What to pay off first?

[ua_guy]

Hi folks--I think I've got a pretty good budget under way. For the past year, I've been socking 20% plus some away between a 401k and cash savings. Expenses are manageable and minimized where possible, but I've still got 3 ugly loans that I need to nuke, and I'm just not sure where to start.

2 of the loans are for vehicles, the other is for a Heloc which we used when we bought our home 6 years ago to escape putting cash down and PMI. The issue is that the house is worth nothing, so does the rule of tackling the loan with the highest interest rate still apply here?

Loan 1: $16k balance, 60month term w/ 48 months left. The truck is right side up by about $2k-$3k. Interest rate = 3.99%

Loan 2: $15k balance, 60 month term w/ 48 months left. The car has about $15k in equity, interest rate = 2.49%.

So...I think Loan #2 gets paid off last, but where should I sink my money first? I also have the option of diverting funds from my 401k if these need to be paid off more urgently than I'm imagining. We as a household will have about $10k coming back in a tax return and are planning on applying it to either the HELOC or one of the vehicles. Thoughts?

[disneysteve]

Sell the cars, at least the truck. Rule of thumb going forward is to never borrow on more than a 3 year loan with a payment not to exceed 10% of your monthly income. Use the 3K equity and some of your cash savings to buy a decent replacement for 5K or so.

Why are you getting such a huge tax refund? Make sure you correct your withholding so that doesn't happen again in 2012.

You only listed 2 of your 3 loans. What's the deal on the HELOC? And what about the primary mortgage? List that info and your income so we can give you better advice.

[ua_guy]

Originally Posted by disneysteve

Sell the cars, at least the truck. Rule of thumb going forward is to never borrow on more than a 3 year loan with a payment not to exceed 10% of your monthly income. Use the 3K equity and some of your cash savings to buy a decent replacement for 5K or so.

Why are you getting such a huge tax refund? Make sure you correct your withholding so that doesn't happen again in 2012.

You only listed 2 of your 3 loans. What's the deal on the HELOC? And what about the primary mortgage? List that info and your income so we can give you better advice.

Whoops!

The HELOC is a 30y fixed (rare!) loan with about a $42k balance, at around 6.5%.
The first mortgage is a 30y fixed loan with a balance of about $400k. Total loans on the house = $442k. The house is currently worth about $330k.

We tried refinancing our first to a 15y fixed, about 2 weeks ago. It would raise the payment about $450/month, which is fine, but the real advantage would have been being able to be right-side-up in the house in a matter of about 2-3 years based on current market value. No dice, because of our loan:value ratio.

Can't sell any of the vehicles. It's totally irrational, but everyone has to have their hobbies and expenses. I don't take European vacations or collect beanie babies, or even go out to eat at nice places. I ride motorcycles and drive fast cars.

[disneysteve]

Originally Posted by ua_guy

Can't sell any of the vehicles. It's totally irrational, but everyone has to have their hobbies and expenses. I don't take European vacations or collect beanie babies, or even go out to eat at nice places. I ride motorcycles and drive fast cars.

Nothing wrong with riding motorcycles and driving fast cars IF you can afford to do so.

I've got nothing against hobbies and expenses. My wife and I spent yesterday at a local casino gambling. Is that a smart use of money? Of course not. But we enjoy it AND we can afford it. We have no debt except our mortgage which we are prepaying each month. We save upwards of 25% of our gross income so I see nothing at all wrong with using some of what's left at the blackjack table.

What's your household income?

[ua_guy]

Originally Posted by disneysteve

Nothing wrong with riding motorcycles and driving fast cars IF you can afford to do so.

I've got nothing against hobbies and expenses. My wife and I spent yesterday at a local casino gambling. Is that a smart use of money? Of course not. But we enjoy it AND we can afford it. We have no debt except our mortgage which we are prepaying each month. We save upwards of 25% of our gross income so I see nothing at all wrong with using some of what's left at the blackjack table.

What's your household income?

Household income is between $170k-$210k. $170k would represent a year without my s/o's bonus. Looks like he will get it this year, but it's as good as gone. It will go towards his car. We had a big blowout 2 years ago over finances--one of the sticking points was his car, which he had just purchased. $60k for a new 2010 Audi S4. Zero down, and he put it on an 72 month loan. I think the rate was 4.49%. The deal we reached (amidst everything else) was that he keeps the car, but that the loan needs to disappear. He's been making some extra payments...the balance is right around $45k and that's what the car's worth.

It's crossed our minds more than once to sell all the cars and pay cash for a used light duty 4-cyl truck, and something along the lines of an off-lease Ford Taurus and be into vehicle spend for no more than about $20k total. But from an enthusiast perspective, I don't think we can do that...

[riverwed070707]

Two things are standing out to me here. First, I too am curious why you are expecting a $10k tax refund, especially with your income level.

Secondly, there is a serious spending problem if you are having to finance cars for 4+ years on that income.

Regarding your home, you don't have to refi to pay extra toward your principal. Once your car debt is under control, start paying that same amount your payment would have gone up toward your principal each month and your house will be above water in no time. If rates are still low at that point, you might still consider refinancing to a lesser term.

