 Dear
Dr. Don,
My wife and I are attempting to downshift into a less stressful life and move to a part of the country with a significantly cheaper cost of living, including lower housing costs and property taxes. Once we sell our house and the dust settles, we'll have about $120,000 in equity. We have no significant credit card debt, but we share student-loan debt of $60,000. Should we pay off the debt or use the money to buy another house right away?
-- Jersey Jake
 Dear
Jake,
I always like to err on the side of financial flexibility. If you use the money for a down payment, you'll be able to tap the equity in your house if you need the money in a pinch. By contrast, if you pay off your student loans, you won't be able to refinance your student loans if you need to borrow money.
There are some tax issues here. Are you able to deduct the interest on the student loans? Would you be able to use the mortgage interest deduction on your taxes?
Estimate the effective cost of your student loans and your mortgage. The IRS publications, "Home Mortgage Interest Deduction" and Publication 970, "Tax Benefits for Education" can help you with the deductibility issues while CCH's "Mortgage Tax Savings Calculator" will let you estimate the effective rate on the mortgage -- you can use it for the student loan effective rate, too.
Talk to your tax professional if you're not sure about the tax treatment of the interest expense.
I'd like you to look beyond these two choices in deciding what to do with the money. Building an emergency fund, investing in tax-advantaged retirement accounts or putting money in a taxable investment account all could make sense. Keep the big picture in mind.
Also, at least consider renting in your new Shangri-La before buying a house and finding out that you don't like your new lifestyle. Between realty commissions, moving costs, closing costs, decorating, etc., there's a pretty big tab to pay in trying on a new community by buying a house.
|
