Which debt to pay off first?

[WarEagle]

Thank you for taking the time to help me out in my "situation". After reading both Jim and jpg's posts, here's what I have concluded. Feel free to correct me if i'm wrong.

1) Car #2, there is hardly any interest being paid on it at this point in time, so I will just continue to make my normal monthly payments.

2) My student loan interest's tax adjusted rate is lower then car 1, so I should just continue making the normal monthly payments.

3) My mortgage rate is the highest of them all by a long shot, and i'm not even getting a tax adjusted rate, as I take the standard deduction. Therefore, I should be making the lump payment to my mortgage. Makes me kinda regret paying down my loan so aggressively the past 2 years.

Thanks again for the advice and replies. It has got me thinking alot of the way I look at the big picture. I will reread the posts above and try to comprehend what both are saying when I have a clearer head. I'm pretty confused after all the reading!

[jpg7n16]

To WarEagle - sir I'm glad you've found help with your problem. Sorry we're having this argument in your thread. But it gets funny I swear!

To Jim - You're wrong. (Evidence to follow)

You only added interest for 1 year, and the OP won't even noticed they saved interest and saved money for another 12 years. If OP wants to save interest just this one single year (that was not his objective), then put money on mortgage.

Oh that's right! I totally forgot that he will stop paying on all debts after year 1! And that $15k gets put right back onto his mortgage, and starts getting charged interest again. Good catch Jim.

...my point is LESS interest is paid over next 10 years if the money is used on cars first, then on house second, and that math is a slam dunk, not even close.

My point is that what you just said is mathematically stupid. You just don't realize it. (Math still to follow) I wonder how much you'll stand behind that statement after reading this post? Hopefully you won't.

...In addition, you are using fuzzy math

If by "fuzzy math" you mean an excel spreadsheet then yes I am. (available upon request)

Making references to George Bush, doesn't make what I said wrong. Or show that you even know how to do "real" math.

Or do you mean the fuzzy math - like comparing the extra savings from my method in only year 1 vs the total savings over all 12 years from your method as evidence of how your method saves so much?

My method actually saves $905 in year one alone (vs $581 - yours). And it keeps saving more money for the next 11 years too. I'm sorry you didn't understand that. Maybe I should have pointed that out?

If payments are the same, then no way could your technique have an extra $324. NO WAY.

You mean other than the fact that there is $15,000 less on the loan that charges a higher interest rate?? And remember it saves $905 in year one (not just 324 - that's only how much better my option was over yours)... which $905 is just over 5.875% of $15,000... hmmmm I've seen those numbers somewhere before...

The math probably works out to roughly (5.875% * 15,000) - (2.9% * 8,718 + 3.85% * 6,282) = $387 close enough. See while in year one you used your 15k to immediately save 2.9% and 3.85%, I used it to immediately save 5.875%. You then spend the rest of the year trying to catch up to me by adding the 470 car payment towards the 5.875%. The math is pretty hard to argue with, but I know you'll try anyways.

...The OP might have paid $324 less in interest 1st year, but they did not have that $324 in their pocket-

Nope - just in their net worth. Sucks to be them.

And there you go confusing cashflow with interest again...

My technique had mortgage paid off sooner than your technique by 3 years and paying $1000 less interest on same mortgage. That is a slam dunk, and its not even close (that is $36,000 less paid on mortgage in those 3 years, plus the interest savings of $1000).

I will take a $37,000 savings over a $324 savings. With decisions like that, you prove very little.

Really? I don't believe you. Because actually, my method pays off the mortgage sooner. See below.

And what's with those "let's compare the savings over 12 years to the extra from one year to show how smart I am" phrases??... It's not even mathematically right. I'll show you the math - because I hate it when people who don't understand math call me dumb for using it.

So here's the math for the whole debt period, since you can't see these things on your own... I used a spreadsheet (emailable upon request). You'll notice the balances for the loans are slightly different than the rounded numbers OP gave. They were recalculated to be more exact based on the interest rate, months left, and payment amounts.

