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Message
My First Money Talk post.Which bill should I pay off first?
Posted on 7/9/13 at 10:29 am
Posted on 7/9/13 at 10:29 am
Hi y'all, I post mostly on the M/TV board but they're not so great at money advice and I sure as hell don't want to put my business the O-T.
I have gotten down to a zero balance on all of my credit cards. After food, some light entertainment, and utilities I have roughly $3500 a month to devote to three bills:
Home mortgage, $888/mo is the regular payment with a balance of $94,024 on a home worth about $175,000. 11 out of 180 payments made. Interest rate is fixed at 3.875%
Home Equity Line of credit with a balance of $26,235. The interest is variable, with a current rate of 3.90%
Car note, $275/mo regular payment, a balance of $12,463 on a car worth probably not much more than that. The interest rate is 4.24%.
I am not interested in either a new house or new car anytime in the near future. I am just interested in reducing my debt.
What would be the best way of allocating this money toward these three debts? Currently I am putting $1500 toward the house and a $1000 each against the HELOC and car loan.
Any advice from the MB Gurus will be appreciated.
I have gotten down to a zero balance on all of my credit cards. After food, some light entertainment, and utilities I have roughly $3500 a month to devote to three bills:
Home mortgage, $888/mo is the regular payment with a balance of $94,024 on a home worth about $175,000. 11 out of 180 payments made. Interest rate is fixed at 3.875%
Home Equity Line of credit with a balance of $26,235. The interest is variable, with a current rate of 3.90%
Car note, $275/mo regular payment, a balance of $12,463 on a car worth probably not much more than that. The interest rate is 4.24%.
I am not interested in either a new house or new car anytime in the near future. I am just interested in reducing my debt.
What would be the best way of allocating this money toward these three debts? Currently I am putting $1500 toward the house and a $1000 each against the HELOC and car loan.
Any advice from the MB Gurus will be appreciated.
6
Posted on 7/9/13 at 10:34 am to johnnydrama
My advice would be to pay the minimum on Mortgage and Car and put all extra towards HELOC for 2 reasons:
1) Rates are starting to go up and the HELOC will continue to rise. The rate on that will be higher than the rate on the other 2 in the near future.
2) The available balance on HELOC can be used in case of emergency. So any extra that you put in can be viewed as an emergency account if anything happens and you need access to funds.
1) Rates are starting to go up and the HELOC will continue to rise. The rate on that will be higher than the rate on the other 2 in the near future.
2) The available balance on HELOC can be used in case of emergency. So any extra that you put in can be viewed as an emergency account if anything happens and you need access to funds.
Posted on 7/9/13 at 10:34 am to johnnydrama
Car.
ETA: $3,500/month will have the car gone in 4 months. Then attack the HELOC. When those two are done, I would max out every retirement vehicle I had before paying the home off.
Additional post, I am not a Guru.
ETA: $3,500/month will have the car gone in 4 months. Then attack the HELOC. When those two are done, I would max out every retirement vehicle I had before paying the home off.
Additional post, I am not a Guru.
This post was edited on 7/9/13 at 10:37 am
Posted on 7/9/13 at 10:41 am to OnTheBrink
Refi the car first, penfed offers 1.99.
1) Pay off HELOC
2) Invest
3) Just pay the minimum on the refi'd car loan and mortgage for the full term.
4) profit
1) Pay off HELOC
2) Invest
3) Just pay the minimum on the refi'd car loan and mortgage for the full term.
4) profit
Posted on 7/9/13 at 10:41 am to OnTheBrink
quote:
Car.
ETA: $3,500/month will have the car gone in 4 months. Then attack the HELOC. When those two are done, I would max out every retirement vehicle I had before paying the home off.
Additional post, I am not a Guru.
Good point about getting rid of the car loan. But I don't think he would have $3,500 to put towards the car. His $3,500 is total between the 3 including $888 to mortgage and probably $300-500 on HELOC. So he could probably devote about $2k or so towards car each month.
And i'm rethinking my post above about all towards HELOC. The car interest is not tax deductible and the HELOC interest is.
I would pay off the car in about 6 months while only paying minimum on HELOC and mortgage. Once car is paid off then pay only minimum on mortgage and put all extra towards HELOC.
Edit: This is if he is looking to eliminate debt. I know there will be detractors saying he shouldn't pay the mortgage and car off early due to low rate, just going along with his request.
This post was edited on 7/9/13 at 10:43 am
Posted on 7/9/13 at 10:48 am to mglsu21
quote:
My advice would be to pay the minimum on Mortgage and Car and put all extra towards HELOC for 2 reasons:
1) Rates are starting to go up and the HELOC will continue to rise. The rate on that will be higher than the rate on the other 2 in the near future.
I agree with this.
Posted on 7/9/13 at 10:51 am to johnnydrama
Why do you have a HELOC?
