help me prioritize debt payments please!

[lavagirl]

Hello,

Recently found mmm and am trying to straighten out our finances.  I've widdled down our monthly expenses as much as we were both willing to do.  I'm looking for suggestions on which debt to pay off first.  I appreciate any suggestions.

Background: I make 93k and husband makes 86k. I contribute 7% to 401k and husband contributes enough for the match ~180/check.

Debts:
student loan 1- 1,430@ 6.5%
Student loan 2- 6,815 @ 6.5
Student loan 3- 6,784@ 3.5%
401k loan- ~ 9000 left (took this out last year to pay high interest credit Card debt)
Rental property- mortgage 122,000 @4.6%
                        2nd mortgage- 23,215 @ 8.6% (purchased during housing boom)                           ( Rental income 1050/month)
Mortgage: 263,100@ 3.75%
Car 1- 28,500@ 2.95%
Car 2- 35,000@ 3.95%

Also, i spoke with a mortgage guy from the bank about refinancing our primary residence. We have an fha Loan and need to keep mortgage insurance for 2.5 more years. Mortgage insurance is $247/month. We could refinance to a conventional loan if our house appraises for what we think it will.  We would have to bring 15k max to settlement but we would save $375/month. Should I save up 15k and do this or should I knock out some debt instead? We have 2500/month to pay down debt.

I appreciate any advice. Thanks!

[JLee]

Can you get cheaper cars? $60k+ of car debt is killin' you.

[lavagirl]

My car is so upside down. I'd have to put in at least 5k to sell it. My husband is a car enthusiast and will not get rid of his car :(

[midweststache]

Assuming nothing changes? Make your minimum payments and then throw ALL your excess money at loans in the following descending order:

Rental Property (2nd mortgage) - 23,215 @ 8.6%
Student loan 1- 1,430@ 6.5%
Student loan 2- 6,815 @ 6.5
Car 2- 35,000@ 3.95%
Student loan 3- 6,784@ 3.5%
Car 1- 28,500@ 2.95%
401k Loan - 9000 left (Interest Rate, or is this loan at 0%?)
Rental Property (1st mortgage) - 122,000 @4.6%
Primary Mortgage - 263,100@ 3.75%

That said, you can expedite this process by doing what JLee offers: get cheaper cars.   Are you underwater on them? As soon as you can, you need to sell and get more reasonable, used cars for a fraction of the price. That would eliminate a significant portion of your debt. To put it in perspective, your car loans are more than all your student loans AND your second rental mortgage combined. That's a lot of debt for depreciating assets...

Also, I left the 401k loan for last (aside from the mortgages, obviously) because you didn't include an interest rate. You may have different reasons for attacking that sooner (interest, payment plan period, etc.)

[kpd905]

Either sell a car or a house.  It looks like you can't afford it all if you are running up credit card debt to get by.

[thd7t]

Do you have PMI on either mortgage?  PMI is a tricky and high interest debt that looks like a payment.  It's really like an increased rate on the top bit of a mortgage.  If on your primary residence, it would probably be the equivalent of you highest rate.

[ShoulderThingThatGoesUp]

                        2nd mortgage- 23,215 @ 8.6% (purchased during housing boom)                           ( Rental income 1050/month)

I can't believe you're cash-flowing $1050/month - what is your actual cash flow on the property? How much do you have in savings? Do you have a cash chiminea in your backyard or something that eats that huge income?

[zurich78]

If you're fiscally disciplined, I would always pay the highest interest down first.

If not though, I would use the snowball method and pay the smallest balances down first.

[seattlecyclone]

You should probably get rid of the PMI first. You say you would need to pay about $15,000 to refinance. At $247/month, that's like paying 20% interest on that $15,000!

After that, pay down the debts with the highest interest rates first. When comparing interest rates, be sure to take into account any tax deductions that may apply. For example, if you can deduct all of the interest on your rental's second mortgage against the income for that rental, that might push the interest rate on that loan down below some of your student loans, depending on what your tax rate is.

[swick]

Would you have to pay back your 401K Loan if you leave your job? How stable is it? (Canadian here, so I'm probably wrong)

Honestly, you make an amazing combined income - you should be able to pay more then 2500 a month towards your debt. With the car loans, you do have "hair on fire" debt, are they worth it? Even if you were underwater, if you sold your car and got a cheaper one, over the course of the loan your would most likely save money.

You might want to type up a "Case Study" (first post in the ask a mustachian category) I know you said you have widdled down as far as you are "willing" to go, but there might be some areas you haven't considered, or some tax saving strategies or what not. Or the very act of writing it all out might help you change or highlight different priorities or just make things clearer.

[Proud Foot]

We have 2500/month to pay down debt.

I appreciate any advice. Thanks!

Is the 2500 the total amount you pay each month? or is it what you have leftover after all minimum payments and living expenses? If the latter you should knock out student loan first. To me it doesn't make sense to keep it around when you can get rid of it immediately. After that I would follow the order midweststache put.

[lavagirl]

You might want to type up a "Case Study" (first post in the ask a mustachian category) I know you said you have widdled down as far as you are "willing" to go, but there might be some areas you haven't considered, or some tax saving strategies or what not. Or the very act of writing it all out might help you change or highlight different priorities or just make things clearer.

I think you're right. I'm going to post a case study asap.  Thanks everyone!

[thd7t]

You should probably get rid of the PMI first. You say you would need to pay about $15,000 to refinance. At $247/month, that's like paying 20% interest on that $15,000!

After that, pay down the debts with the highest interest rates first. When comparing interest rates, be sure to take into account any tax deductions that may apply. For example, if you can deduct all of the interest on your rental's second mortgage against the income for that rental, that might push the interest rate on that loan down below some of your student loans, depending on what your tax rate is.

And that's not even counting the 3.75% interest that's on top of that as a portion of the mortgage!  Crazy town!

[justajane]

It looks like you're losing money on the rental property and will for quite some time. Is there a reason why you want to keep it?

I second a case study, if only to understand where all your money is going. It would help tremendously if you could save 3K or more.

[swick]

Case Study Here :)

http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-fu-to-debt-prioritization-post/