The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: agentM on April 17, 2014, 03:41:18 PM
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I've got a side gig now making about 800 (net of taxes and expenses) per month.
Here are various debts I could put this against:
car note: 13k @ .9% - 45 months left
student loans (combined balances of myself and spouse)
subsidized (currently on in school deferral): 11k @ 5.8% - 82 months left
unsubsidized (currently on in school deferral): 40k @ 5.2% - 120 month left
mortgage: 230k @ 5% - 324 months left, also PMI of $110 per month until balance reaches 190k
I'm torn between paying down the unsubsidized loans and the mortgage.... I'm still decidedly a mustachian in training and looking for good advice.
FYI - I'm fully aware that many of these were probably not the best ideas - selling our house is not an option I am willing to explore at this time nor the car the note is on. I just specifically want advice on the best order to pay off the debts using the additional 800 per month coming in.
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I would pick the highest non-mortgage interest rate, and put it there.
But if your student loan interest is a tax deduction, make sure to factor that into the effective interest rate, for a fair comparison.
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Nice side income, what are you doing?
Most people would advise putting the majority on the highest interest rate, unless you have a hard time getting motivated and it helps to pay off a debt. Looks like you should be putting it on the 5.8% student loan.
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Your instinct is right on the mortgage---pay that until you now longer have PMI, because right now it has an effective 8.3% interest rate on all money above $190k.
The PMI payment is an effective extra 3.3% interest rate on $40k of your mortgage ($1320 / $40000 = 3.3%). Pay this off, and then tackle the next highest interest rate.
Could you refinance to get rid of your PMI and/or lower your interest rate? Or get an HELOC to pay down the mortgage enough to remove the PMI? Mortgage rates are in the low 4% for 30 years, and ~3% for 5/5 ARMs (for example, see https://www.penfed.org/mortgage-rates-all/ or https://www.dcu.org/loans/mortgage-overview.html ).
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Work on ditching the PMI.
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I wish I could refinance - but our house is non-standard for our neighborhood - original 1950s tiny ranch in a neighborhood of 800k+ mcmansions - and when we tried to refinance a year ago we got told we couldn't get a conforming appraisal because there simply are no comps in our zipcode - and the nearest comps in the next town were all foreclosures.
Good news is we bought it after the market crashed, and paid a little less than what the last empty lot on the street sold for in 1999 - plus the house is in surprisingly good shape. Needed some plumbing and insulation upgrades, but otherwise solid.
The side income is from writing custom cover letters. I didn't used to get many clients, but I decided to start sending out some marketing letters to staffing agencies, and got a couple firms to send me regular referrals. I spend about 5 hours a week on this. It's a great side income at least while so many people are unemployed - plus I love it when I hear they get hired. And it's a good chance to keep my writing skills polished.
Thanks for the advice - I was pretty sure the mortgage was a better bet than it seemed because of PMI.
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I wish I could refinance - but our house is non-standard for our neighborhood - original 1950s tiny ranch in a neighborhood of 800k+ mcmansions - and when we tried to refinance a year ago we got told we couldn't get a conforming appraisal because there simply are no comps in our zipcode - and the nearest comps in the next town were all foreclosures.
Have you tried different lenders? Or a mortgage broker that can shop around to multiple lenders? Sometime a different lender will have different appraisal standards that can accommodate special situations.
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Your instinct is right on the mortgage---pay that until you now longer have PMI, because right now it has an effective 8.3% interest rate on all money above $190k.
The PMI payment is an effective extra 3.3% interest rate on $40k of your mortgage ($1320 / $40000 = 3.3%). Pay this off, and then tackle the next highest interest rate.
Could you refinance to get rid of your PMI and/or lower your interest rate? Or get an HELOC to pay down the mortgage enough to remove the PMI? Mortgage rates are in the low 4% for 30 years, and ~3% for 5/5 ARMs (for example, see https://www.penfed.org/mortgage-rates-all/ or https://www.dcu.org/loans/mortgage-overview.html ).
This all day - in fact, the effective percentage rate you're paying on the difference INCREASES as you pay down the $40K gap because the PMI doesn't decline along with the principle balance the way normal interest would.