debt payoff...WWYD

[meriface11]

after being out of work for a year, DH got an email on Friday letting him know that he would be getting a formal offer for a job he is very excited about on Tuesday!

we've fortunately gotten along fine on my salary and UE and didn't have to touch our 6 month emergency fund. i would say my job is very secure, and in the unlikely event that i lost my job, my company provides a very generous severance that would cover me for about 7 months with benefits continuation.

now that it looks like we are going to have 2 paychecks again, we are looking to tackle our secured debt (we have no cc debt) and looking for some thoughts from my budget board friends.

i am currently funding my 401k to the IRS cap, and DH plans on doing the same. i also have a vested pension that i participate in.

we owe 10K on 1 car at 6%, 12K on the other at 6.5%, our primary mortgage is 6.125% and our piggyback mortgage is at 7.25%. we'd like to refinance, but we owe just about what out house is worth due to declining home values which is making rolling our 2 mortgages into 1 difficult.

i'm confused about how we should tackle our debt. should we pay off the cars first and then the piggyback mortgage (so we at least continue to get the tax benefits), or pay off the piggyback first since the interest rate is higher and it would help with our ability to refinance? should we tap our emergency fund to do it faster since my job is pretty secure? i know dave ramsey recommends only keeping $1K in emergency fund while you are snowballing, but i am not sure if that's only when you are talking about paying off unsecured credit card debt, or all debt in general. we could pull back on our 401ks to the company match limit to free up more money for debt payoff, but i'm not sure how wise that is from a tax perspective.

 

[Cooky]

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[wdwfan16]

after being out of work for a year, DH got an email on Friday letting him know that he would be getting a formal offer for a job he is very excited about on Tuesday!

we've fortunately gotten along fine on my salary and UE and didn't have to touch our 6 month emergency fund. i would say my job is very secure, and in the unlikely event that i lost my job, my company provides a very generous severance that would cover me for about 7 months with benefits continuation.

now that it looks like we are going to have 2 paychecks again, we are looking to tackle our secured debt (we have no cc debt) and looking for some thoughts from my budget board friends.

i am currently funding my 401k to the IRS cap, and DH plans on doing the same. i also have a vested pension that i participate in.

we owe 10K on 1 car at 6%, 12K on the other at 6.5%, our primary mortgage is 6.125% and our piggyback mortgage is at 7.25%. we'd like to refinance, but we owe just about what out house is worth due to declining home values which is making rolling our 2 mortgages into 1 difficult.

i'm confused about how we should tackle our debt. should we pay off the cars first and then the piggyback mortgage (so we at least continue to get the tax benefits), or pay off the piggyback first since the interest rate is higher and it would help with our ability to refinance? should we tap our emergency fund to do it faster since my job is pretty secure? i know dave ramsey recommends only keeping $1K in emergency fund while you are snowballing, but i am not sure if that's only when you are talking about paying off unsecured credit card debt, or all debt in general. we could pull back on our 401ks to the company match limit to free up more money for debt payoff, but i'm not sure how wise that is from a tax perspective.

I would want to get the mortgage and second mortgage rates down. Have you check into how much money you would have to bring to the table to do the refi? Depending on how much it is WRT your emergency fund I would consider this first.

If that is not an option then I would do the cars first, since the low to high interest on all debt is 6-7.25. Not much of a difference in interest and when you include the tax break of the two higher they are actually cheaper.

Since the cars are almost the same values and the same interest I would pay off the $12K vehicle first.

 

[silmarg]

I would want to get the mortgage and second mortgage rates down. Have you check into how much money you would have to bring to the table to do the refi? Depending on how much it is WRT your emergency fund I would consider this first.

If that is not an option then I would do the cars first, since the low to high interest on all debt is 6-7.25. Not much of a difference in interest and when you include the tax break of the two higher they are actually cheaper.

Since the cars are almost the same values and the same interest I would pay off the $12K vehicle first.

wdwfan is spot on. I would consider a "cash in" refi mortgage (where u put cash in to deal to make it work). In the absence of that transaction, pay off the cars before prepaying the mortgage.

Don't touch the emergency fund (with the possible exception to do the refi). Fully fund the 401k.

Best wishes

 

[mrsklamc]

Check into a credit union for a refi on your mortgage. Ours did a 99% loan to value to a 15 year mortgage for FREE, and without PMI. They paid for the appraisal, no closing costs. Do not borrow from your 401k.

Edit to add- sorry I misunderstood. I see that you were not considering doing that. The technical, Dave Ramsey way of doing it WOULD be to go down to 1k in your emergency fund even for secured debt and stop contributions to the 401k until the cars were paid for, and the 3-6 month emergency fund was restored.

 

[buckler]

I don't know how fast you were thinking you could pay off the cars, but if it would be a while it might be worth it to investigate refinancing them. PenFed Credit Union has some pretty good loan rates all around (currently 2.99% for auto refinancing). Anyone can qualify for membership (you pay a one time fee to join a friends of the military society to qualify).

Auto Loan Refinancing at Pen Fed

 

[neatokimmo]

My credit union offers heloc loans at 3.25% up to 75% of tax assessment. I was able to take my 5.25% regular mortgage loan and transfer it to this program (for free, no fees at all!) while the house is for sale. My payment didn't change, but I have an extra $200 going towards the principle.

I think your interest rates are a little high. I would shop around and at least refinance the cars. Then I'd get those paid off asap. My credit union is offering 2.9% on used and new cars too.

 

[Cheshire Figment]

Pay off the car loans first. They are not tax deductible.

And see about combining the two mortgages into one with a rate under 5%.

