Thinking about changing plan

[geojen]

Hello,
Previously, I had posted a plan to get our debt paid off in 3 years. This includes paying off our 2 cars and 2 student loans.

The order of the plan would be this:

Car # 1: paid off in Dec 08 (interest rate 6.8%, current balance 5,996)
Car #2 paid off in April 09 (interest rate 5.75%, current balance 7,567)

Then I would attack my student loans. The first has a balance of 13,441 at an interest rate of 6.8%. The second has a balance of 5,211 at 4.75%. These would be paid off by June 2011, leaving our mortgage.

However, this week in the mail I received a notice that my larger student loan at an interest rate of 6.8% will be reduced to 0% for the remainder of the loan after 36 on-time payments. This makes me wonder if I should skip paying off the student loans and begin to attack my mortgage.

Right now, we have a 5/1 arm at 5.5% that will reset in 2013. We would like to be able to refi to a 15 year fixed at that point, but would need to have paid down about 30,000 on the balance of the mortgage to do this. If we let the student loans die naturally, we could do this, because as of April 2009 we would have 870 extra dollars going towards the mortgage every month which equate to 31,320 by April 2012. Meanwhile, my student loans would still be around, but at 4.75 and 0%, is that really so bad?

What do you guys think?

[disneysteve]

Once the student loan drops to 0%, stop making extra payments. Just pay the required amount.

I would reconsider the mortgage. I think we are entering a period that will see rising interest rates. If you don't refi until 2013, you may find yourself paying a much higher rate than what is available today. ARMs are bad news. I'd refi now and lock in what are still relatively low rates. If you think you can afford a 15 year loan in 5 years, get a 20 or even 25 now and you won't have to worry about rising rates.

[geojen]

Once the student loan drops to 0%, stop making extra payments. Just pay the required amount.

I would reconsider the mortgage. I think we are entering a period that will see rising interest rates. If you don't refi until 2013, you may find yourself paying a much higher rate than what is available today. ARMs are bad news. I'd refi now and lock in what are still relatively low rates. If you think you can afford a 15 year loan in 5 years, get a 20 or even 25 now and you won't have to worry about rising rates.

We looked into refing last week. The rate was only .5% less than what our loan would reset to in 5 years. We decided it was best to keep an eye on the rates and see what happens. Right now, we can't afford what amounts to a 200 dollar increase in the mortgage payment and keep paying down debt. We have to chose. If we are stuck with a higher rate in the end, at least our debts will be gone and we will have more room in the budget to handle it.

We never wanted a 5/1 in the first place. We had locked in 30-year fixed at 5.8%, and the bank decided 30 minutes before closing that they wouldn't go through with it because the septic needed to be replaced.

[noppenbd]

I agree with DS. Even if you have to pay PMI or get a piggyback 2nd to refi to a fixed rate I would go for it. Then if you want to apply extra payments you can pay down the 2nd.

[jIM_Ohio]

I think you need to plot this out on a month by month timeline.

List the debt, the principal payment, the interest payment, the extra payment in different columns.

Then run through the pay down scenario. At some point in the future your goal is

a) to be debt free
b) to have a high net worth
c) to be able to retire

which goal is it?

I assume a) based on "the old plan", which means what you want to do is pay down the debts with the highest interest rate first. It might make sense to pay down the mortgage (before the cars) because of the rate and the possible risk when the ARM expires.

The cars and student loans die a natural death and you get the mortgage paid down in shortest possible time? Or would snowballing the car payments towards the mortgage give more cash flow to the solution? You need to create a spreadsheet and run the numbers.