Stats: Mortgage balance $130k; Payments left - 180; Int 5.875%; Pmt = $1,088.25
Car1 balance $31,021; Int 3.85%; Payments left - 58; Pmt = $587
Car2 balance $8,718; Int 2.9%; Payments left - 19; Pmt = $470

Baseline: make all payments as normal, add car payments to mortgage when cars are paid off; cash earns no interest in the bank
Car2: 19 pmts @ 470; $8,930 total paid, $212.21 interest paid
Car1: 58 pmts @ 587; $34,046 total paid, $3025.27 interest paid
Mortgage: 19 pmts @ 1088.25 then 39 pmts @ 1,558.25 then 41 pmts @ 2,145.25; $169,557 total paid, $39,557 interest paid

Mortgage gone in 99 months, paid $42,794 in interest, still has $15,000 in cash (so after 99 months, you would have no debt, and $0 extra cash)

Jim's advice is followed: pay off Car2, with remainder of $15k to Car1; apply what would have been car payments to mortgage
Car2: n/a
Car1: 45 pmts @ 1057; $26,621 total paid, $1,883 interest paid
Mortgage: 45 pmts @ 1,558.25 then 43 pmts @ 2,145.25; $163,308 total paid, $33,308 interest paid

Mortgage gone in 88.5 months, paid $35,191 in interest; pays self mortgage pmt for 10.5 months and has 22,603.44 in bank when baseline would finish. (So after 99 months, you would have no debt and $7,603.44 extra cash)

My advice is followed: pay $15k towards mortgage today, add car payments to mortgage payments when finished; keep same mortgage payment amount; new mortgage balance = $115k
Car2: 19 pmts @ 470; 8,930 total paid, 212.21 in interest
Car1: 58 pmts @ 587; 34,046 total paid, 3,025.27 in interest
Mortgage: 19 pmts @ 1088.25 then 39 pmts @ 1,558.25 then 30 pmts @ 2,145.25; $145,815.86 total paid, $30,816 interest paid

Mortgage gone in 88.0 months, paid $34,053 in interest; pays self mortgage pmt for 11 months and has $23,741 in bank when baseline would finish. (So after 99 months, you would have no debt and $8,741 extra cash)

Looks like we have a winner. Both methods pay off the mortgage early, both have over 20k in the bank when the 1st loan would have ended.

My advice just makes an extra $1,138 over yours.

[jpg7n16]

... when you look deeper into problem, you can CLEARLY see over any period of time longer than 5-7 years that OP will pay less interest if the cars are paid off first, then snowball those loans into the house.

Oh wait... you wanted to put it all towards the cars first... then the home. Well that's even worse.


Jim's advice is followed: pay off Car2, with remainder of $15k to Car1; apply what would have been car payments to Car1 first then to mortgage
Car2: n/a
Car1: 24.4 pmts @ 1,057; $25,758 total paid, $1,019 interest paid
Mortgage: 24.4 pmts @ 1,088.25 then 64.4 pmts @ 2,145.25; $164,796 total paid, $34,796 interest paid

Mortgage gone in 89 months, paid $35,815 in interest; pays self mortgage pmt for 10.2 months and has $21,979.39 in bank when baseline would finish. (So after 99 months, you would have no debt and $6,979.39 extra cash)


In that case, mine is better by $1,761.51.

And this is over just under 8 years.

[jIM_Ohio]

If payments are the same, then no way could your technique have an extra $324. NO WAY.

You mean other than the fact that there is $15,000 less on the loan that charges a higher interest rate?? And remember it saves $905 in year one (not just 324 - that's only how much better my option was over yours)... which $905 is just over 5.875% of $15,000... hmmmm I've seen those numbers somewhere before...

The math probably works out to roughly (5.875% * 15,000) - (2.9% * 8,718 + 3.85% * 6,282) = $387 close enough. See while in year one you used your 15k to immediately save 2.9% and 3.85%, I used it to immediately save 5.875%. You then spend the rest of the year trying to catch up to me by adding the 470 car payment towards the 5.875%. The math is pretty hard to argue with, but I know you'll try anyways.

...The OP might have paid $324 less in interest 1st year, but they did not have that $324 in their pocket-

Nope - just in their net worth. Sucks to be them.

And there you go confusing cashflow with interest again...

you are focusing on net worth when OP is focusing on interest paid
I am using the cash flow as a way to pay less interest and reduce risk along the way.

