What to pay first: high-interest mortgage, or low-interest CC debt?

[mjb]

Hey everybody. Let me say first: I'm so glad I found this blog and forum. It has really given me a swift kick in the ass/punch in the face. Thank you all.

Here’s my current dilemma:

The short version: what should I pay down first: a 15-year/10.25% mortgage, or ~$14k in low/zero-interest credit card bills?

The long version: my now-ex-wife and I own a home together. (It's a classic, mid-century 1000 sq ft 2bd/2ba in a fast-growing college town that I plan to die in. Definitely keeping it.) We got an 80/20 loan at the time (2006) at the suggestion of our credit union, as we had no money for a down payment.

My ex-wife now wants me to buy her out of the home and get her off the 80% loan, which will require me to refinance.

However, since my credit score is now much higher (around 780, compared to 675 when we got the loans), I'd love to get rid of the higher-interest 20% loan and refinance both loans into a single, lower-rate loan. To do this, I need to have 20% equity in the home, and I'm at about 10% right now. (My ex and I are on great terms, and she is fine with waiting until I achieve 20% equity before I refinance.)

As of today, the loan balances/interest rates are:

- 80% loan: $88,172 @ 5.375% interest, 30 yr.; Monthly P/I: $521
- 20% loan: $16,207 @ 10.25% interest, 15 yr.; Monthly P/I: $255 (I've made 88 of 181 total payments)

Purchase price of the home was $116,500.

My only other debt is two large, but low-interest credit card balances (this is old debt I am taking care of; I have clamped down hard and am no longer accruing new debt):

- credit card #1: $6,050.00 @ 3.99% until Sep 1, 2015, reverts to 10.24% afterward
- credit card #2: $7,544.79 @ 0% until Mar 1, 2015, reverts to 15% afterward

Does it make sense to throw extra money toward the high-interest mortgage — with the intent of refinancing within the next 12 months — instead of the credit card debt?

My income varies widely (I am a freelancer), but I can probably throw between $500 and $1000 extra toward the mortgage principal each month. At that rate, I can be at 20% equity by the end of 2014, I think.

Thanks for your help!

[FIPurpose]

I think you have a good plan.

The only issue I can see is that your credit cards will go to extremely high interests a year after you are able to get 20% equity. I (and you can take my opinion with a grain of salt) would make sure that after gaining 20% equity (which would also hopefully get rid of any insurance costs as well), I have those credit cards completely paid off before they hit their new rates.

[Empire Business]

Does it make sense to throw extra money toward the high-interest mortgage — with the intent of refinancing within the next 12 months — instead of the credit card debt?

In your case my opinion would be yes.

A thing to think about would be whether your ex would be willing to wait a few months longer after you get to 20% equity so you can pay off one or more of the credit cards before refinancing.  It would help your DTI and utilization for your refi application, and open up your options for the larger mortgage, maybe you can squeeze to a 15 year without one of those credit card payments and get a lower rate.  You don't want the 15% card turning into a pumpkin especially, the 10.24% would be a little better off than your second mortgage now.  But there would be a lot more refi options without either card balance.

[RobertBirnie]

After you refinance the house how are you planning on buying her out of her portion?

[mjb]

Thanks for the replies, everyone.

There is definitely a lot more to think about, especially re: buying her out. I will need to do a bit more calculating to figure out the best way to handle that.