Author Topic: Which debt should i payoff first?  (Read 3294 times)

caymann

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Which debt should i payoff first?
« on: January 16, 2016, 04:00:51 PM »
I have saved up some money and i am thinking about the best way to use it.
At present i have 25k in savings (aside from rainy day funds)

I have two debts :-

1. Credit card debt at 0% interest that expires in Aug 2016 and a balance of $12k on it.
My minimum payment is $130/m.

2. A 2nd mortgage on the home at 7.81% I have a balance of $49k on it.
I donot expect the home to appreciate beyond 3% per year, in the near five year or so
My minimum payment is $450/m of which interest is around

I am in a 20% federal tax bracket.

Any advice would be appreciated.

thanks
jim
« Last Edit: January 16, 2016, 04:20:35 PM by caymann »

skuzuker28

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Re: Which debt should i payoff first?
« Reply #1 on: January 16, 2016, 04:07:48 PM »
Personally I'd up the monthly payments on the CC so that it is paid off before August.  If that isn't possible cash-flow wise, I'd just pay it off now.  I'm presuming the interest rate after the promo period will be higher than your mortgage.

DebtFreeBy25

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Re: Which debt should i payoff first?
« Reply #2 on: January 16, 2016, 05:41:37 PM »
Hi Jim. So the good news is that you have a substantial amount of savings. The bad news is that you have credit card debt. Credit card debt is almost never a positive. (The exception would be in rare circumstances when you have a 0% promotional APR and plan to pay off the entire balance before any interest accumulates which may be the case for you.)

Since you are currently paying no interest on the credit card for the next 6 months I'd recommend paying as much as you can towards the second mortgage during this time. Your mortgage is actively accruing interest while your credit card debt is not. Keep in mind that you will need to pay off the entire balance of the credit card before August. It makes no sense whatsoever to hold on to your savings if you have high interest debt.

Once your credit card is paid off, consider the rate of return on your investments versus the 7.81% interest on your mortgage. Mortgage interest is also deductible on your federal taxes. Of course, like many of us, you may have a personal aversion to debt. I paid off my mortgage early (yes, at 25) even though it was at a low interest rate because debt makes me itch.

Vagabond76

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Re: Which debt should i payoff first?
« Reply #3 on: January 16, 2016, 06:06:32 PM »
What are the details on the first mortgage?  LTV on the house?  You may be able to pay off the credit card with you cash pile and refinance the 1st & 2nd mortgages into one loan at a lower rate.  If your LTV is too high, another option would be to use the cash to pay down the 2nd mortgage to decrease LTV to the point that you could refi. Use current income to pay down the credit card.

SwordGuy

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Re: Which debt should i payoff first?
« Reply #4 on: January 16, 2016, 08:08:01 PM »
If your balance contains $0.01 of today's debt on the day after the promotional period expires, will you be paying high CC interest rates on the $0.01 or the ENTIRE $12,000.00 balance?


caymann

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Re: Which debt should i payoff first?
« Reply #5 on: January 17, 2016, 05:41:26 AM »
I don't want to refi and pay another 2k on closing costs.
The interest rate for the ccard will jump to 12%, after the term expires in August

My dilemma is the following :-

I can imagine switching to another 0% card after the term expires.
It will only cost me a transaction fee of , say $300 or so

However, on that 7.81% interest loan, (yearly $5364)i am losing $3720
this year, $3500 next year etc.

Yes, it contributes to wards my tax deduction, but only a small amount.
I thought, i need to find out how may i slow down this bleeding (since i don't have
the 49k to pay it off). This is what is bugging me.

jim

soccerluvof4

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Re: Which debt should i payoff first?
« Reply #6 on: January 17, 2016, 05:48:02 AM »
How much savings do you feel you will accumulate over the next 6 months?

What is your the value of your home to debt ratio? and do you plan on staying there and if so for how long?


caymann

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Re: Which debt should i payoff first?
« Reply #7 on: January 17, 2016, 06:23:21 AM »
Additional savings in the next 6m can be around 20k
LTV on home is around 80%. I plan to stay here next 6yrs.

jim

Ricky

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Re: Which debt should i payoff first?
« Reply #8 on: January 17, 2016, 06:24:24 AM »
In general, anything above ~4%, pay off the highest interest rate first. Anything below that, never pay it off and invest the difference :)

If I were you, I'd just go ahead and pay off the CC and put the rest towards your mortgage. Nearly 8% on a mortgage is too high to keep it.
« Last Edit: January 17, 2016, 06:28:48 AM by Ricky »

Rubic

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Re: Which debt should i payoff first?
« Reply #9 on: January 17, 2016, 12:17:35 PM »
I'm somewhat conservative when it comes to debt, so my strategy would be:
  • Set aside $12K to pay off the credit card in 6 months.  If you put it in a 1% savings account (e.g. Ally), you'll make an additional $60 in interest.  Not much, but it's free money.
  • Take the other $13K and pay down your 2nd mortgage.
  • Over the next 6 months, continue to pay down the 7.8% mortgage out of your $20K savings you expect to generate as the money comes in.
One possible modification to the above would be to max your IRA/401K out of your $20K expected savings, toward the end of the year, but only after you've paid off your credit card debt.

Depending on your strategy, you should have somewhere between $16-21K remaining on your mortgage by the end of the year, and will probably have it entirely eliminated in 2017.