debt obligations and divide by your monthly income). Although I was always approved, this loan caused so close calls to the maximum DTI allowed by the lenders.
In November, the final payment was made, so it was time to celebrate. Not to go out and buy anything, but to cherish the moment, hug the wife and kids, and set in motion my next moves.
Accelerate student loan payments
Earlier this year, I refinanced my student loans with SoFi. SoFi is a new “FinTech” lender that specializes in borrowers with excellent credit and offers student loans, personal loans, and mortgages.
My loan was originally a combination of subsidized and unsubsidized Federal loans with a fixed rate loan of 6% . If I paid only the minimum, I would have been paying for the next 15 years, or more. Based on the payments I was making, I had about 10 years left.
When refinancing the student loans with SoFi, I had the option of a fixed rate or a variable rate that was substantially lower. Although we’re heading into a rising interest rate environment (the Federal Reserve increased the “Fed Funds Rate” by 0.25% this month), my plan is to pay the loan off before that becomes too much of a factor.
With the lower rate and additional payments, I was able to drop my loan term from 10 years to about 6 years. Now that I’m also applying my Tahoe payment to the SoFi student loans, they will be paid off in less than 2 years!
Bye bye to Mortgage PMI
Now that the Tahoe is paid off and the student loans’ demise is within sight, all of my consumer debt will be eliminated. I charge a lot to my credit cards, but those are paid off in full each month. The airline miles and hotel points rewards I earn are not worth the interest I would pay for carrying a balance on a credit card.
The money I used to pay towards the Tahoe loan and the SoFi student loans will now be applied towards our mortgage balance so we can eliminate the mortgage PMI (private mortgage insurance).
PMI is roughly 1% of my mortgage balance and (per FHA rules at the time we refinanced in 2018) must be paid for a minimum of 5 years. Say you have a $400,000 loan (which isn’t hard to do in Southern California), that translates into $333 a month, or $4,000 a year, for something that you get no benefit from. PMI is deductible in 2015, but there are income limits which exclude us from being able to deduct it.
In my case, it is actually MIP (mortgage insurance premium), since I have an FHA loan. This is an insurance policy to protect the lender when you have a down payment of less than 20% when buying your house, or have a loan-to-value ratio (mortgage loan balance divided by appraised value of home) above 80% when refinancing.
With the recent increase in home values, I could have refinanced my loan to eliminate the MIP, but then I would have incurred fees for the refi, the loan would have reset to 30 years, and I would have lost my 3.25% fixed rate loan. I did the math, and at today’s interest rates, I would have lost $60,000 by refinancing… even after accounting for the elimination of my monthly MIP.
So, I am paying a few hundred dollars a month extra towards our mortgage to bring us closer to the 78% LTV while we wait for the 5 year timeframe to elapse. In January 2018, we will need to write a relatively small check to bring our mortgage balance the rest of way down to 78%, freeing up even more money.
And now we wait….
The debt payoff plan is in place. I feel like I’m pulling back a slingshot, aiming and ready to fire. Now, all we can do it wait as we dutifully pay off the balances one piece at a time over the next two years.
In 2018, a major shift in our personal finances will occur when these goals are realized, and I can redirect roughly $20,000 a year towards the future (investing more) instead of the past (paying off debt).
What are your plans?
Do you have a long-term plan for your finances? Or are you so overwhelmed that you cannot see past your next paycheck?
Let’s talk about it.