possible $10k bonus. which debt to pay?

[RayMetz100]

My three credit cards are:
AE $6.5k @ 16%
CB1 $8.8k @ 0% for 10 more months
CB2 $3.5k @ 4%

Home is:
1st $275k @ 5.75%
2nd $45k @ 6.5%

December 2009 home refi appraisal was $280k. It didn't go through.
Realator said this month is would sell for $360k though.
I still don't think it would refi and I'm weary of throwing another $500 fee to find out, since it's been less than a year.

If I got a $8-11k bonus in August/September, do you recommend I kill the AE card, or should I put it all on the 2nd mortgage? I do plan on staying in the home and want to refi as soon as possible. Or should I keep the cash and try to refi from that position. My income is $100k/yr gross and my other savings is less than $1000

[littleroc02us]

Throw the 10k at the 6.5k and 3.5k. That will settle those. Then don't use them anymore. When you can finish off the 8.8k, if you don't pay off before 10 months transfer it to another card and then get rid of it asap. After your out of debt then start paying off the second to gain equity for a refi.

Good luck!

[jIM_Ohio]

My three credit cards are:
AE $6.5k @ 16%
CB1 $8.8k @ 0% for 10 more months
CB2 $3.5k @ 4%

Home is:
1st $275k @ 5.75%
2nd $45k @ 6.5%

December 2009 home refi appraisal was $280k. It didn't go through.
Realator said this month is would sell for $360k though.
I still don't think it would refi and I'm weary of throwing another $500 fee to find out, since it's been less than a year.

If I got a $8-11k bonus in August/September, do you recommend I kill the AE card, or should I put it all on the 2nd mortgage? I do plan on staying in the home and want to refi as soon as possible. Or should I keep the cash and try to refi from that position. My income is $100k/yr gross and my other savings is less than $1000

American Express, then wipe out half balance of the CB2

You should then have enough cash to pay off CB1 and CB2 in about 10 months.

I would not pay down home equity loans until other debt was paid off.

[disneysteve]

Pay off AE first. Pay off 2nd mortgage next. Highest rate to lowest rate. Then take the monthly payments that were going to AE and add them to the 2nd mortgage payment.

ETA: I forgot about the mortgage deduction. Oops. Pay off the two credit cards with interest first.

[RayMetz100]

ok I will pay the credit cards first. I was dreaming that a 4% mortgage would save me $500 per month, but that's not a realistic option since the refi won't be approved anyway. Paying 10k on my second won't really help the refi today so I guess it makes the most sense to just pay off the credit cards.

Thanks for all your advice. It's nice that you all agreed so I'm confident to pay the credit cards first. That's assuming the bonus actually comes through. One year I only got 4k. Even then, I'll pay the AE first though

[Debt Vigilante]

I know there are interest rates are higher on the 2nd mortgage, but personally, I would still go American Express and then CB2. Only because it wipes out to segments of debt completely and allows you to focus more energy on the larger ones. Yes the mortgage has a high interest rate, but 3.5k is hardly going to budge the balance.

Like I said, it may not be the mathematical way to do it, but its what I would do personally.

[ferriwinkle]

Do you have an emergency fund? The reason I ask is that you might want to save, say 10% in a money market or ING Direct account (key is separate from your regular bank account) to make sure that you don't need to go into more debt if the unthinkable happens. If you do have emergency funds already, then I would pay off the AE and CB2, then work on the card with 0% interest. Work on your 2nd mortgage after the credit cards are paid off.

[disneysteve]

my other savings is less than $1000

Do you have an emergency fund?

ferriwinkle raises a good point which I had thought of also. How much "less than $1,000" is your EF currently? In your other thread, you list monthly expenses of over $5,700. If you were to lose your job, you wouldn't last a month. You can always default on credit cards but you still need to eat and cover other necessities in the event of an emergency.

There are two ways to go about this. Pay off the credit cards as discussed and then start putting the money that was going toward those payments each month into savings to gradually build up your EF or set aside part of any bonus in your EF up front and use the remainder to pay off the debts.

[snshijuptr]

I am a fan of one month's bills in the bank in case of late paychecks or other true emergencies. Then wipe out the highest interest debt.

[jpg7n16]

Pay off AE first. Pay off 2nd mortgage next. Highest rate to lowest rate. Then take the monthly payments that were going to AE and add them to the 2nd mortgage payment.

ETA: I forgot about the mortgage deduction. Oops. Pay off the two credit cards with interest first.

I stand by DS's original statement.

Even with the income tax deduction - your income tax marginal rate would have to be over 38.4% before you would prefer the 4% to the 6.5% (there is currently no such tax bracket).


Most likely, your tax bracket is the 25%, which 6.5% * (1-.25) = 4.875% tax adjusted interest rate. So even after accounting for the tax advantages, it's interest rate is still higher.


Pay off AE card. Pay rest on 2nd mortgage.

(FWIW - even paying extra on the 1st mortgage is preferrable to paying down the 4% card. Tax bracket would need to be over 30%. And 5.75 * (1-.25) = 4.3125% for the 25% bracket)

[dahoov2]

Throw the 10k at the 6.5k and 3.5k. That will settle those. Then don't use them anymore. When you can finish off the 8.8k, if you don't pay off before 10 months transfer it to another card and then get rid of it asap. After your out of debt then start paying off the second to gain equity for a refi.

Good luck!

I agree with this. I'd pay those two loans off. Then I'd take the money I was paying on those two loans and then roll it probably into the second mortgage and pay that off next.