You have a great income to work with, learn how to make it work for you and not the other way around.

[NetSkyBlue]

Do you plan to stay in the home long-term? If so, I personally would pay off the vehicle loans first (despite them having lower interest rates), then use the payments you were making on those partly to pay down the HELOC and partly to start saving for a DP for a new vehicle(s). If you don't plan on moving, your home will likely outlast your cars, which will eventually need to be replaced.

[disneysteve]

Originally Posted by ua_guy

Loan 1: $16k balance, 60month term w/ 48 months left.

Loan 2: $15k balance, 60 month term w/ 48 months left.

Originally Posted by ua_guy

$60k for a new 2010 Audi S4. Zero down, and he put it on an 72 month loan. I think the rate was 4.49%. the balance is right around $45k

I'm confused. Is the Audi a 3rd car loan? The numbers don't match up with either of the first 2 loans you listed?

[ua_guy]

Originally Posted by disneysteve

I'm confused. Is the Audi a 3rd car loan? The numbers don't match up with either of the first 2 loans you listed?

The Audi is a third car loan.

The tax return-- We're unmarried and we both claim 0 deductions on our payroll. That usually leaves me with $1500-$2000 at the end of the year for a return, plus my other half gets about $2000 for his. Then, we deduct the housing interest in his name--we both own the home, but his name is primary on the mortgage, and all mortgage related payments are paid from his accounts. The interest deduction usually totals between $4k-$5k. The Heloc is still mostly interest at this point, as well as our primary mortgage since it was refi'd in 2009.

[disneysteve]

Originally Posted by ua_guy

The Audi is a third car loan.

The tax return-- We're unmarried and we both claim 0 deductions on our payroll. That usually leaves me with $1500-$2000 at the end of the year for a return, plus my other half gets about $2000 for his. Then, we deduct the housing interest in his name--we both own the home, but his name is primary on the mortgage, and all mortgage related payments are paid from his accounts. The interest deduction usually totals between $4k-$5k. The Heloc is still mostly interest at this point, as well as our primary mortgage since it was refi'd in 2009.

This story gets more and more and more complicated. So you are single but have your finances co-mingled to some extent with your partner. As I'm sure you've already figured out, that makes for a VERY messy situation.

How do you handle expenses? Is it all done jointly? Is it proportional based on each of your incomes? Are there certain expenses that you pay and others that he pays? What type of communication is there regarding purchases like cars and other expensive things? Since you are single, neither of you really has any say over what the other does with his or her money until you get married.

Are the debts you've asked about (the 2 cars and the HELOC) yours or his?

I'm not even sure where to start answering your question now that you've told us more about the situation.

The one thing I will say is that I would not consider getting married until he straightens out his spending issues and gets his debt cleaned up. You don't want to marry into that mess.

[ua_guy]

Our finances are fairly straightforward in my head. No, we're not married, and we can't get married (I'm not a girl...).

In terms of total household income, he brings in about 60%. Me 40%.

We own the house jointly and each pay 50% of the mortgage and are both named on the loan and in the deed with joint tenancy with right of survivorship.
He covers most of the utilities. I pay the garbage bill.
We each own separate cars. One each. And we have a Jeep that both of us own--we are both named on the loan, both named on the registration, and each pay 50% of the payment and expenses. Joint insurance policy on all vehicles.
We both have separate 401k/retirement.
We are both on separate health plans.
We both have separate emergency funds/savings.
We have a joint credit card which we use for household expense--food, eating out together, etc. It gets paid monthly and we both keep good control of what we spend on there.

We've been together for 8 years.

[disneysteve]

Do you have a joint household budget? If not, I would urge the two of you to sit down and create one. Decide where every dollar is going each month. That would help clear up some of the issues here.

As for paying down debt, your original question, I'd still go highest to lowest interest rates. That gets you debt-free the fastest at the lowest cost. But ultimately, it doesn't address the more serious underlying issues, like why 2 people own 3 cars, in debt on all of them.

The standard advice you'll get here is for single people to keep their finances separate. I think that applies to all couples including same-sex couples. Until people are married, they don't have the legal protection afforded by marriage. Unfortunately, you need to wait longer than most until same-sex marriages are legalized everywhere. Blending finances, mingling debt, having joint loans, etc. is all potentially asking for trouble if anything ever happens to the relationship.

[pdweaver]

You said the refi on the first loan was a no go due to LTV? Who is the loan through? The government has changed a few of the rules with the HARP program to allow people to refi even if they are upside down on their mortgage. Ask to see if you qualify. Most banks aren't starting this until the new year, so whoever you were dealing with may not have even known yet. Chase bank for example is starting this in January. Check on this to save money there and apply it towards the HELOAN.

I always like to pay the highest balance and highest rate down first. You are currently paying around $227 in interest every payment to the HELOAN. Doing this you will save the most money.

If you already have 6-12 months emergency savings fund, i would start putting that money you were saving towards your HELOAN. Unless you are making more than 6.5% in savings, which you are not, then i would apply that money towards your loans.