Higher cash flow and less interest paid is a slam dunk to me
the cars are depreciating assets, the house is **usually** an appreciating asset, so putting more money on a secured debt before unsecured or depreciating assets are paid off is wierd logic.

ortgage balance $130k; Payments left - 180; Int 5.875%; Pmt = $1,088.25
Car1 balance $31,021; Int 3.85%; Payments left - 58; Pmt = $587
Car2 balance $8,718; Int 2.9%; Payments left - 19; Pmt = $470

check OP again, but I believe house has less than 180 payments left

Baseline: make all payments as normal, add car payments to mortgage when cars are paid off; cash earns no interest in the bank
Car2: 19 pmts @ 470; $8,930 total paid, $212.21 interest paid
Car1: 58 pmts @ 587; $34,046 total paid, $3025.27 interest paid
Mortgage: 19 pmts @ 1088.25 then 39 pmts @ 1,558.25 then 41 pmts @ 2,145.25; $169,557 total paid, $39,557 interest paid

Mortgage gone in 99 months, paid $42,794 in interest, still has $15,000 in cash (so after 99 months, you would have no debt, and $0 extra cash)

we need baseline 1 and baseline 2, because baseline 1 would be 66k in interest paid to mortgage (assuming car payments are not snow balled).

This is important because OP will need new cars in less than 15 years, and probably in less than 8 years, so its not probable that all $1000 of car payments could be tied to mortgage for 8 years (and that's also cash flow which you keep criticizing me for). Pick one argument and stick with it.

Jim's advice is followed: pay off Car2, with remainder of $15k to Car1; apply what would have been car payments to mortgage
Car2: n/a
Car1: 45 pmts @ 587; $26,621 total paid, $1,883 interest paid
Mortgage: 45 pmts @ 1,558.25 then 43 pmts @ 2,145.25; $163,308 total paid, $33,308 interest paid

Bad math, car should be paid off well before 45 payments with the extra applied

My advice is followed: pay $15k towards mortgage today, add car payments to mortgage payments when finished; keep same mortgage payment amount; new mortgage balance = $115k
Car2: 19 pmts @ 470; 8,930 total paid, 212.21 in interest
Car1: 58 pmts @ 587; 34,046 total paid, 3,025.27 in interest
Mortgage: 19 pmts @ 1088.25 then 39 pmts @ 1,558.25 then 30 pmts @ 2,145.25; $145,815.86 total paid, $30,816 interest paid

Jim - please do the math next time BEFORE you tell everyone how "BAD" my advice is.

You fudged numbers to make your situation look better

I know this because I calculated interest on the cars, and it was a lot less than $1883 paid you showed here. Not sure where the numbers came from, but IMO you are fudging numbers to make yours look better- the car 1 should be paid off 19 months from now, and it the "key" to my snow ball for the mortgage reduction.

You also change your math from post to post, as you did not snow ball the cars into mortgage originally, then criticized me for talking about cash flow, then did the same thing while criticizing me for doing what you suggested.

[jpg7n16]

you are focusing on net worth when OP is focusing on interest paid
I am using the cash flow as a way to pay less interest and reduce risk along the way.

Higher cash flow and less interest paid is a slam dunk to me
the cars are depreciating assets, the house is **usually** an appreciating asset, so putting more money on a secured debt before unsecured or depreciating assets are paid off is wierd logic.

Okay it's official. You're just an argumentative idiot. There's no point continuing this argument, so I'm done responding.

Please for the sake of people you are trying to help, go take a course on how to use a financial calculator.

Clearly you're mistaken because the higher net worth is because of the lower interest charged. Cashflow is not interest!! Just because you "feel" like less cash is coming out of your wallet does not mean you are paying less in interest...

And just because the assets you got from acquiring the debt are appreciating/depreciating, does not have any bearing on how much interest you will charged over the life of the loan.

If increasing your net worth is "wierd logic" then count me in for being wierd.

check OP again, but I believe house has less than 180 payments left

Doesn't matter. Math still favors paying the highest interest rate 1st.

we need baseline 1 and baseline 2, because baseline 1 would be 66k in interest paid to mortgage (assuming car payments are not snow balled).

Again it doesn't matter. If A>B>C, then A>C. If baseline 2 is better than baseline 1 and our methods are better than baseline 2, they're better than baseline 1. And if my method is better than yours, well... then my method is better than yours regardless of which baseline we compare to. Both our methods will just have bigger savings numbers and mine will still save more than yours.

This is important because OP will need new cars in less than 15 years, and probably in less than 8 years, so its not probable that all $1000 of car payments could be tied to mortgage for 8 years (and that's also cash flow which you keep criticizing me for). Pick one argument and stick with it.

