Bi-weekly mortgage question

[2moretrees]

Can you explain in more detail how to apply this program if you still have credit card debt. Thank you.

[vendigirl]

I believe that the concept here is to put the extra money that would be 2 extra mortgage payments per year toward your CC debt instead of your mortgage. Referring to the example in the original email, you would take that extra $50 and place it on your CC debt.
So, instead of changing your mortgage payment schedule, divide the amount of your current mortgage payment by 12 and use that number as the amount of extra cash you should pay toward your CC debt monthly. Does that help?

[jeffrey]

Yes...there are actually a number of ways you can approach it. If you want to start the bi-weekly mortgage process, but have credit card debt, then switching the extra money that you would be paying toward the mortgage to your credit cards until they are paid off make sense. Then once your credit cards are paid off, you just switch the extra payment to your mortgage at that time.

The one instance where you might want to put the money toward mortgage before your credit cards is if you are still paying the PMI and have less than 20% equity in your house. By paying down the mortgage more quickly, you will hit that 20% mark earlier which will free up that money to be put toward your credit cards.

The basic concept in all of this is to always try to pay more than the amount you have to pay whether it be on your credit card, mortgage or other interest bearing loan tackling the highest interest loan first. If you can do this, then you will pay off the loans much quicker than the schedule dictates and save a lot in interest charges along the way.

Please let me know if you have more specific questions or need me to elaborate a bit more.

You can read more about bi-weekly mortages in our article here

[terry1156]

This is a great way to start reducing you debt and it works well in combination with snowballing your payments.

[PattyinFlorida]

I have a question. I have been told that you should have anywhere from 3-8 months of your wages saved in case of an emergency. We have credit card debt, about $4000 at 3.9% rate, a $12,000 car loan and then a $68,000 mortgage payment at 5.5% for 15 years. I really want to get the money saved so that we have that cushion there for emergencies because right now we have nothing. What do you suggest we do first?

[jeffrey]

What is best really depends on what you feel most comfotable with. I say that because the stress of doing it a way you're not comfortable with can cause more problems than paying a little more and keep you from doing anything. That being said, here are some choices:

If you have made the commitment to reduce your debt and feel confident that you are not going to use your credit card, then you are better off paying your debts before creating you emergency fund. Since your credit card rate is low, you have a nuber of choices on how you want to approach it.

What is the rate on your car loan? If it is significantly higher than the credit card rate, you might want to consider paying this off first. Otherwise I would opt for paying off the credit card first. Now, your mortgage rate is higher, but I wouldn't go for this first for the following 2 reasons.

1. Credit card rates change (even for fixed rates) so how long that 3.9% rate will be in place is anyone's guess.

2. If you do have an emegency, paying off the house loan first will leave you without a lot of free room on the credit card and no savings which could end up being a bad situation.

I would probably opt for paying off the credit card first and designating it as your emergency fund if you have the confidence you can do that. Then if an emergency arises, you have the card to pay for it. If you don't, you can begin tackling the other debts.

There are a lot of people who just feel better having a cash emergency fund. While this will cost you more, they do better at saving overall with the cushion. If you are this type of person, then an emegency fund is worthwhile for the stress relief it provides and giving you more motivation toward tackling your debt.

Once you have your emergency fund or credit card paid off, then you can pay down the car loan first and then the mortgage. Again, the most important aspect in any of this is setting up a system you are comfortable with since that will almost always determine whether you follow through or not.

[vendigirl]

I agree with the P.P. on this one- it is a matter of personal preference. We chose to create a $1000 "emergency fund" before really concentrating on paying down debts. Saving for 6 months' worth of expenses would have taken us too long and the debt would have been languishing at 18% nad 7% respectively during that process. That $1000 account has kept us from using our credit to handle unexpected emergencies more than once and has been well worth the small amount of interest we paid on the cards while we saved for emergencies.