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I have 22k in student loans at a fixed rate of 7.25% that has already been consolidated. I also have a 55,369.00 30 year fixed 6.25% mortgage. I have made 7 years of payments into my mortgage. My credit card debt of 6,000.00 should be paid off by May of 2010. A lot of the debt on my credit cards was for car repairs, vacations and veterinary bills. |
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You're already on the right track by getting your credit card paid off first. Your student loan debt has a lower balance and a higher interest rate, so knocking out that one will give you more breathing room faster, and will save you more interest in the long run. The one thing to consider before you pay down your debt is whether your emergency fund is at a level you're comfortable with. Consider building that up before throwing a lot of extra money at your debts. Another way to go about it is to sock, say, half of the money you've earmarked from each paycheck to your emergency fund, and the other half to paying down your debt. Good job! MBHunter makes a great point about the sort of breathing room you'll get from paying down that lower-balance student load debt. Imagine how good that will feel to knock that debt out, too, and be debt-free except for your mortgage! Love that you can count down to your May 2010 freedom from credit cards date. As far as the emergency fund goes, I find that there is a ton of freedom that comes from knowing there is cash sitting there, waiting for me to need that. What do you think about MBHunter's advice regarding splitting your paydown between your emergency fund and your student loans?
(Nov 28 '09 at 18:55)
Dogfood Provider
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I would also suggest seeing if you could refinance your home if you plan to stay there for 5 years or more. A 15 year mortgage would shorten your home payoff by 8 years and the current rates are in the 4 1/2 % range. Your actual payment may be similar to your current one. Would need more information to run the numbers but would recommend at least checking. I like your suggestion and that would leave me with a lower monthly payment (200k less per month) but is it possible? I seem to recall being told I could only consolidate my student loans into a simple interest mortgage, what the big banks were offering but at outrageous rates like 19%. If I did payoff my loans using a conventional fixed rate refi wouldn't that be considered a second mortgage and therefore bear a higher interest rate?
(Nov 02 '09 at 17:25)
MARY
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The only reason it would be a second would be if you don't have enough equity to get you under the 80% value of your home for refi purposes. In other words, if you home is worth 120, you could consolidate the difference between your current mortgage balance and 96,000 bucks. If your equity is not much, you wouldn't be able to retrieve equity or a take a second in this current environment (opinion-you would have to check with your mortgage broker). I would not consolidate though unless you have changed your "debt" habits. Otherwise you could be in the same shape or worse next year.
(Nov 03 '09 at 18:52)
Dr Dean 1
If you are 7 payments into your mortgage, Dr. Dean's suggestion might not work for you. I.E., if you refi and it works, under Dr. Dean's suggestions, you need Mortgage Debt remaining + Student Loan debt remaining = <80% of your home's value. If you didn't put down at a 20% down payment, I have a hard time seeing this work out. Are my numbers off? What do you guys think?
(Nov 28 '09 at 18:57)
Dogfood Provider
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I think you're on the right track by actually knowing how long it will take you to pay down your CC debt. The simple fact that you've ran the numbers so extensively, and budgeted out your expenses to 2010 means you have a plan. In my opinion, that's one of the top ways to pay down existing debt. Both MBH and Dr. Dean have solid points, so I would start there. But I will throw out an idea to reduce your student loan interest rate... Around 5 years ago (when home loans were easy to get), a friend of mine consolidated his grad school debt (~$40k) into his mortgage. At that time, he had a home that appreciated fairly rapidly, and could afford to pay the increased monthly payment. He was also paying in the 7% range for student loan debt, but got it down to 5% range with the refi/consolidation. If you follow Dr. Dean's advice of refinancing your mortgage, it might be a worthwhile question to ask your mortgage guy. Best of luck! |
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Good work in taking care of your debt. You're off on the right foot and asking the right questions! Personally, I think you're much better off tackling the student loans next, primarily because of the reasons others have mentioned (smaller amount makes it a good "debt snowball" candidate according to Ramsey). Other suggestions to refi are also valid, but there must be a desire to hang onto the home and a recognition of market conditions, living situation, etc. The best thing you can do is to keep making smart financial decisions (spend less than you bring in) and take on these debts over time. Good luck! |
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I would definitely not roll your student loans into the mortgage. If you lose your life, your spouse would still have to pay them off. If you pay off your mortgage first, and you lose your life, your student loans go away. Run the numbers and see how much extra paying off the mortgage first will cost you. It shouldn't be too much. It's not like your student loans are 19%. Consider it the cost of life insurance. Also, if you are disabled and your house is paid for, the government won't make you pay back the student loans. So you can also consider this to be a form of disability insurance as well. If you lose your job and your house is paid for, you won't lose your house. and there are no wages to garnish for your student loans. Good point. In financial-speak, Laura is talking about the dangers of taking an UNSECURED DEBT, your student loan, and transforming it into a SECURED DEBT, your mortgage, which is secured (linked to, tied to) your house. The corollary that goes along with Laura's point is that, god forbid, you default on your student loans next year, they can't take your house. But if you roll the loans into one payment, and default on that mortgage payment, your home is in jeopardy.
(Nov 28 '09 at 18:59)
Dogfood Provider
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Personally, I would go for the student loans because of the higher interest rate and the much smaller amount. You may want to refinance the mortgage to an even lower rate of you can, while the markets down. You may be able to lower the interest on your school loans too, but I would still aim to pay those off first. My two cents |
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Thank you all for the input!! I am looking into lumping all my debt into a refi-ed fixed mortgage as that would lower my monthly debt and even the aggregate interest. |
Bravo to you for getting the debt paid off!