Doesn't matter (I'm seeing a trend here) because under either method, the cars are still paid off in 4 years - which is probably when they'll need the new cars. So both yours and my scenario will have the cashflow available at that time.

Stop acting like these things only affect MY scenario. You'd have to stop paying extra on the mortgage in yours too...

Bad math, car should be paid off well before 45 payments with the extra applied

Bad reading. In that example, the payment from Car2 was paid to the mortgage not to Car1.

Conveniently, I made an entire 2nd post before you responded that addressed this specific situation and shows how paying it on Car1 is even worse.

You fudged numbers to make your situation look better

No I didn't. You misread the numbers, and criticized me for them to try and make me look worse.

Just because you don't understand how to do financial calculation doesn't mean I'm making up these numbers. Anyone with excel can do this - and I can email them my spreadsheet with all the work done so you can see for yourself.

I know this because I calculated interest on the cars, and it was a lot less than $1883 paid you showed here. Not sure where the numbers came from, but IMO you are fudging numbers to make yours look better- the car 1 should be paid off 19 months from now, and it the "key" to my snow ball for the mortgage reduction.

It is a product called "Microsoft Excel." There are these formulas you can put into cells called =pv() ; =pmt() ; =nper(), etc. If you actually knew how to use them, maybe you'd see why you're wrong.

Microsoft Excel Financial Functions

http://office.microsoft.com/en-us/excel/ha011117451033.aspx#Borrowing

Car2 should be paid off in 19 months (as shown in my posts), not Car1. When applying both car payments to Car1, it'd actually be paid off in 22 (see post directly before yours).

Here's how the math works: Based on payment size, interest rate, and remaining debt - you use excel to calculate how many payments are left. (its the =nper() function) If it takes 10 payments at $500 to remove a debt balance of 4,000, then it cost you $5000 to get rid of $4000 - making the extra $1000 the interest paid.

Plug this in excel - just type exactly what I list below and let excel do some math for you:

Column A.....Column B
1) N......... =NPER(B2,B4,B3,B5)
2) int....... =3.85%/12
3) PV........ =31021-(15000-8718)
4) PMT....... =-(587+470)
5) FV........ 0

Cell B1 will calculate to 24.3693 months/payments. So 24.4 pmts @ $1,057 = $25,758.40 paid to remove a balance of $24,739 (B3). So the extra paid is interest $25,758 - 24,739 = $1,019.

Hmmm now what did my post immediately before your last one say again??

You also change your math from post to post, as you did not snow ball the cars into mortgage originally, then criticized me for talking about cash flow, then did the same thing while criticizing me for doing what you suggested.

That's kinda why I mentioned that the process was changing when I made the 2nd post...

I gave you too much credit for thinking smartly about this. My bad.

In post 1 (of evaluating the full 99 months), I thought you would pay off Car2 and immediately start applying its payment to the mortgage. Hence why it still takes 45 payments to pay off Car1.

In the post immediately following it, I realized you were doing the even dumber thing of paying car2's payment towards the other car. So I showed you the math from it.

The math is fine. The numbers are correct. Paying as much as you can towards the highest interest rate 1st is better. You will probably still argue with me about this because you argue with me about everything. But I'm done. The evidence is all here, say whatever you want - cause I'm not responding any more.

I joined this forum to help people - not to argue with idiots like you over math.

[WarEagle]

Jpg and Jim,

I really do appreciate the time both of you have taken to help with my dilemma. I have drawn my own conclusions after reading this over a couple of times and have decided I will put the money towards my mortgage. I feel JPG's way will help me save a tad bit more money when everything is said and done, but it will leave me with no "extra" cashflow until car 2 is paid off in 19 months. Jim's way will free up cashflow sooner (now) if "needed" but will cost me about 1-2k more dollars in interest over the next 9 years (not too much money if you really think about it). So the ultimate decision is do i feel that being able to have the extra cashflow of $470 right now outweigh saving the money? My answer would be no as I have an emergency fund to tap into if needed, and in 19 months, car 2 will be paid off if extra cashflow is needed, (however, the plan is to put it towards mortgage).

I apologize if this thread has caused any tension between JPG and Jim, that was certainly not the intentions. I just want the both of you to know that you taught me a way of looking at the different perspectives of my personal financial situation and for that I THANK YOU!

[zetta]

One thimg to consider is that if you sell the house before paying off the mortgage, you don't really save yourself any interest. While you may plan to stay in this house, a lot can change in 9 years -- layoffs forcing a move, unforseen divorce (happened to my parents after 7 years in their "forever" house), disability, etc. I would recommend continuing to attack the student loan.

