Which loans to tackle first?

short+sassy · August 2014

Hello--

You all give great advice to people with MM questions and I'd love to hear your perspective on my journey to be debt free. I recently got a Home Equity Line of Credit (HELOC) to consolidate my bills and pay a big chunk on my car loan (but didn't pay it off). So now I am down to three loans...my mortgage, my HELOC, and the remainder of my car loan.

I do have an e-fund of $1,000 but, have multiple streams of income, and don't want to focus on bolstering that up until all my loans are paid off.

After paying my bills, I have an extra $3,000 each month to use to tackle my loans and I'm looking for advice on the best way to do that. Here are the details on the loans:

Car Loan -- Loan Balance $8500 -- Monthly Payment $290 -- 5.9% Interest

HELOC -- Loan Balance $16,000 -- Monthly Payment $202 -- 1.9% Interest through Dec. 2014, then somewhere around 5-6% (it varies)

Mortgage -- Loan Balance $63,000 -- Monthly Payment $601 (includes taxes, insurances) -- 5.5% Interest

None of them have early payoff penalties. My thought is to pay the car loan first, since it has the highest interest and lowest balance. Then, once it is paid off in a few months, I'll have another $300/month to tack onto the next loan. Next, I am thinking of tackling the HELOC loan, since it has a lower balance than the mortgage and I could have it paid off faster. Then the mortgage hopefully leading to the happy, happy day when my house will be totally paid off.

Does this all make sense? Is there anything I'm not considering and should? I see the big light and huge relief at the end of the tunnel, I just wish it was sooner!

CuriousKiddosMama · August 2014

I would do it exactly as you have planned. I am a Dave Ramsey follower and I really buy into his system of getting rid of the smallest debt first because it gives you motivation to keep going. With an extra 3 grand a month, your car loan will be paid off in 3 months, and then your HELOC would be next on the list. When you get to the HELOC you add the $290 monthly payment you were paying on the car to the HELOC so what you are paying on the lowest debt just keeps getting bigger and bigger.

You will get it done soon enough! It sounds like you are pretty motivated, and will get there soon.

als1982 · August 2014

I'm not a Dave Ramsey follower, but I would also go with the plan you have in mind. It's best, in my opinion, to pay down the debts with the highest interest rates first. My only exception to this, again in my opinion, would be to drop to the bottom of the priority list any debts that you can (and do) deduct interest on (i.e. student loans and mortgages).

lifeonthehill · August 2014

The plan looks great to me! If you can use $3,000 every month and keep adding the other payments to it you will be done in less than three years! That would be such an amazing accomplishment. Keep it up.

short+sassy · August 2014

Thanks for the responses and encouragement!

@Vikingsfan711, I haven't read any of the Ramsey books, but have read about the "snowball" system on this board and it really appeals to me.

@als1982, I hadn't even thought about the tax implications. All the more reason to pay my car off first, because the interest on both the mortgage and HELOC is tax deductible.

@alyssa32713, thanks! I cannot wait for the day to have my house paid off and I feel very fortunate that...at least on my present course...it is achievable within a few years.

Xstatic3333 · August 2014

Ditto PPs-great plan, and with $3,000 extra a month it should go by in no time!

vlagrl29 · August 2014

I would tackle them the way you plan too. Keep on going with it. GL!

smbenevides1989 · August 2014

I agree with you and the others. Great plan!

cbee817 · August 2014

Plan sounds good to me- that extra $ each month is huge... your debt will be wiped out before you know it!

brij2006 · August 2014

I would agree with your plan. Focus on the car first, HELOC 2nd. After that, I would focus on building up an emergency fund, then putting 15% into retirement, and lastly focus on paying off the mortgage.

I'm a Dave Ramsey follower too, and recommend his Total Money Makeover book to anyone who wants to get in control of their budget and their debt.

hoffse · August 2014

als1982 said:

I'm not a Dave Ramsey follower, but I would also go with the plan you have in mind. It's best, in my opinion, to pay down the debts with the highest interest rates first. My only exception to this, again in my opinion, would be to drop to the bottom of the priority list any debts that you can (and do) deduct interest on (i.e. student loans and mortgages).

I agree with this.

And do look at the tax implications. Our mortgage plus taxes and insurance will be about $400/month more than what we pay in rent. But because of our income tax bracket, we'll just about break even once we adjust for tax savings on the house.

The interest rate and payment on your house is also low enough that I wouldn't be super gung-ho to pay it off. I would get a better e-fund and probably start some external investments before paying that one off. Once the car and HELOC are done you will have about $3500/month extra to throw at savings. I think that's more important that getting rid of a $600/month house payment, especially at your income levels. But that's just me.

If you haven't already, look at boosting retirement savings too. You want to be somewhere in the 15-20% gross income range for that. Again, I think that's a (much) higher priority than the house.

Do pay off the car loan because it's pretty high interest for a car loan. I would probably pay off the HELOC because it's not a great idea to secure non-home debt with your house, and I don't love floating rates. On the other hand, HELOC interest is also deductible so do check that before you pull the trigger on that one. Ultimately I would not be paying off the house early. The interest rate is too low and you make too much to have only $1,000 sitting in a bank account right now. If you focus on some investments you would very likely build wealth at a higher interest rate than you are paying on that mortgage.

short+sassy · August 2014

Thanks brij2006 and hoffse, I've been so focused on paying off my debts...including the mortgage...that it didn't occur to me I could be earning more than my 5.5% mortgage interest rate in investments.

Not to be a sad panda, but I'm not much for traditional retirement plans because I have a medical condition that makes it, though not impossible, unlikely that I will live to be 65. As such, my "retirement" plans...though not much so far... tend to be more along the lines of having money saved up and establishing recurring monthly income.

I still want to pay my house off in a few years, but now I'm thinking it makes more sense to (after HELOC and car are paid off) to put some of my savings into a good mutual fund and let the money grow at (hopefully) a higher rate than the 5.5% of my mortgage loan. Then pay the house off when I've grown my account enough to do that.

More shocking news. I looked at my budget/expenses again and was stunned to discover that, once my house is paid off, I could technically retire...at least from my full-time job...and comfortably live off my part-time job and rental income. I probably wouldn't literally do that, because I'm fairly happy with where I work, but it is a comforting thought.

Anyway, just kind of thinking out loud. A lot can happen between now and a few years from now, but I'm feeling really happy to know I could potentially semi-retire in a few years. To no longer worry about the next "layoff" or being stuck in a bad work situation would be heavenly. Fortunately, I am not facing either of those things right now at my job, but I've certainly experienced that kind of turmoil at other jobs and definitely don't want to ever have to deal with it again!

Which loans to tackle first?

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