Thursday, June 6, 2019

Total Debt Payments for four mortgage/student debt combinations



Post looks at total debt repayments for four mortgage/student loan options

Question:   Consider a person with a $100,000 student loan and a $300,000 mortgage.  The interest rate on the student loan is 5.0 percent and the interest rate on the mortgage is 4.5 percent.  The borrower is considering four repayment combinations – (1) 30-year FRM & 10-year student loan, (2) 30-year FRM & 20-year student loan,  (3) 15-year FRM & 10-Year student loan, & 15-year FRM and 20-year student loan.  What are the total loan payments for the four combinations?  

Consider the potential implications of these calculations for your long term financial strategy and the advice you are probably receiving from your financial advisor about the importance of making large contributions to your 401(k) plan.

Technical Note:   The mortgage and student loan payments are made in Excel with the PMT function.  The syntax of the PMT function is

PMT(monthly interest rate, number of monthly payments, original loan balance)


Results:

Below are the calculations for total debt repayments for the four mortgage/student loan combinations.


Total Loan Repayment Calculations for Four Options
30-year FRM and 10-year Student Loan
30-year FRM & 20-year Student Loan
15-year FRM & 10-year Student Loan
15-year FRM and 20-year student loan
Number of student Loan payments
120
240
120
240
Monthly Payment
$1,061
$660
$1,061
$660
Lifetime Loan Payments
$127,279
$158,389
$127,279
$158,389
Number of Mortgage Payments
360
360
180
180
Monthly Mortgage Payment
$1,368
$1,368
$2,065
$2,065
Total Mortgage Payments
$492,498
$492,498
$371,787
$371,787
Total Student Loan & Mortgage Payments
$619,777
$650,887
$499,065
$530,176


Observations:


The least expensive loan combo 15-year FRM/10-year student loan is $499.065.

The most expensive loan combo 30-year FRM/20-year student loan is $619,777.

The difference a staggering $120,000.

Implications:

Most financial advisors want you to pay off your credit cards, start a small emergency fund and then start investing in your 401(k) plan.

These numbers indicate there are huge potential gains from getting your student loan repaid in ten years or less and getting into a 15-year mortgage.   Many people who choose to make large contributions to their 401(k) plan do not have enough left over to make higher payments on shorter maturity student loans or shorter maturity mortgages.     The higher lifetime debt payments associated with the 30-year FRM and the 20-year student loans will largely offset investment gains from increased 401(k) contributions.









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