Posted on 7/9/13 at 11:15 am to johnnydrama
I don't follow Dave Ramsey but I think you are a great case for someone who should. He says to "snowball", pay off your debts from smallest to largest. For you, your smallest is also your highest interest rate. Also, if you are on asking these questions, then congrats on being smart enough to recognize what you don't know. Try to learn more going forward, but in the mean time follow Ramsey's cookbook one size fits all financial advice.
Put all extra towards the car, then all that extra plus your current $275 car note can be applied towards your HELOC. You will be surprised how fast you knock out both debts. After that, you can continue to follow Ramsey and start applying a lot towards your house. Or you can start to invest the extra money if you think you can earn more than you lose on interest towards your house.
Put all extra towards the car, then all that extra plus your current $275 car note can be applied towards your HELOC. You will be surprised how fast you knock out both debts. After that, you can continue to follow Ramsey and start applying a lot towards your house. Or you can start to invest the extra money if you think you can earn more than you lose on interest towards your house.
This post was edited on 7/9/13 at 2:11 pm
Posted on 7/9/13 at 5:23 pm to johnnydrama
First off, ignore the Dave Ramsey people, your situation is very different since all your interest rates are low. Don't forget that the interest you pay on the mortgage and the HELOC are tax-deductible, so the real rate is lower than you think.
Even so, I would pay down the HELOC and raid emergency funds to do it if you have any. Why? Because if you need cash in an emergency you can borrow back from the HELOC, so there's no point in having any idle cash lying around at all. You cannot do this with the mortgage or the car, money paid towards those cannot be easily recovered.
An alternative would be to convert your HELOC to a fixed rate mortgage loan and invest in a Roth or 401 instead, but IMHO that's a marginal strategy, I'd just pay off the HELOC instead.
That said, I would carefully think about how this affects your other savings to your Roth and 401. In my personal opinion (others may reasonably disagree) you should do whatever possible to take advantage of any employer match programs there, and after that it is kind of a judgement call between that and the HELOC but I lean toward contributing to retirement instead if you're feeling secure in your job. But that's a personal decision.
Even so, I would pay down the HELOC and raid emergency funds to do it if you have any. Why? Because if you need cash in an emergency you can borrow back from the HELOC, so there's no point in having any idle cash lying around at all. You cannot do this with the mortgage or the car, money paid towards those cannot be easily recovered.
An alternative would be to convert your HELOC to a fixed rate mortgage loan and invest in a Roth or 401 instead, but IMHO that's a marginal strategy, I'd just pay off the HELOC instead.
That said, I would carefully think about how this affects your other savings to your Roth and 401. In my personal opinion (others may reasonably disagree) you should do whatever possible to take advantage of any employer match programs there, and after that it is kind of a judgement call between that and the HELOC but I lean toward contributing to retirement instead if you're feeling secure in your job. But that's a personal decision.
Posted on 7/9/13 at 5:33 pm to foshizzle
quote:Good advice.
First off, ignore the Dave Ramsey people, your situation is very different since all your interest rates are low. Don't forget that the interest you pay on the mortgage and the HELOC are tax-deductible, so the real rate is lower than you think.
Even so, I would pay down the HELOC and raid emergency funds to do it if you have any. Why? Because if you need cash in an emergency you can borrow back from the HELOC, so there's no point in having any idle cash lying around at all. You cannot do this with the mortgage or the car, money paid towards those cannot be easily recovered.
An alternative would be to convert your HELOC to a fixed rate mortgage loan and invest in a Roth or 401 instead, but IMHO that's a marginal strategy, I'd just pay off the HELOC instead.
That said, I would carefully think about how this affects your other savings to your Roth and 401. In my personal opinion (others may reasonably disagree) you should do whatever possible to take advantage of any employer match programs there, and after that it is kind of a judgement call between that and the HELOC but I lean toward contributing to retirement instead if you're feeling secure in your job. But that's a personal decision.
Posted on 7/9/13 at 6:00 pm to foshizzle
quote:Since you are obviously talking about me, I would hardly consider myself a Ramsey person. I don't think I have ever recommended him to anyone before today. His method may not be the best, but it is easy to follow. Less knowledgeable/disciplined people will see more benefit from a good plan they can stick to than a great plan that they won't stick to.
First off, ignore the Dave Ramsey people, your situation is very different since all your interest rates are low.
quote:
Don't forget that the interest you pay on the mortgage and the HELOC are tax-deductible, so the real rate is lower than you think.
You don't know this guys full situation and how close he is to using standardized deductions. Once he drops below that value ($12,200 married 2013) then he will be wasting money paying a higher interest rate because someone told him to avoid paying it for tax purposes.
quote:That is a good point, but he didn't say his line of credit was maxed out. The car is his smallest loan with the highest interest rate and he is close to paying it off. Getting out from under that $275/mo car note will give him more flexibility and he can do that soon.
Because if you need cash in an emergency you can borrow back from the HELOC
Posted on 7/9/13 at 7:10 pm to eelsuee
Exactly, plus he made be upside down in the car from the way it sounded. Couple that with the statement made by the OP that he is "just interested in reducing debt".
