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I am finally at a point where my only debt is my mortgage at 5.25% a second at below prime and $10,000 left on a massive student loan at 7%.

I would like to start investing and also considering purchasing a beach house for rental income.

My question is: Should I pay down my mortgage to refinance it at 3.25% (the value of my home is what I owe because of the market values.) and pay off my student loan. (I am not able to deduct the interest because of my income.) Or can I start investing in stock? I hope to retire in 15 years.

Second question would be on buying a rental property. This would put me back into debt but would allow me to fulfill a dream of owning a beach home.

Thank you in advance for any advise.
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I am finally at a point where my only debt is my mortgage at 5.25% a second at below prime and $10,000 left on a massive student loan at 7%.

Congratulations.

Should I pay down my mortgage to refinance it at 3.25% (the value of my home is what I owe because of the market values.)

Given that you have apparently managed to save up some money so that you can ask about investing or paying down debt, it appears that cash flow isn't an issue for you. In that case, you need to look at how much will the refi really save you? i.e., for every $100k in current mortgage balance, the refi will save you less than $2k the first year, and the savings diminishes from there, as the principal decreases.

Also, have you looked into whether you are eligible for a HARP refi? http://www.makinghomeaffordable.gov/programs/lower-rates/Pag... If you are eligible, then you wouldn't have to pay down your mortgage at all. Even if you aren't eligible, you may want to wait a bit to see what happens with the talk of expanding HARP to everyone: http://news.yahoo.com/u-may-expand-mortgage-refinance-progra...

If you aren't able to refi without paying down the mortgage, then you need run the numbers to see if the savings justify it vs the cost of the refi, plus the capital you will have to invest in the paydown that you could be investing.

Should I ... pay off my student loan. (I am not able to deduct the interest because of my income.)

Definitely! At 7% this is not 'good' debt, and you will be hard pressed to beat this return without significant risk, while the student loan payoff would expose you to little risk, assuming you have adequate emergency funds after paying it off.

I hope to retire in 15 years.

Do you have any retirement savings now? Or are you eligible for a pension? If not, that's a very ambitious hope.

Second question would be on buying a rental property. This would put me back into debt but would allow me to fulfill a dream of owning a beach home.

Only if it would be cash-flow positive from Day 1, after considering all of the costs (mortgage, property taxes, homeowner's insurance, flood insurance, repairs, maintenance, months when it's not fully rented, costs for you to get to the property if it's not close to your home, etc.) An investment that requires ongoing cash flow isn't an investment, it's an expense.

AJ
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Beach homes can be expensive when you consider flood insurance and the risk of hurricanes affecting homeowners insurance, not even taking into account the home maintenance costs of keeping your home in good shape in a humid, salty environment. Speaking of environment, you have to take into account the potential for erosion taking your land and even your house (depending on location). Beach front properties can also be very expensive just to purchase.

I think your first priority should be to pay off the remaining $10k on the 7% student loan. After that, whether you should refinance or not depends in part on the terms of your current loan. If you are near the end of the fixed portion of an adjustable rate loan and facing a rate increase, or are at the beginning of a loan where you will save on the interest over time, a refinance may be good. But if you are near the end of a fixed rate loan in which you have already paid the interest and are now paying largely principal, a refinance may not save you much money.

Similarly, you have to consider the terms of the new loan. If it is an adjustable rate loan, will you be selling or prepared to refinance before the end of the fixed term before the rate becomes variable? If it is a fixed rate loan, are you prepared to extend your terms another 30 years? Are there any points or closing costs that will increase the long term costs of the loan?

Back to the beach house, are you prepared to manage this property directly, or are you going to hire a management company? Have you researched what other beach houses are leasing out at in the current market and would that be enough to cover your monthly expenses, including property tax, grounds keeping, house cleaning, etc? Your customers would most likely be short term renters, so having a local management presence to perform credit and background checks and keep an eye on renters and address issues quickly might also be an issue.

