Not Sure What to do Next

[KandiB47]

Hi. I would appreciate some financial advice. About 14 months ago I read the Dave Ramsey book, TTM. At that time we had about $46,000 in debt, not including the mortgage. Since then we have paid off about $30,000.

We still owe $7500 on a car at 4.9% and about $9000 on a student loan at 3.37%. Currently we are putting snowball payments on the car.

We have an 80/20 loan for our mortgage on a 5 year ARM (3 years left). One part of the loan is 5.25% and the other is 11.75% (payments are interest only). Yikes, I know. We plan to refinance to a 15 year fixed VA loan** once we have 10% equity in the house. We have about 6% equity now. We can get the other 4% by waiting for our home to go up in value or saving $8000.

We only have $1000 in savings.

I’m getting a major mental boost by paying down our smaller debts even though I realize it probably doesn’t make sense to keep the mortgage payments with the high interest.

What should we do? Pay off the small loans and then refinance? Build a bigger emergency fund? Save up the extra money to refinance our home?

Any advice would be appreciated.


**You can only refinance a VA loan for 90% of your home’s value. I wanted to avoid paying private mortgage insurance if I can because it seems like a waste of money. I think the PMI would keep us from gaining anything from refinancing. We don’t currently pay PMI.

[KandiB47]

I should also probably add that we contribute about 8% of our income to retirement and $200/month into a college savings plan for our 8 month old son. We hope to eventually put 15% into retirement and $350/month for the college savings.

[buzz]

It would help if you revealed how much cash you have after monthly expenses. But I would start by building the emergency fund, and then concentrate on the mortgage.

The car loan and student loan are both below current CD and Online Money Market rates, so when you have the mortgage dealt with, you can invest rather than paying off the loans, especially the student loan. You can make money, and at the same time have cash available.

As far as the mortgage details are concerned, someone else will have to help you with that. I'm not up to date on mortgage options.

Edit: Personally, I would suspend retirement and education savings for the short term until the mortgage is squared away. (Keep enough to earn a company match, if applicable.)

[Ima saver]

I think you should save the $8000 so that you can refinance the house at a good rate. I would cut out the college savings until you get the $8000 saved.

[LuxLiving]

Wiser heads than mine will be along to help you, and I'm not up on mortgage options either, BUT I would be wanting to lock in a decent longterm rate on that mortgage before things tank in the RE world. I'd suspend retirement & education to get that locked up first and then go right back to making sure I had a decent e-fund, then retirement, then education.

[KandiB47]

Originally Posted by buzz

It would help if you revealed how much cash you have after monthly expenses. But I would start by building the emergency fund, and then concentrate on the mortgage.

We have about $1000-$1500 extra a month

[Ima saver]

I agee, you need to get a good mortgage rate locked up as soon as possible.

[buzz]

KandiB47

Take your time and put some thought and research into it. You are not in any kind of financial bind, and you have done an exemplary job of reducing your debt already.

With some more cash on hand and a long-term mortgage squared away, you will be sitting pretty.

[KandiB47]

I changed my mind about this idea

[disneysteve]

I would not be making extra payments on the car or student loans. Any extra money should be going to that outrageous home loan.

I would split your available money between the home loan and building your savings.

[kristinecfp]

First, congratulations on paying down $30,000 in debt. That's awesome!

Second, Dave Ramsey's snowball debt formula does make you feel better as you watch those smaller debts go away, but it does not always make sense if you have other debts (the larger ones) that have a much higher interest rate.

I would apply more money to the higher interest loans, and stop paying extra towards the lower interest loans, even if they are much smaller. It sounds like your 11.75% loan is what bothers you the most, so that's what you should focus on.

As for stopping your savings for retirement and college while you're paying off your loan, I'm not sure I agree. I can see reducing or slowing down the college savings, but I would not stop or slow down the retirement savings - retirement is just too important.

Hope this helps. Good luck!

[KandiB47]

I found out some good news. I called my mortgage company to see what my options were and I found out my house is worth more than I thought. We already own 12%. I was basing the home's value on what our tax bill said but the lady told me that was low. Our home is worth $13,000 more than I thought. I can't really do much more until Tuesday but I'm crossing my fingers that they offer us a good rate and cheap closing costs.

Thank you for your ideas. No one suggested that I should keep paying on the car and student loan so DH and I are changing our plan. 1)Refinance 2)Emergency fund 3)Other debts 4)Fully contribute to retirement and college fund

Thanks again

[jIM_Ohio]

Originally Posted by LuxLiving

Wiser heads than mine will be along to help you, and I'm not up on mortgage options either, BUT I would be wanting to lock in a decent longterm rate on that mortgage before things tank in the RE world. I'd suspend retirement & education to get that locked up first and then go right back to making sure I had a decent e-fund, then retirement, then education.

I think a portion of this is bad advice.

First thing is take of your financial house before saving for kids education.

Use the money for kids education savings to pay down the mortgage. You could refinance second into a 15 yr or 30 yr fixed second, probably getting a rate of around 7.5% (I am in process of refinancing our house right now, we are getting 5.875% on first and 7.5% on second).

In either refinance case for 2nd mortgage, make 15 yr payment. The first expense to suspend would be kids education accounts.

I would also work on paying down the student loans and car. If you can afford to make 15 yr payment on 2nd mortgage and pay down car, then snowball that money to student loans, then snowball that to mortgage, I think that is what is best use of money.

In my case here is what we are doing (in a similar situation):

refinance 1st and 2nd (saved $100/mo), making 15 yr payment on the 2nd.
adding $75 to student loan payments and using the "free month" of mortgage payment to payoff other student loans (frees up $220+$75 each month).
We have two cars (one bought, one leased) after driving two cars into the ground in 2006. The new ones are Hondas which we will drive into the ground. When a car is paid off, we always finance the next one for a full year less (right now we are at 4 yr purchase, costs $697/mo). Next car is financed at 3 yrs (that will be 10-15 yrs from now...) We bank the $697 between when it's paid off and when we need new car. This should pay for new car in cash or fund vacations/ emergencies/ car repairs in mean time.

The tax deduction on student loan interest saved us a whole $50 on income taxes... it might be cheap money, but no debt is "good" in my eyes.