How to Examine Different Financial Scenarios

Surfside Beach CondoI recently have been considering buying a beachfront condo. One of the hardest parts of making a decision is the financial impact of buying a condo. As you know, my girlfriend has been paying off her student loans and I’ve been saving to help her pay them off once we get married.

Instead of just wondering what impact it would have on my finances I decided to run the numbers and see what would actually happen. Below are a few scenarios of how long it’d take to pay off my girlfriend’s student loans and how much interest we’d pay in each case.

Option 1 – Minimum Payments Only

This isn’t really an option we’ve ever considered but it is worth exploring. If we make just the minimum payments we’ll be paying for my girlfriend’s student loans until 2024! CRAZY!

While making payments over a long period of time isn’t a fun idea, the more important number to us is total interest paid on the loans. By paying only the minimum payments we’ll pay just over $22,000 in interest. No fun.

Option 2 – Continue Paying at the Current Rate

This option isn’t very likely either, but again is worth exploring. If we never combine finances and my girlfriend continues to pay her student loans off at her current rate (without my contributing) she’ll have her student loans paid off in early 2019. That’s better than 2024… but not by much.

What’s amazing about this option is that, while it only shave 5 years off the loan time period, this option will reduce total interest paid to just under $11,000. That’s half of the interest paid in option 1 above.

Option 3 – Don’t Buy a Condo

This is the first realistic option. I would use my cash hoard in the way I originally intended and pay down my girlfriend’s student loans once we get married if we don’t buy a condo. This method would result in my girlfriend’s student loans being paid off by the end of 2013!

Even though the time period is drastically reduced by this option we’ll still end up paying a decent amount of interest. This method would result in a little less than $3,000 dollars of interest paid. That’s only 1/4th of the interest in option 2 and 1/7th of the interest paid in option 1.

Option 4 – Buy the Condo

This is another realistic option. In this option my cash hoard would be used for a down payment on a condo instead of being used to pay down my girlfriend’s student loans.

After we buy the condo we have planned for a three month transition period to rent out the townhouse we currently live in. During this time we’d have two mortgages and less extra money to put toward her student loans.

Once the townhouse is rented we’ll then transition to our new budget and resume the student loan payoff at full speed. This is probably an overly cautious transition plan but we wanted to plan for the worst.

In this option my girlfriend’s student loans will be paid off in late 2015 to early 2016. This option extends the payment for about 2 more years than our current plan, option 3.

This option also means paying more in interest. We’d end up paying a little less than $6,000 in interest in this method, or about $3,000 more than in the current plan. 

Student Loan Interest Isn’t the Only Thing to Consider

The student loan interest analysis is only half of the picture. In order to make a smart financial decision you need to look at the whole picture and look at the total financial impact. The other half of the picture is the condo prices and interest rates.

If either of the prices or interest rates change between buying now and buying after her student loans are paid off (and saving up a down payment) it would alter the financial results. If the price goes up or interest expense on a mortgage rises by more than $3,000 in the time period we delay a condo purchase it wouldn’t be financially wise for us to put off buying the condo.

I’ll be delving into this half of the equation in another post.

So, based just the student loan interest side of the equation, which option do you think will work out best?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. Predicting interest rates gets into some pretty speculative territory, so in this situation we’d probably choose a compromise position like the last one you mentioned. If interest rates on mortgages rise (which they’ve started to), it might be penny wise but pound foolish to concentrate so much on the student loans.
    Not to be too nosy, but do you guys have a timeline for wedded bliss and sharing finances? If it’s far enough out, then you may be able to save everything up again even after having a size-able downpayment on the condo.

  2. That’s a tough call. I think either one would be a good option. Who knows on the mortgage rates, but they can only go up from here and that is something that I know you’re considering. I personally would probably pay off the loans as I would want to be free of them, but the condo is definitely an enticing option. I’ll be interested to see what you end up choosing.

  3. Option 3 based only on the student loan side of things. The fed has pretty much said late 2014 and more likely 2015 before they are going to raise rates, so that gives some clue you don’t need to hurry too much.

    I will wait until I see the other side of your equation before giving much more opinion, which really isn’t worth much anyways.

    • I value all opinions as they help me see things I may have missed or not considered. While mortgage interest rates are affected by the fed they are also affected by the economy. The fed rate has been steady for years but mortgage rates continued falling throughout 2012 until around December.

  4. I’m curious as to whether you intend to live in it or keep it as a vacation/investment property? I’m assuming you would be living in it since you would be renting the existing condo out. This would play an important part in my overall decision Only because having it as a rental property has the potential of realizing extra income for at least 12 weeks out of the year and there would be some potential tax benefits as well. But, If I was looking at this strictly from the Interest on a student loan then option 3 would be my first choice with option 4 a close second.

  5. Buying the condo only makes sense if it does not require damaging anything else you are trying to do. By default, if it does, don’t buy the condo.

  6. One of the things that the game Cashflow taught us was that paying down low interest loans was not really a good idea. I knew that but it took the game to convince Maria. Mind you, I still often win but there is a lot of luck in it.

    In Cashflow I never pay off the mortgage – that’s the lowest interest loan.

    So if the condo is for you, at least your rental will be lower and you will profit from any (eventual) capital gain. The right property can return up to 10% ROI so if that is a lot more than the interest on the loan, get the condo.

    But watch out for a tsunami! I wouldn’t buy anything in an area that can be devastated. A retreat in the mountains or near a lake side may be preferable (tsunamis need some distance and depth of water to be really damaging – the Japanese have built their nuclear reactors on the wrong side of the country!).

  7. I always recommend paying off debts before incurring any new ones unless it is absolutely necessary. The good news is after you pay off the loan you’ll have more cash flow to purchase a home and hopefully save up a sizable down payment.

  8. I can’t help but jump ahead and say go with option 4. That way you get the condo (awesome), earn some rental income, and pay off the loan in good time.

    “Run the numbers!” – I can’t tell you how often I live by that mantra. I love these what-if scenarios.

  9. What is the interest on the student loan? Is it deductible or does she make too much?

    ummm seems like I am the first one to say it (but not think it)…she isn’t your wife yet. What if you break up the day after you send the check? Personally, what I would recommend you do is create an agreement that says if you don’t get married or if the marriage breaks up in the first few years you get that money back.

    Sounds cold but I can’t believe no one has said it yet

    • They range from 4.75 to 8% variable with some fixed 6.8% loans. They are deductible at this point but who knows, that may change in the future. I’ll address the when we’re getting married thing soon. I don’t blame you for mentioning it at all and it would be smart to have a back up plan.

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