Should I Pay Off My Boat Before Cruising?

[n8kraft]

Hi cruisers,
I want your opinion on whether I should have my boat completely paid off before I go cruising.

Here's my backstory. My wife and I just bought a Cheoy Lee Offshore 41 for $40,000 in Annapolis, MD and paid to ship it to San Diego, CA. My monthly payments are $387 a month for 120 months. I can have the boat paid off by my departure date of July 2014 if I pay $1240 a month.

I'm not overly concerned about the interest because since the boat is my primary residence the interest can be taken off my taxes.

Are there any benefits to having the boat paid off before I go cruising, or is it better to just put the money in an account and have the bill paid automatically each month?

[Ram]

Maybe you should ask your accountant this -

[atoll]

go sailing now,the world is ending on the 12/12/12

[maytrix]

Tax implications aside, if the money you borrow costs you less interest than you could make if that same money was in another place, then it makes sense to keep it.

If however you could pay it off and make more interest on your money, then paying it off would make sense. This once was a no brainer, but with today's low interest rates, it's not anymore and could likely make more sense to keep the loan.

Just my 2 cents..

[hellosailor]

"Are there any benefits to having the boat paid off before I go cruising,"
Only one, you'll have one less bit of paperwork and bill paying that can get screwed up.
As to whether it "pays" to pay it off, you'll have to run the numbers or have an accountant do that for you. What you can get on investment return now, versus the effective after-tax interest rate you're paying on your boat loan. And the third option, which is to pay the monthly note, INVEST all the rest at a higher rate if you can, and then think about paying the boat off in one lump sum before you go. Assuming there's no pre-payment penalty on the boat loan, which there might be.

Run the numbers, or ask an accountant.

[sailorboy1]

Originally Posted by n8kraft

I'm not overly concerned about the interest because since the boat is my primary residence the interest can be taken off my taxes.

So ................. you are ONLY losing around 85% of the interest paid with the income tax deduction! Tell you what; give me $100 and I will give you $85 back as that is the same thing.

The only way around this is if the principle balance of the loan can make a higher rate of return on investment that the interest rate of your loan.


Pay the thing off if you are able!

[n8kraft]

Wow, thanks for the fast replies! I have opened a mutual fund for my cruising kitty that's based on bonds and should outperform my savings account. I could dump over $800 a month in to that and then if the historical return continues (ha, I lost $80 since I opened the fund a month ago) I could be in much better shape.
I'm in the navy, so I don't have an accountant, but maybe I should ask my Mom since that's her line of work.

[svpattyd]

Make ur regular payment, then put the rest directly on the principal. You will pay it off in half to one third the time. The interest compounds on the principal. Reduce the principal, reduce the interest.

[Charlie]

I'm of a different mind on this one. I say it is better to have the cash in hand then to increase your payment. $387 a month translates into a 3% interest rate. You are starting off with a payment that is almost 2/3 principle. I would rather have the extra $800 a month set aside in a cruising kitty. The reason is that you may come across a need for that money and it won't be so easy to get it back once it has been paid. Over the course of 10 years you will be paying ~$6500 for the use of the money. That is $54 a month. Lets say you need a new sail or run across some other emergency where are you going to get the funds? Saving $800 a month for two years you will have over $19k in your fund. At that time if you have other money set aside then you can pay the principle down. $54 a month is not enough of a savings to entice me to pay off an asset.

[abh]

The only thing that is worse than owing money, is owning it.

[virginia boy]

...and that is why I pay cash for everything. Cars, boats, vacations, everything.

[sailorboy1]

Charlie - that's what credit cards are for. Instead of paying interest on the boat loan (lose money) just to have and hold it "in case"; keep the lost money (interest) and have a plan to buy the "in case" things.

This of course is my opinion and I understand the other point of view. I like seeing my savings account grow at 0.8% interest while I at the same time I spend 6% on boat loan instead. I KNOW that is stupid but have a hard time stopping myself. Then I say to myself........... hey that's $30,000 dollars!

[Wotname]

Originally Posted by n8kraft

..........
I'm in the navy, so I don't have an accountant, but maybe I should ask my Mom since that's her line of work.

Hmm... perhaps a very good idea.

FWIW, my Mum (Mom?) would have told me very simply "Don't owe money if you can possibly avoid it".

She would have also said stuff along the lines of: it limits your freedom when you are obligated to another, it prevents you taking advantage of unknown future changes, money is tool for living not a reason to live and such like. Yes she lived in a different era but maybe the philosophy remains valid - I like to think so.

[Kettlewell]

The one big issue I can see with continuing the boat loan is you will find it difficult and expensive to carry comprehensive insurance coverage on an older boat going cruising far afield. On a boat at that price I would normally skip the comprehensive insurance, and maybe get liability only, saving at least $1000-2000 per year, particularly if you are leaving the USA.

[capngeo]

Not to mention a loan begets insurance, insurance dictates where and when you can sail, I am in the pay off the boat and use a credit card IF an emergency arises