 

[AlbertZeroK]

Pay off the car loans first. They are not tax deductible.

And see about combining the two mortgages into one with a rate under 5%.

Paying off your cars will give you quick satisfaction, and once they are paid off, that money can goto the morgage. That being said, I've always heard pay off the highest interest loans first.

Personally, I'd pay off the lowest balance of the 4 first, then tackel the next highest balance. I would enjoy the satisfaction of paying something off as soon as I can.

 

[mrsklamc]

And hey- kudos to you for being so prepared for what you went through! I'm sure that didn't happen without lots of discipline, and I don't think discipline gets celebrated enough so hooray for you!

 

[meriface11]

thanks for the advice everyone. once the offer is official, we'll look into whether we can refinance. if not, i think we'll pay off the cars over the next few months (it should take less than a year for both of them), and then snowball it all into the piggyback and then the primary.

we're definitely more comfortable keeping our emergency cushion flush over 2 interest points and continuing to max out our 401ks and just pay off the mortgages early to save on interest, but was curious whether the Ramsey enthusiasts would recommend going totally debt free before focusing on saving.

 

[LuvOrlando]

Paying off debt is admirable, but before you go paying stuff down ASAP give yourselves a moment to recoup. Take a few months and save a bit, go to dinner, take a breath. I'm pretty conservative financially but unemployment must have been an enormous stress on both you and your DH. If it was me I'd just tread water a few months before stressing over debt so quickly. Build up a nice comfy cushion and enjoy the peace of mind it will bring THEN start to pay stuff off. The debt will be there waiting for you and a few months won't make that much of a difference in the long run but a nicer savings WOULD bring you peace of mind. I wouldn't say this if you didn't sound so disciplined, but you do sound disciplined so a little bit of a break seems reasonable to me. I know peace of mind doesn't pay interest, and doesn't pay off debt but to say it doesn't have value anyway is like saying a sunny day doesn't have value.

I know I'm a black sheep, I just can't help it. It bothers me when the guru's neglect the very human aspect of personal finances, it's not all about the numbers on paper.

 

[silmarg]

Paying off debt is admirable, but before you go paying stuff down ASAP give yourselves a moment to recoup. Take a few months and save a bit, go to dinner, take a breath. I'm pretty conservative financially but unemployment must have been an enormous stress on both you and your DH. If it was me I'd just tread water a few months before stressing over debt so quickly. Build up a nice comfy cushion and enjoy the peace of mind it will bring THEN start to pay stuff off. The debt will be there waiting for you and a few months won't make that much of a difference in the long run but a nicer savings WOULD bring you peace of mind. I wouldn't say this if you didn't sound so disciplined, but you do sound disciplined so a little bit of a break seems reasonable to me. I know peace of mind doesn't pay interest, and doesn't pay off debt but to say it doesn't have value anyway is like saying a sunny day doesn't have value.

I know I'm a black sheep, I just can't help it. It bothers me when the guru's neglect the very human aspect of personal finances, it's not all about the numbers on paper.

good points here...

 

[kat08]

I'm no professional but, personally, I would pay off the lower balance car first. Like PP, it would give me satisfaction to get that off my plate then, you will free up the monthly payment from that and you can use that payment to help pay off the higher interest car.

Could you possibly refi your 1st mortgage (without rolling in your 2nd) to a 15 yr? This would both give you a smaller intereste rate and you'll be paying more each month in principal.

This way, you can work on your cars first then your second mortgage then your 1st mortgage.

I think you're doing the right thing loading up your 401Ks, not touching your emergency fund then paying off your cars first b/c you don't get any tax benefits on those.

BTW, we are currently refi-ing to a 4.5 % APR 30 yr mortgage. You can surely find something better for a 15 yr if that's possible.

 

[eyor44]

I would pay off the cars first and then refinance. Unless you knew you could get the rates that are hovering around 4.125 right now.

I do agree with LuvOrlando, take a bit of time to breath a bit.

Congrats to your DH for the job and congrats to you both on being so displined on the emergency fund and making it all work while he was still looking. That's awesome.

 

[meriface11]

ideally, we would like to go from our current 30 year to a 15 year. and i do belong to a credit union, so i will check that out to see if they offer some better options than a traditional bank.

it certainly has been an extremely stressful year, and if this all works out, it will certainly make our upcoming trip a celebration without the stress of his job situation hanging over our head. thank you all for your kind words, advice and support.

 

[crisi]

ideally, we would like to go from our current 30 year to a 15 year. and i do belong to a credit union, so i will check that out to see if they offer some better options than a traditional bank.

it certainly has been an extremely stressful year, and if this all works out, it will certainly make our upcoming trip a celebration without the stress of his job situation hanging over our head. thank you all for your kind words, advice and support.

There are advantages to refi-ing with a 30 year. I did ours as a 30, and paid it off in seven. The interest rate was a little higher, but the advantage was that if one of us did loose our jobs, the house payment was a lot less.

Rates are about 4% right now, so I'd consider doing a cash in refi on your house as the first step. I'd keep it at 30 years, for the cash flow flexibility. Then I'd pay off both cars as fast as possible. Then I'd split what was the car payment into two - the "new car" fund and the "add to mortgage payment" fund. That way you'll never need another loan.

 

[eyor44]

ideally, we would like to go from our current 30 year to a 15 year. and i do belong to a credit union, so i will check that out to see if they offer some better options than a traditional bank.

Do check with your credit union. We were able to refi from a 30 to a 15 and while everyone told me it was a mistake, to just double up on payments, I need the accountability. I would find all kinds of reasons to not make a double payment. While we paid most of the same fees with the CU as we would a regular bank, the terms were a bit better with the CU.