Pay Mortgage Debt or Bike Debt

**bjl584** · 02-14-2013, 08:58 AM

I'd pay off the bike. It's a luxury item, it's a depreciating asset, and it doesn't have the same tax advantage that a mortgage does.

**theduc** · 02-14-2013, 09:56 AM

How many more years are left on the bike loan?

I recently did some calculations on my own to look at a similar situation... paying off my mortgage vs. auto loan first. I have about 2 1/2 years left on the auto loan and just under 29 years left on the mortgage.

both payments are about $250/month... I calculated on a factor of having an extra $300/month to add for a total of $800/month going to the payments.

If I put the extra toward the auto loan first it would be paid off 1 year, 4 months early. If I then put the additional $550/month ($250 auto loan plus the $300) on top of the mortgage it would be paid off in July of 2019.

If I did the opposite and put the additional $300/month toward the mortgage for the next 2 1/2 years until the auto loan was paid off and then up it the additional $250 that was going to the auto loan then the mortgage would be paid off in February of 2019 (6 months earlier and $750 less in interest on the mortgage).

Paying off the auto loan first would save me $130 in interest on it but would cost me $750 in interest on the mortgage...

These numbers would be much different for you as my mortgage only has about $44K left on it (5.5%) and about $7,600 left on the auto loan (2.79%).

All of that being said... some people need the psychological happiness of seeing that the there is one less payment each month. Paying the bike off first would do this a lot faster but in the end you would cost you a little more in interest on the mortgage.

The truth is that both options are 100% better than not doing either one! Just pick one and put as much as you can towards the principal every month.

**Goldy** · 02-14-2013, 07:09 PM

If it were me I would refi into a 15 yr loan at 3% interest and no closing fees then toss the extra money towards the bike till its paid off. Once that is paid the I would take a look at the mortgage or invest, whatever you are more comfortable with.

**MonkeyMama** · 02-15-2013, 05:31 AM

Agreed with bjl.

On the refinancing, it's hard to say without running numbers. No-cost refis are pretty common right now and could significantly reduce your interest rate. But the 3-4 year payoff might or might not make the refi worthwhile. Just depends how much you'd save. The numbers aren't quite adding up for me ($167k loan at 30 years, 4.875%, does not add up to a $700 monthly mortgage payment?). BUT, estimating a bit, it doesn't look like refinancing down to 2.75% would save you anything in the long run. You'd maybe pay off a couple of months sooner, and save $2500 (2 months of payments plus extra), but probably not worth the hassle.

BUT, there has been a lot of talk about PenFed having HELOCs - 5 years payoff at 1.99%. Again, may or may not be worth it, but is probably less hassle than a traditional mortgage refi. If you are going to pay off in 3-4 years anyway, might as well pay the lower interest rate.

**twest** · 02-15-2013, 07:04 AM

I didn't even consider that I might could get no fee closing cost. I may have to run some numbers and see if it would work out.

Oh and Monkey Mama you are right. I guess I didn't explain myself well on the reason my payment is low. We started out with a bridge loan at 167,000. (May not have been the smartest thing but it is what it is) We had our first house that hadn't sold yet. When that sold about 3 months later we put about 70,000 down and then went to a conventional loan. That loan began with 92.000. That is why our payment is stil pretty low.

Thanks for all the advice so far.

**jpg7n16** · 02-15-2013, 07:41 AM

I would pay more to the house. I would also consider a house refi, if you haven't done so in a while.

Depreciating asset doesn't affect your loan balance or interest rate. Luxury item doesn't make a low interest rate charge you more. Assuming you're in a higher bracket, even 30%, the tax advantage would reduce your cost of borrowing to

4.875% * 0.7 = 3.4125%

Which is still nearly double the bike loan.

If your goal is to get out of debt, then pay extra to the mortgage.

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Having said that, the real thing I would try is to refi down to the 3's, and then invest rather than pay off extra on your debts. Most investment allocations are expected to earn between 5-11% long term, so even conservative investing should make you more than your interest is currently costing you.

So even if you can't refi, I'd still invest rather than pay extra on your debts.

If your goal is to maximize your wealth, and have the most secure future, don't pay extra on your debts. Invest.

Would you rather take your dollars and save $0.02 or $0.034? Or use them to make $0.05-$0.11?

IMO this is a pretty clear decision to invest long term.

How much retirement income will I have if I save regularly?

**twest** · 02-19-2013, 02:15 PM

the duc: We have about 27 months left on the bike loan.

jpg7n16: We do invest about 14% to Roths and Roth 401K. Would you still answer the same: Do more investing? Or go ahead and pay debts first?

**jpg7n16** · 02-19-2013, 05:51 PM

Originally posted by twest View Post

jpg7n16: We do invest about 14% to Roths and Roth 401K. Would you still answer the same: Do more investing? Or go ahead and pay debts first?

Roth's are not investments. They are tax advantaged accounts that hold investments. You can hold investments in non-tax advantaged accounts too.

How much do you expect your investments to make long term? (%)
What is your debt costing you? (%)

Another way to look at it:
If you invested $1000 - how much would you make per year on average?
If you used $1000 to pay down your debt - how much would you save per year on average?

So many times people get so focused on which debt to pay (Option A or Option B??) and they miss option C, which is totally different.

My advice doesn't change. Your debts are cheap. You can expect to earn more than that by investing. If you can do it in a Roth great. If not, build up a taxable brokerage account. Now there's certainly some risk there, but at 2-3% debt costs, the additional expected return is worth it.

**twest** · 02-20-2013, 06:44 AM

Thank you so much for everyone's responses.

Thanks jpg7n16 for making me think of something completely different. I am thinking of opening a Vanguard account pretty soon.

Pay Mortgage Debt or Bike Debt