Posted on 7/9/13 at 8:24 pm to eelsuee
quote:
Since you are obviously talking about me
Sorry, I was replying to the OP directly, I didn't notice your response above mine.
I will note, however, that the OP's situation as he described it is very different from the standard DR clientele, i.e. no credit card debt. quote:
You don't know this guys full situation and how close he is to using standardized deductions. Once he drops below that value ($12,200 married 2013) then he will be wasting money paying a higher interest rate because someone told him to avoid paying it for tax purposes.
Agreed, but (and this is why I stated that it was my personal opinion only) paying off the HELOC first is IMHPO only better because it can be borrowed back if needed. Yes, the rate is slightly higher but only just.
quote:
he didn't say his line of credit was maxed out. The car is his smallest loan with the highest interest rate and he is close to paying it off. Getting out from under that $275/mo car note will give him more flexibility and he can do that soon.
The interest rate difference isn't even beer money. Seriously.
Posted on 7/9/13 at 9:14 pm to foshizzle
quote:
Sorry, I was replying to the OP directly, I didn't notice your response above mine.
Thanks for clarifying. quote:Yes, but he can get rid of the car note and have an extra $275 per month within 6-8 months.
The interest rate difference isn't even beer money. Seriously.
Also, I do recognize you as one of the better MT poster and I think you typically give great advice. I even like your advice in this thread with one exception. I am always amazed a how most bad people are with money when talking to them. I think a DR type method gets people out of trouble and establishes some discipline, people need to learn to walk before they can run. Given the nature of the OP's questions, I think your advice was a little too advanced. If he can follow it, great, but he might fall off that wagon. If he spends one year (maybe two) cleaning up his debt and learning, he will come back confident and ready to adjust his long term plans.
Posted on 7/10/13 at 10:37 am to johnnydrama
Thank you all for your advice. It has given me plenty to think about.
I am a little surprised that everyone agreed that I should only pay the minimum on the home mortgage, as I thought I was getting the most "bang for my buck" by throwing extra money toward it as I had always heard that a little extra each month toward the principle would take years off of the end of the loan. But I suppose that y'all's reasoning for that is because I did say that my interest was in debt reduction. I trust your advice as y'all have a lot more experience in these matters than I do.
As to the question about why I have an HELOC, I originally got it to do some renovations, now completed, then used it to cover expenses during a period of unemployment. It is maxed out right now, and the minimum payment is $95/mo.
My current employer has no Roth/IRA or 401K.
While I have never heard of Dave Ramsey or "snowballing", that sounds similar to the method I used to pay off the five credit cards that I had. I attacked them in order of size, smallest first, with ties going to the higher interest rate, in order to reduce the number of bills I had to pay. I knocked out almost $40,000 of foolish credit card debt in about 15 months that way.
As far as car vs. HELOC, I just don't know. Two very valid points were made, both of which fit in with my prior experience. First that the car could be paid off in a few months, which would follow my credit card plan, second that the HELOC would offer a source of emergency funding, which I also have done before.
I am torn.
I am thinking now I will go $1000 to mortgage (I just can't let go of the idea of sending a little extra toward principle), $2000 to car (paying it off by the end of the year) and $500 to HELOC (in order to give me a little emergency funding.
Does the Board approve?
Thanks again for all of y'all's help.
I am a little surprised that everyone agreed that I should only pay the minimum on the home mortgage, as I thought I was getting the most "bang for my buck" by throwing extra money toward it as I had always heard that a little extra each month toward the principle would take years off of the end of the loan. But I suppose that y'all's reasoning for that is because I did say that my interest was in debt reduction. I trust your advice as y'all have a lot more experience in these matters than I do.
As to the question about why I have an HELOC, I originally got it to do some renovations, now completed, then used it to cover expenses during a period of unemployment. It is maxed out right now, and the minimum payment is $95/mo.
My current employer has no Roth/IRA or 401K.
While I have never heard of Dave Ramsey or "snowballing", that sounds similar to the method I used to pay off the five credit cards that I had. I attacked them in order of size, smallest first, with ties going to the higher interest rate, in order to reduce the number of bills I had to pay. I knocked out almost $40,000 of foolish credit card debt in about 15 months that way.
As far as car vs. HELOC, I just don't know. Two very valid points were made, both of which fit in with my prior experience. First that the car could be paid off in a few months, which would follow my credit card plan, second that the HELOC would offer a source of emergency funding, which I also have done before.
I am torn.
I am thinking now I will go $1000 to mortgage (I just can't let go of the idea of sending a little extra toward principle), $2000 to car (paying it off by the end of the year) and $500 to HELOC (in order to give me a little emergency funding.
Does the Board approve?
Thanks again for all of y'all's help.
Posted on 7/10/13 at 7:03 pm to johnnydrama
If your income is stable you will be fine doing that, but what foshizzle said is dead on.
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