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June 18, 2012

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Not only should you get out from under the PMI but if you get your loan value down under 80% you can immediately refinance your loan for 3.75% on a 30 year mortgage which will save a bundle on interest. You should definitely pay down the mortgage to the amount that will let you get out of PMI and get a much better interest rate.

Beyond that what you do with the extra is going to be a minor consequence because the debt numbers are small. If you want to pay down the student loan debt that would be fine but by far your biggest gain will coming from getting a new mortgage at 3.75% without PMI.

Well, first off...what does your wife want to do? It's her relative that died, so I'd give her wishes priority. Or maybe a percentage (10%?) to do what she pleased with (no questions, no judgement).

If it were completely up to me, I'd pay off those student loans ($5250), and put enough into the house (~$7500) to refi 79% (both to get out of the PMI and for a lower interest rate).

Any remaining should be saved for tuition.

I agree with the previous comments focusing on the refi -- there's a lot of potential savings there which will seem likely to be more valuable than the savings gained from putting the money towards tuition.

That said, don't forget to at least double check tax questions. I haven't looked into it at all myself, so I've no clue what (if any) tax responsibilities you may have when receiving an inheritance (I have some vague memory that it depends on your state), but this should be investigated before you spend the money.

I recently read some advice from a financial planner (Kiplinger live chat) that you should opt to put extra money into a 401(k), if that's an option, over any student with a sub 6% rate.

Pay off the current student loan. Save the rest for the first year's tuition. Work butt off while going to school so can cash flow the second yr, etc. Any kind of debt sucks, and he can probably find a well-enough paying job right now that grad school could be put off.

I definitely agree with Apex. I would refinance the home mortgage and get out of PMI. If you put about $7k into the loan and spend $2k on closing you'd be free of PMI and cut your interest ~1%. (assuming your $110k assessment is correct). That could easily save you $100-$150 a month. Say it cuts $100 between PMI & lowered interest cost, thats $100/month x 12 = $1200 savings on a $9000 investment. This is like making 13% return on your money.

Are the student loans in your name and subsidized? If so then you can defer them when you go back to school and they turn into 0% loans for 3 years. So no sense in paying them off now.

You could just put the rest of the money in the bank and make some interst off it or have it handy for an emergency.

I would get your PMI elminated first and then the student loan debt second. Third I would ask the wife if she wants to do anything with the remaining money? How many years you have been in the home will determine if you should refi or not, but you are not paying alot for housing and with no PMI you should be in a better position. Going from 4.8% to 3.8% is not much of difference in monthly payment, knocking off a few years is the best situation in a refi scenario.

I agree with Apex as well and ran some numbers to back it up. Based on your actual mortgage payment of $791 excluding PMI, you have about 14 years left on your mortgage. I assume you have a 15-year mortgage. If you get your equity to 80%, which I am assuming is $88,000 based on your numbers, and refinance to a 30-year fixed at 3.75% (Apex's number) with no PMI, your payments would be $407 a month - less than half of your current payment. A $6,500 principal paydown with your inheritance would save $435 a month or $5220 a year which needless to say is an excellent return. Alternatively you could take out another 15-year mortgage at an even lower interest rate (let's assume 3%) which produce payments of about $607 a month - still $235 less than you are currently paying. If you're not figuring to be in your house too long (5-7 years), go with the 15-year as you'll have a lot more equity when you sell. Otherwise, go with the 30-year for cash flow purposes.

I would do a cash in refinance and forget about the 80% LTV. Put 5k in your wife's Roth IRA and let her have the rest. I don't think grandpa had paying your student loans in mind when he wrote the will.

Better yet you could call your mortgage lender and say to them you are going to refinance soon. They may lower your interestss saving rate just to keep your business saving yourself on closing costs.

I would
1. Pay enough on mortgage to save PMI (and you'll shorten the mortgage's life and save interest as well.
2. Fully fund Roth IRA accounts if you weren't planning to do that without this money.
3. Use whatever is left to put toward your tuition and so minimize future student loans.

Good luck!

Anything besides paying your student loan debt.