Fuskie
Who cautions, if you were planning to buy a beach front foreclosure property, to make sure of the condition of the property or your maintenance expenses could explode...
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Thank you so much for the responses. I guess I knew the answer but was hoping for a different one.

I do already have a pretty good 401k and max out on both the 401k contributions as well as their ESPP. I am also putting away quite a bit for my daughter's college.

So my goal for 2013 will have to be:
Payoff student loan
Build up more of emergency savings
Invest more in stock
Save for a very large down payment for my dream beach house :)

You can't ask a girl to give up her dreams!
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You can't ask a girl to give up her dreams!

Never give up on your dreams. Just prepare for them.

Fuskie
Whose parents once visited an exclusive golf course on an island with no land access and fell in love with the island, then bought some property in a new development, built a house facing the sunset, survived a resort bankruptcy, and have now retired permanently there where they can sit out on the porch and watch the dolphins feeding and playing...
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Hi,
Regarding "positive cash flow" I don't think that is possible at least here in NC. Beach houses can't get rents high enough for a positive cash flow even when you consider all the tax deductions you can claim (assuming the fiscal cliff doesn't kill them).
Jim D.
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Save for a very large down payment for my dream beach house :)

and start researching the price and all costs of a beach house.
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Regarding "positive cash flow" I don't think that is possible at least here in NC. Beach houses can't get rents high enough for a positive cash flow even when you consider all the tax deductions you can claim (assuming the fiscal cliff doesn't kill them).

I'll bet it is possible, if you purchase the home for cash instead of taking out a mortgage.

However, no matter where it is, a rental house that doesn't provide positive cash flow, especially when interest rates are so low, is a continuing expense, rather than an 'investment'.

AJ
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I do already have a pretty good 401k and max out on both the 401k contributions as well as their ESPP. I am also putting away quite a bit for my daughter's college.

Congrats on being able to max out your 401(k).

On the ESPP - are you holding a significant amount of your employer's stock? If so, you are taking on some significant risk - think Enron, WorldCom, HealthSouth, Lehman, etc.

I would also urge you to remember that while college costs can be borrowed for, you can't get a 'retirement' loan, so your retirement goals should probably be a higher priority than saving for college.

While you say you have 'a pretty good 401k' - if you want to retire in 15 years, you should be thinking about your retirement savings in terms of multiples of the income you want to pull from it in 15 years, including any taxes you will have to pay on the distributions. If you subscribe to the 4% 'safe withdrawal rate' theory, you need 25 times that income. And you also need to remember that if inflation averages 3% - 4% per year for the next 15 years, the buying power of the income then will only buy 55% - 64% of what it buys today.

Once you work through some of these numbers, you can determine if it will be reasonable for you to retire in 15 years, and still be able to afford a beach house.

AJ
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I second the concern about buying a beach house. You might consider renting one for several weeks a year (VRBO website has worked well for us)for your own use.

I'd be hard put to decide between Mission Beach (San Diego) and Santa Cruz and the San Juan Islands and Cannon Beach....I like the idea of varying my beach trips.
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AJ,

Every time I feel like I am making progress I get over whelmed by the complexity of the numbers and trying to calculate what I really need for retirement. At the point my goal is to "just have a lot". :)

My ESPP is with a company on the SA core so I think I am a little safe. However, I have only been working there less than a year and cashed out on my first ESPP opportunity to pay off credit card and majority of student loan.

You also mentioned that the 7% on my student loan was not "good" debt. Why is that and what would be good?
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I think then the issue on the student debt is the interest rate and the active benefit. It can be argued that the benefit of your education is over, you are long passed taking classes. But it can also be argued that your education contributes to your professional and personal lives long after leaving the classroom. That is more of an intangible consideration. Student debt is also unsecured debt, with no asset like a car or home being put up as collateral. It is generally thought that private student loans are worse than Federal student debt because of laws that ease and in some cases can partially forgive Federal loans while less strict regulations on collecting private student loans can make things more difficult for those struggling to make payments.

Fuskie
Who notes it is almost always better to attack your highest interest rate debt first, whether the debt is good or bad...
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On the ESPP - are you holding a significant amount of your employer's stock? If so, you are taking on some significant risk
I strongly repeat this.