[jpg7n16]

Jpg and Jim,

I really do appreciate the time both of you have taken to help with my dilemma. I have drawn my own conclusions after reading this over a couple of times and have decided I will put the money towards my mortgage. I feel JPG's way will help me save a tad bit more money when everything is said and done, but it will leave me with no "extra" cashflow until car 2 is paid off in 19 months. Jim's way will free up cashflow sooner (now) if "needed" but will cost me about 1-2k more dollars in interest over the next 9 years (not too much money if you really think about it). So the ultimate decision is do i feel that being able to have the extra cashflow of $470 right now outweigh saving the money? My answer would be no as I have an emergency fund to tap into if needed, and in 19 months, car 2 will be paid off if extra cashflow is needed, (however, the plan is to put it towards mortgage).

I apologize if this thread has caused any tension between JPG and Jim, that was certainly not the intentions. I just want the both of you to know that you taught me a way of looking at the different perspectives of my personal financial situation and for that I THANK YOU!

I think you summed it up pretty well except I think $1-2k extra is a lot of money

This thread didn't cause tension between me and Jim - we caused it between ourselves. Hope we didn't turn you off to the forums. We're glad to help with any advice you need later on!!

Good luck!

[jpg7n16]

One thimg to consider is that if you sell the house before paying off the mortgage, you don't really save yourself any interest. While you may plan to stay in this house, a lot can change in 9 years -- layoffs forcing a move, unforseen divorce (happened to my parents after 7 years in their "forever" house), disability, etc. I would recommend continuing to attack the student loan.

If he wound up needing to sell the house, he could apply the extra equity (gained by paying extra today) towards the loan on a new house... or if he didn't get a new house, he could apply the extra equity to the cars/loans or whatever debt had the highest tax adjusted interest rate at that time.

Best of both worlds

[DavidKimball]

Let's make this simple. No house until no debt. All of this leveraging others' money is insane. Look what just happened to everyone who did this in the past decade? Kept refinancing and buying more things on credit -- and then BAM. No job, owe everyone.

Than you can only recover pennies on the dollar, if that. Pour everything you have into paying off the personal debts, even if that means selling and downsizing. Then have at least 20% down on the house with 6 months cash flow banked.

[TBH]

I wouldn't venture to go head to head with Jim or jpg in terms of math problems, but I will say I'm surprised nobody has said anything about buying new cars with borrowed money. I think that's a bad idea.

If it were me, I would be so uncomfortable having such big debts on depreciating assets that I would absolutely pay down the cars before the house, even if it meant paying slightly more interest over time.

[WarEagle]

UPDATE! 8 months later and here's what i decided to do! Let me know what you think.

Mortgage: REfinanced with a 15 year fixed@3.75% 116k left (started all over again)
Student Loan: 30 year 4.75% rate, 8k remaining
Car 1: SOLD and purchased another sedan at 8k (paid in full, No more car payment!)
Car 2: 5k remaining on loan, (10 months of payments left)

My plan from here is to pay off car 2 in 10 months, then pay off student loan debt in 2012. From there, roll everything into the mortgage payment and hopefully have it paid off in the next 7 years or so. After that, I can start to think about investing in other avenues after I have the cashflow. Thanks to everyone for the input and help so far, this board has been great!

[jpg7n16]

wow congrats! that's 31k of debt gone

and your biggest interest rate is now one of the smallest, so that's good too. This picture looks a lot better than before. Good work and keep it up!

[Tree0164]

UPDATE! 8 months later and here's what i decided to do! Let me know what you think.

Mortgage: REfinanced with a 15 year fixed@3.75% 116k left (started all over again)
Student Loan: 30 year 4.75% rate, 8k remaining
Car 1: SOLD and purchased another sedan at 8k (paid in full, No more car payment!)
Car 2: 5k remaining on loan, (10 months of payments left)

My plan from here is to pay off car 2 in 10 months, then pay off student loan debt in 2012. From there, roll everything into the mortgage payment and hopefully have it paid off in the next 7 years or so. After that, I can start to think about investing in other avenues after I have the cashflow. Thanks to everyone for the input and help so far, this board has been great!

Good I am glad that you SOLD a car and bought one in cash! Smart move.

One thing to add is save up for a new car as well so you don't need to have a car payment.

Good job!