[ua_guy]

Originally Posted by disneysteve

Do you have a joint household budget? If not, I would urge the two of you to sit down and create one. Decide where every dollar is going each month. That would help clear up some of the issues here.

As for paying down debt, your original question, I'd still go highest to lowest interest rates. That gets you debt-free the fastest at the lowest cost. But ultimately, it doesn't address the more serious underlying issues, like why 2 people own 3 cars, in debt on all of them.

The standard advice you'll get here is for single people to keep their finances separate. I think that applies to all couples including same-sex couples. Until people are married, they don't have the legal protection afforded by marriage. Unfortunately, you need to wait longer than most until same-sex marriages are legalized everywhere. Blending finances, mingling debt, having joint loans, etc. is all potentially asking for trouble if anything ever happens to the relationship.

I think that's good advice--I'm just still undecided on which loan to pay down first. I'd aim for the HELOC, but the house isn't worth anything so I'm hesitant to throw money at it. Is it better to throw money at an asset you can actually sell?

We know that if we ever split, we have business issues to clean up--but the good news is that the ONLY debt we have is the house and cars---but it's not exactly good debt, being that it's THREE cars, and there are 2 loans on the house. We were thinking that if we could tackle the HELOC and at least one of the cars in the next year that we'd start feeling normal again.

[disneysteve]

Originally Posted by ua_guy

I'd aim for the HELOC, but the house isn't worth anything so I'm hesitant to throw money at it. Is it better to throw money at an asset you can actually sell?

I don't think it matters at all. Unless you intend to foreclose on the house or do a short sale, you borrowed the money and need to pay it back. The value of the home is irrelevant. Even adjusted for the tax deduction, the HEL is still your highest interest debt so I'd attack that first.

Personally, I'd still stand by my original advice to sell one or more of the cars even if you are upside down on the loans but you've been pretty clear that you aren't willing to consider that option. In that case, just move from the HEL to the next highest rate and then the next highest after that until all of the debts are gone.

[ua_guy]

Originally Posted by pdweaver

You said the refi on the first loan was a no go due to LTV? Who is the loan through? The government has changed a few of the rules with the HARP program to allow people to refi even if they are upside down on their mortgage. Ask to see if you qualify. Most banks aren't starting this until the new year, so whoever you were dealing with may not have even known yet. Chase bank for example is starting this in January. Check on this to save money there and apply it towards the HELOAN.

I always like to pay the highest balance and highest rate down first. You are currently paying around $227 in interest every payment to the HELOAN. Doing this you will save the most money.

If you already have 6-12 months emergency savings fund, i would start putting that money you were saving towards your HELOAN. Unless you are making more than 6.5% in savings, which you are not, then i would apply that money towards your loans.

Chase Bank NA holds the loan on the 1st, and it's backed by Fannie/Freddie. They are who we tried to refi with. We attempted to do so, with the latest HARP changes, but were denied.

In person/over the phone, we were told that a) Since we used the first HARP legislation back in 2009, we were ineligible for any consideration under that program even with new rules. b) HARP aside, the bank could refi us if they wanted to, but they don't--stating loan:value as the reason and that they were not interested.

The kicker is that after that phone conversation, we received an official "denial" letter in the mail. There was no mention of the above, and the reason for denial was "credit." Possible reasons stated something to the effect of insufficient credit, low credit score, length of time accounts have been open. Quite frankly, I laughed my ass off. I pulled my Experian report, the same as they had done, and the Experian report in my hands was almost 20 points higher for a total credit score at 800. My other half's was 826. We have more assets than ever, and some accounts have been open 10+ years. Whatever.

That's my rant about big bank arrogance--and it appears that its appendages don't communicate.

I'm leary of tossing my emergency fund at the 2nd mortgage. Tax return--yes, but emergency fund? Seems risky.

[pdweaver]

I wasn't saying to put your emergency fund towards the HELOAN, only excess money that you are applying towards savings. Do not touch your 12 months reserve fund.

I use to work at Chase, so i understand your frustration. There is a stipulation I believe you needed to have the loan prior to 2008 in order to be able to refi, so that might be the reason. I would call them back after the new year and speak to someone else and see if you get a different answer, it can't hurt.

LTV with the new HARP and even credit shouldn't be much of a factor. Try again and good luck.

[Xtreme Thunder]

In regards to the credit scores, at least for my wife and I on our mortgage, the average of the two low scores were used to determine credit score for the rate and I am sure other factors. Not saying that is the case for you, but something to look into being you noticed a 'discrepancy' in you scores.

[treeguy]

The car loans. We have both cars paid for and its a great feeling.

[josephbales]

Your problem is not these loans, it's your lifestyle. If you and your partner could live like you make $50K a year instead of $170K a year, these loans would go away in about 6 months. You guys could be completely debt free in about 5 years including the house.

If I were in your shoes, I'd pay these loans off smallest to largest balance as fast as I possibly could. With your combined incomes this should take just a few months, the interest rates over that period would mean little.

Like DisneySteve said, you guys should sit down together and figure out where all this money is going.