I bought and held my company's stock in an ESPP and lost a bunch of money by doing so. I would have been far better buying it and immediately cashing it out for the 15% gain right when it was purchased every six months. Holding it - plus the stock in my 401K, PLUS stock options, put me at huge risk and I lost a ton of money this way.

Diversify, diversify, diversify...
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Every time I feel like I am making progress I get over whelmed by the complexity of the numbers and trying to calculate what I really need for retirement. At the point my goal is to "just have a lot". :)

That probably works well as long as you don't have a specific goal for retirement in mind, but since you do have a goal of 15 years, if you want to meet that goal, you will have a better chance if you do figure some numbers. A fairly simple way to start is to take your current annual costs from that budget you are working on over on the budgeting board, subtract any costs you don't plan on having in retirement (contributing to a 401(k), IRA or ESPP; SS & medicare taxes; mortgage P&I if you plan on having a paid off house; lower food costs because you will only be feeding 1; etc.) then add some additional costs if you think you will be traveling more, will have to pay more for medical insurance or have some other additional costs. Just use estimates of what those things might cost you now - it will still give you a starting point. You're basically looking for an estimate of how much it would cost you if you were retired today.

Then choose an inflation rate and apply it to the estimate you came up with for 15 years, and that's the income you will need when you retire. You can then multiply by 25 if you believe that a 4% withdrawal rate is reasonable, and that's your goal.

Revisit every year, and as you get closer to your 15 year goal, you should start to zero in on your estimates, and see if your goal is reasonable.

Yes, it takes some work, and yes, it deals with numbers. But if you want to successfully retire in your early or mid 50's without a lot of risk of having to go back to work, you will be better off taking these steps now.

My ESPP is with a company on the SA core so I think I am a little safe.

There were a lot of people recommending Enron, WorldCom, HealthSouth and others not that long before they tanked either. Take it from someone who has watched several companies she has worked for drop precipitously in short order - it's a risk. Go ahead and take it if you want, but realize that you are taking it.

You also mentioned that the 7% on my student loan was not "good" debt. Why is that and what would be good?

People often say that student loan debt and mortgage debt are 'good' debt. I just wanted to point out that if you are paying 7% on your student loan, and can borrow elsewhere significantly cheaper, a 7% debt is not 'good'.

AJ
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Let me turn "what would be good debt" into
an example of bad debt

spending money you don't have with nothing to show for it
say, running up your credit card debt on junk food that bloats your body

Then you have months paying interest on the debt, long past any enjoyment of what the spending brought you.

Sometimes, in favorable housing markets, a mortgage is a good debt, because you can sell the house for more than you agreed to buy it for, thus getting rid of the debt obligation when you move. (wistfully thinking of my childhood in the suburbs: Dad bought a house that was 4x his annual salary, they paid the same monthly payment through twenty five years of inflation, and then sold it for more than 10x the purchase price)
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I am always in favor of paying off all debt with the exception of a mortgage as quickly as possible and always starting with credit cards first.

Sounds like your debt is under control, so in my opinion, I would pay off the student loan first at 7% then look at getting rid of your second mortgage and refinancing at a lower rate. After all of that, then you could consider buying a beach house.
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I do already have a pretty good 401k and max out on both the 401k contributions as well as their ESPP. I am also putting away quite a bit for my daughter's college.

aj already mentioned the risk with ESPP and the idea of prioritizing retirement and college savings. As a subset of these...by "max" on the 401k, is that max for their contribution, or max allowable? If you are maxing beyond their contributions, you might consider diversifying into a Roth IRA (or even 401k if your employer offers it.) My opinion is tax rates have no where to go but up, so doing all of your savings in the "tax deferred now" category adds tax risk.

Also, the Roth can serve as a hybrid retirement/college savings vehicle, IF you are careful about segregating the amounts targeted for college in some recordable way, and are willing to give up the long term retirement savings room.

v/r
Tom
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