Assuming the inheritance is in her name, the safest thing to do with it is leave it in her name and never comingle it with marital assets.

Student loan debt isn't discharchable in bankruptcy, but it is discharged at death. In my own situation, if something were to happen to me, I wouldn't want my spouse to have blown an inheritance on my personal debt for education, as his need for cash would be greater without my income.

PMI isn't awful. It's the price of greater leverage. Without knowing the trend in home values in your area or your plans for staying put or if your best opportunities after earning the grad degree will require a move, I wouldn't confidently recommend putting her inheritance toward the house. If/when the time comes, it's much easier to spend cash than it is to spend equity.

Thank you everyone for the comments. I'm sorry I wasn't online when this went live. Here are responses to some of the comments and questions.

"if you get your loan value down under 80% you can immediately refinance your loan for 3.75% on a 30 year mortgage which will save a bundle on interest."

I didn't realize rates were still that low. We'll have to look into that for sure.

"Well, first off...what does your wife want to do? It's her relative that died, so I'd give her wishes priority."

She wants to put all towards loan payoff/tuition. I'm semi-forcing her to spend some on fun stuff for herself.

"Work butt off while going to school so can cash flow the second yr, etc. Any kind o
f debt sucks, and he can probably find a well-enough paying job right now that grad school could be put off."
I'm not quitting my full-time job, but will be going from 50-60 hour weeks to 30-40 hour weeks. Grad school is the task whose time has come. I've already put it off for three years in order to gain residency for lower tuition, and to tackle other minor debts. My employer is supportive of the lesser hours, and I will be taking the minimum credits to be full time.

"How many years you have been in the home will determine if you should refi or not, but you are not paying alot for housing and with no PMI you should be in a better position."

At least the 3 years for grad school. From there it depends on where I find employment, the housing market, where my wife wants to live, and how much we had to borrow in student loans.


"I don't think grandpa had paying your student loans in mind when he wrote the will."

Technically they're her student loans if that makes a difference in the equasion. We don't keep separate finances though, and my wording may not have been clear.

"Fully fund Roth IRA accounts if you weren't planning to do that without this money."

That's a good idea. We have IRA accounts, but haven't been contributing much to them, focusing instead on paying off cars (done) and paying down the mortgage and student loans.

$2k tithing
Pay the $6500 to stop PMI. it saves 600 in 1 yr. thats 9.5% interest rate plus what it would save each year until you actually got down to an 88K loan bal.
Then pay the student loans @ $5200 saves the interest, headache, paperwork, makes it easer for getting the best rate on loan for your next phase of education.
That leaves $6300. Splurge $300 on a weekend away in memory of your wife's grandfather - Make some happy memories. He listed you in his will with your happiness in his mind. Put the rest to the tuition. My logic is borrowing is bad and since the rates are close, getting the deduction on your mortgage gives that loan the advantage plus the student loan is not cleared in a bankruptcy (not that we want to go there) so the less borrowed there, the better.


I would suggest you pay off the student loan as the first priority and then pay the first year fee of your grad course with remaining money left. this will save the money you will pay as interest. You can keep paying the mortgage installments with your salary. It would be a right thing to do with that money as you are spending it on education. and once your grad course is completed, accumulate some good money and try to pay off the mortgage loan as well to relieve from any financial burden.

VERY SIMPLE:

1. Mortgage rates have dropped. Refinance and make sure it is now without PMI. That is the BIGGEST bang for the buck.

2. If any money is left over from reduction in mortgage to be $1 below the PMI requirement, then payoff the highest interest rate loans.

3. Do NOT leave any money in the pockets to spend, but after you do step 1 and 2, go our for a $100 dinner treat with spouse, and talk about the wonderful times with Grandpa.

Good luck.

Kenny

Just an fyi...

I believe that subsidized loans for graduate students will no longer be available as of next year.

+1 to Kenny for the thoughtful suggestion about taking time to actively remember and honor Grandpa.

"I believe that subsidized loans for graduate students will no longer be available as of next year."

Ack. You're right.

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