<#-- Rebranding: Header Logo--> <#-- Rebranding: Footer Logo-->

What should my bonus money be put toward: car loan, student loan, or savings for house?

I have been receiving large bonuses from work and I am unsure where to spend the influx of cash. I am 28 years old and married with one child. Between the both of us, we have $15,000 left on one car loan (4.75 percent interest rate, 5-year term), $9,000 on my wife's student loans (3.4 percent interest rate) and about $5,000 in hospital bills from pregnancy (on a very minimal payment plan). I have $25,000 in a high yield savings account. I have about $5,000 in a Roth IRA, and my wife has about $3,000 in a Roth IRA.

I plan to purchase our first house in about one to two years and would like to spend $200,000-$250,000.  I have no interest in taking money out of our retirement accounts for a down payment on a house. I would like to avoid private mortgage insurance (PMI). I save about $500-600 towards this down payment each month, but sometimes more due to my work bonuses. My current rent is $1500. At our current rate of $800 per month to her student loans, they will be paid off this time next year. My car payment is on point with what the lender calculated.

What should my bonus money be put toward: car loan, student loan, or savings for house?

Banking, Career / Compensation, Debt, Financial Planning, Retirement
Answers
Sort By:
Most Helpful
September 2018

If you do not want to delay the purchase of your house, put ALL of your discretionary resources toward saving for a down payment.  You want to hit the 20% target to avoid PMI. 

The equivalent interest rate for PMI (possibly 8.25%) is much larger than the rates you are paying on your car loan (4.75%) or your wife's college loan (3.4%).  It sounds like your medical loan might be interest free.  

Calculation of PMI equivalent interest: PMI ranges between 0.5% and 1% of the entire loan balance.  So, let's say you took a loan of $220,000 on a $250,000 house.  Your PMI (assuming the midpoint of 0.75%) would be $1,650.  To avoid this $1,650, you would need to save an additional $20,000 toward your down payment.  So, your effective interest rate on the PMI would be 8.25% ($1,650 / $20,000).

I also encourage you to pay down the other debts on schedule, but do not accelerate the payments.  The next priority would be to add to long term retirement savings.  The loans you have in place are moderate in interest rate and not the kind of loan (e.g. 24%) you would pay down ahead of all else.

Good luck saving for your house.  I hope things work out well for you and your family.

September 2018
September 2018
September 2018
September 2018