Pay off Student Loan, Second Mortgage or Car?

[f0rgiv3n]

Hello there! I've been reading for awhile and am now in a different financial situation than I ever have... I'm trying to figure out what I need to put my extra money towards! Basically, we have three debts... Student loans, mortgage, and car.

Income per month: 6,400
Expenses: 3,600
Left over: 2,800

EF: 5,000

Debt:
Student Loans: 50k between my wife and I
Mortgage: Primary 104k (6.25%) Second 34k (8.25%)
Car: 19k (3.99%)

My goal is to have a $15k EF and obviously pay off the debts that I currently have... We're stuck in our house because we are upside-down.

My question is which do I pay off first? i know that normally the highest interest debt goes first... which would be our second mortgage of 34k... should I first save up 15k for the EF and THEN start paying off the second mortgage? Or do it half-and-half each month?

What are your thoughts?

[disneysteve]

Originally Posted by f0rgiv3n

My question is which do I pay off first? i know that normally the highest interest debt goes first... which would be our second mortgage of 34k... should I first save up 15k for the EF and THEN start paying off the second mortgage? Or do it half-and-half each month?

I think a 5K EF is fine for now. That should cover most run of the mill unexpected expenses. I wouldn't worry about building that any farther at this point. I'd rather start attacking the debt. And yes, go after the highest rate first. Also, would paying off the 2nd mortgage allow you to eliminate PMI? If so, that's another reason to do that first.

I'm curious about the car. What is the monthly payment and how long was the loan? What is the car's current resale value?

[snshijuptr]

Another added benefit to paying off the second is working your way out of being upside down. What APR are your student loans at? I know public loans are usually 6.8%, but older public loans are variable interest rates and private loans can be painful.

[f0rgiv3n]

Yeah, definitely a good call. To answer the question, the car was a bad financial decision :P. It was only about 3 months ago that we bought it. I've been paying about $400 a month on it where the required amount is $300. Unfortunately, I was taken to the cleaners and have since learned from it... first car ever bought from a lot so it was an experience, that's for sure. It's worth about 18k and I owe 19k.

The student loans, 45k are at 2.11% and 5k at 6.8%.

That's the other question, should I just pay off the 5k 6.8% student loans then focus on the second mortgage?

[disneysteve]

Originally Posted by f0rgiv3n

It's worth about 18k and I owe 19k.

The student loans, 45k are at 2.11% and 5k at 6.8%.

That's the other question, should I just pay off the 5k 6.8% student loans then focus on the second mortgage?

No, I wouldn't pay a lower interest loan before a higher interest loan regardless of the balance.

As for the car, I might consider paying that down to get even, selling it and replacing it.

[nck4857]

I would also pay off the 2nd mortgage first. I paid our car off first, which had a slightly lower interest rate, but I could pay it off quickly and free up the extra money to "snowball" the 2nd mortgage. I'm throwing around 3k extra towards our 2nd mortgage now, it's like watching paint dry, but it helps (me at least) to see how much interest each payment is saving you. Good Luck!

[f0rgiv3n]

Thanks for the advice guys, I'm going to go watch some paint dry

[wincrasher]

If you are going to go the route of paying off the higher rate loans first, keep in mind that your 2nd mortgage interest is probably deductable - that changes the math a bit, along with if it enables you to retire PMI.

Good luck!

[bjl584]

All debts except the car may have tax deductability. You will have to consider that in your calculations. Because of that, i would probably work on the car. Pay it off or sell it for something more affordable.

[Money Gal]

Focus on paying the 2nd mortgage first. That is the highest rate and getting rid of it will allow you to refi the first to a better rate while rates are still low for the next couple years. You should be very aggressive with the 2nd mortgage payments & not put extra towards anything else until you get rid of that.

Then pay off the car. I would NOT prepay the school loans until you are fully funding retirement accounts and have a solid EF. Why? Because even though part of the student loans are high rate, if they are federal loans (that is what the rate looks like to me) then you get a lot of flexibility in deferment and repayment plans if your income drops substantially or you become unemployed, or if you go back to school, etc.