What would you do?

iVillage Member
Registered: 12-05-2004
What would you do?
9
Wed, 01-12-2005 - 1:27pm


Our three remaining debts are as follows:

2nd mortgage 18,743.45 (10% int)
Credit Card 9807.43 (Prime rate)
Karate sch. 2086.00 (no int)

Our plan was to take the extra $400 from our car payment, which we paid off on December 31st, and add it to our 2nd mortgage payment to pay it down faster (since that one has the higest interest rate).

BUT....I was looking at our budget for the month of January (bi-weekly paychecks), and I know, without a doubt, and without cutting things too tightly budget-wise, I can pay off the entire karate school tuition amount with our January 28th paycheck. Completely gone. We'd still be under contract with the school, for instruction, through Feb 2006, but we would pay nothing to them anymore. That would allow us to pocket an extra $150 per month to put towards our other debts.

So...what should I do? The karate school payments are handled through a bank, although there is no interest being charged. So it appears on our credit report as an unsecured debt. The 2nd mortgage, although a larger debt and larger interest rate, is at least secured by our home. IMO, paying off the karate school would only leave us with two outstanding debts on our credit report--the secured 2nd mortgage, and the unsecured credit card. That's bound to look better to anyone who needs to check our credit, right?

Thanks for the input!

Pat

Avatar for mymartes
iVillage Member
Registered: 03-26-2003
Wed, 01-12-2005 - 1:52pm

Pat,
I would pay off the karate school first. The 2nd mortgage, i would pay last. It's a write-off for your taxes.

Just my two cents.

MYM

iVillage Member
Registered: 02-19-2004
Wed, 01-12-2005 - 1:59pm

What is the payment toward the second mortgage each month?

The facts I have are that you have an extra $400 per month every month (because the car got paid off) and about an extra $1,500 or so in January (you can pay the school off at $2,086 less the $150 you had already budgeted and less the extra $400, so that is an extra $1,536 you'd be paying out). I ran two scenarios assuming no other payment to the mortgage. I can re-run it if you give me your mortgage payment, but I think the answer will be the same.

Scenario 1 - in January you pay the extra $1,500 plus the extra $400 to the 2nd mortgage and keep paying $150 per month to the school. You'd be paying $6,300 toward this debt in 2005 and you'd incur $1,593 in interest over that time.

Scenario 2 - In January pay the school off and pay nothing to the 2nd mortgage (since I don't know your minimum payment), and from then on pay $550 per month to the 2nd mortgage (the $400 plus $150 that previously went to the school). You'd end up paying $6,050 to the 2nd mortgage in 2005 and incur $1,704 in interest during this time.

Look at it this way, you are going to put the same amount of cash towards your debts in 2005 either way. But if you focus on the 2nd mortgage (putting all extra money towards that) you will be $111 less in debt by the end of the year because you incurred less interest. It isn't costing you anything to have the debt to the school. It will help you to pay the mortgage an extra $150 per month, but you can still do that when the school is paid off in February 2006. If you have extra cash from your January 28th paycheck, that will do more to reduce your mortgage debt.

I don't think either scenario will improve your credit score drastically over the other.

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iVillage Member
Registered: 02-19-2004
Wed, 01-12-2005 - 2:03pm
Oh, I forgot about the tax deduction. Well, either way she's only going to pay around $100 less in interest if she pays the mortgage first, so it might not make that much of a difference. If there is a psychological boost to paying off the school, that might be a good reason to do it.

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iVillage Member
Registered: 12-05-2004
Wed, 01-12-2005 - 2:16pm


Wow, thanks for taking the time to run those scenarios for me. I really appreciate that. With our new monthly budget, and me not shopping like I used to (which feels surprisingly good, especially with our debt going down), it looks like we're going to have about $1500 left over each month to put towards our debt load, above and beyond our normal expected payments (208.42 to 2nd mortgage and $55 minimum to card, which we always pay more to anyway).

I guess it is more of an emotional boost to see that debt disappear just as we saw our car payment disappear on December 31st. Excluding unforseen things that 'could' come up financially (car repairs and such), it looks like we could still get our 20yr 2nd mortgage paid off in about a year by paying everything to it (even after the karate school is paid off on the 28th).

I just love the feeling of watching these debts get lower and disappear. :-D

Pat

iVillage Member
Registered: 02-19-2004
Wed, 01-12-2005 - 3:16pm
I think you are doing a great job!

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iVillage Member
Registered: 05-14-1999
Wed, 01-12-2005 - 4:54pm

I'll give my humble opinion, take note that I know nohting about mortgages, and very little, really, about finances.

Just as a mental thing, I would go ahead and pay the school. To see your debts disappear can give you a great pick me up.

iVillage Member
Registered: 09-21-2004
Wed, 01-12-2005 - 7:42pm
I agree with calla lilly. I personally like to see a debt totally disappear. It makes me feel better about myself and our situation and it actually makes me feel as if I'm doing something. But that's JMO.
iVillage Member
Registered: 03-27-2003
Wed, 01-12-2005 - 10:09pm

Poking my head in to say that I agree with the previous posts, and it looks like whichever way you cut it, it's a good thing, and I wouldn't stress too much over the mathematics.

I did want to add a note, though, about secured vs. unsecured debt. The advantages of secured debt are mostly on the lender's side, and that's why the interest rates are usually lower. For the consumer (you), most of the advantages are on the side of unsecured debt, except insofar as interest rates may be lower if it's secured.

To a lender, a debt secured by your house or car is better because if you default, they can repossess the home/car/whatever. To you, a debt secured by your house or car may be better because the interest rate is lower. But it has the huge disadvantage that if anything ever happens and you can't pay all your debts, they can come take away your house/car/whatever.

So, if you have a two debts, both of which have the same interest rate, same balance, same payments, etc., and ignoring tax benefits, paying down the *secured* debt first is actually to your advantage. That way, if you ever hit a tough spot again, you don't risk losing your home.

Of course, in real world scenarios no two debts are exactly equivalent in that way, so you have to consider all the other factors. But I just wanted to point out that secured debt is not necessarily better just because it's secured.

And when it comes to your credit rating, I am not an expert, but I do know that most places are more interested in your debt-payments-to-income ratio than whether those debts are secured or not. Besides, what do you care whether your credit score is a few points higher or lower? You already own your home, and I *know* you don't have any plans to get a new credit card any time soon... right?? LOL

I say, do what makes the most sense logically and emotionally for you, and have fun. Isn't this great stuff?

Blessings,

Heather

iVillage Member
Registered: 02-19-2004
Thu, 01-13-2005 - 8:00am
That was a great post!

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