A Financial WWYD

[AlmiraGulch]

I'm in the process of refinancing my home. There will be no closing costs or additional fees because of the type of loan. They monthly payment is going to go down by somewhere between $250 - $300 per month. My current loan is a 30-year that I've been paying on for nearly 7 years, and the new loan would also be 30 years. The program under which I'm refinancing does not allow me to change to a 15 or 20-year rate.

 

DH thinks we should just pay what we've been paying on our mortgage and it would be paid off in 2032, or about 4 years sooner than even my current mortgage.

 

I think we put the extra money toward our higher interest debt. So, first, our credit cards, then our car payments, and then my student loans, and finally the mortgage. All of these things have interest rates higher than what my new mortgage interest rate will be. I am way upside down on my mortgage (bought at the peak...a familiar story) but I can't see any upside to paying extra toward a mortgage while we still have higher interest debt than that.

 

What say the Hive?

 

P.S. Since I think that most of you are going to agree with me, can anyone offer any words I can use to convince him this is the right way to go? I think he gets the math of it, but for him it's a psychological thing, I think. I don't know. I just can't seem to get my point across.

 

P.P.S. Since you know what they say about people who assume, if you don't agree with my approach please tell me what I'm not thinking of. I'm certainly no expert.

[xixstar]

I'm a Dave Ramsey fan and so I pay off debt and fund emergency funds before paying down my mortgage. Sounds like re-fi gives you some breathing room and allows yall to get more aggressive about debt. Until you're debt free with fully funded emergency fund, you're just on the brink of disaster. Paying the mortgage faster offers no security, especially not on an upside down house in my opinion.

 

I found the book My Total Money Makeover pretty approachable, even for my dh that wasn't really interested in in Dave Ramsey at first.

[Anne in CA]

If he starts listening to Dave Ramsey he might get your point but some people really want to pay off their mortgage sooner and you are right, it is psychological. I have a friend who is paying off her mortgage rather than a high interest loan because she feels that having her house paid off means that she and her children will always have a place to live. It is a matter of security to her.

[Mnemosyne]

Looking at it from a purely financial standpoint, paying off the highest interest debt first will save you the most money. From a psychological standpoint, you would able to get rid of the smaller debts and 'snowball' the money that went to them and use them towards the rest of the debt, quickening the pay-off rate (and you may be able to pay a lot extra towards the mortgage once the others are paid off). Maybe take it from that standpoint? It's really the best of both worlds to pay the higher interest debts first (especially since the mortgage is probably the biggest debt anyways).

[zoobie]

Get a piece of paper and write out your non-mortgage debts. Three columns: total debt, minimum monthly payment, and interest rate. Add up the minimum monthly payments. Now figure out how much you have to put toward these bills. Re-write the list, ranking by interest rate, highest to lowest. Pay minimums to all from the bottom up, and send whatever extra you have to the highest interest rate. When that top one is marked off, attack the next.

 

Mortgage interest is tax-deductible, but any extra you pay goes to principal and not interest. As long as you have other debts that are also collecting interest, you should pay off the non-tax-deductible interest-collecting debts first. Then work on savings. Then home mortgage.

 

You should always pay the highest interest rate first. Think of it as the fastest growing debt. It's the most dangerous, and the one that will eat up more of your money over time. Your mortgage has the interest built in. It's not going to get larger if you pay the scheduled monthly payments. Also, theoretically, your home increases in value over time. The stuff you bought with credit card decreases in value, same for vehicles. So you're paying MORE for much, much less.

[AlmiraGulch]

I'm a Dave Ramsey fan and so I pay off debt and fund emergency funds before paying down my mortgage. Sounds like re-fi gives you some breathing room and allows yall to get more aggressive about debt. Until you're debt free with fully funded emergency fund, you're just on the brink of disaster. Paying the mortgage faster offers no security, especially not on an upside down house in my opinion.

 

I found the book My Total Money Makeover pretty approachable, even for my dh that wasn't really interested in in Dave Ramsey at first.

 

 

Thanks. I have it, and also FPU. This is actually a snowball method, minus the fully emergency fund (we have a decent amount, but it isn't fully funded). And that's why I agree with you!

[AlmiraGulch]

Looking at it from a purely financial standpoint, paying off the highest interest debt first will save you the most money. From a psychological standpoint, you would able to get rid of the smaller debts and 'snowball' the money that went to them and use them towards the rest of the debt, quickening the pay-off rate (and you may be able to pay a lot extra towards the mortgage once the others are paid off). Maybe take it from that standpoint? It's really the best of both worlds to pay the higher interest debts first (especially since the mortgage is probably the biggest debt anyways).

 

 

See....that's the thing. This IS a snowball. It just so happens that my lowest to highest interest rates (except the mortgage) are also the smallest amount to the largest amount of debt. I'm not sure why I can't make him understand, but clearly I'm not explaining something properly.

 

Maybe if I actually get it on paper he'll get it.

[zoobie]

 

 

See....that's the thing. This IS a snowball. It just so happens that my lowest to highest interest rates (except the mortgage) are also the smallest amount to the largest amount of debt. I'm not sure why I can't make him understand, but clearly I'm not explaining something properly.

 

Maybe if I actually get it on paper he'll get it.

 

 

You could also run a spreadsheet on how long it would take y'all to pay it off your way vs his way. But of course title them "Mortgage Focused" and "Interest Focused" to avoid bias. ;)

[Ameena]

Former Dave Ramsey follower here, who discovered the plan doesn't always work despite what DR says.

 

How stable is your family's income? If it's fairly stable, then yes I'd follow DR's plan. if there might be any type of issue - health, loss of job, etc - I'd pay off the house first so that if things went bad, you could cut living expenses. With the house being upside down, I'd really want to get it back right side up again - how long would that take with the new mortgage and original payments?

 

Otherwise, I'd tackle the student loans first from the rest of the debt, as they are non-bankrupt-able. I'd want them GONE asap, before I started on the Credit cards or anything else. if you had a major income loss, you could always let the Credit cards go and they would disappear after enough years from your credit report, but the student loans will follow you FOREVER.

[AlmiraGulch]

Former Dave Ramsey follower here, who discovered the plan doesn't always work despite what DR says.

 

How stable is your family's income? If it's fairly stable, then yes I'd follow DR's plan. if there might be any type of issue - health, loss of job, etc - I'd pay off the house first so that if things went bad, you could cut living expenses. With the house being upside down, I'd really want to get it back right side up again - how long would that take with the new mortgage and original payments?

 

Otherwise, I'd tackle the student loans first from the rest of the debt, as they are non-bankrupt-able. I'd want them GONE asap, before I started on the Credit cards or anything else. if you had a major income loss, you could always let the Credit cards go and they would disappear after enough years from your credit report, but the student loans will follow you FOREVER.

 

 

Thanks. Definitely a perspective I hadn't considered. We THINK our income is relatively stable, but you really never know, I guess. Certainly food for thought.

[zoobie]

Former Dave Ramsey follower here, who discovered the plan doesn't always work despite what DR says.

 

How stable is your family's income? If it's fairly stable, then yes I'd follow DR's plan. if there might be any type of issue - health, loss of job, etc - I'd pay off the house first so that if things went bad, you could cut living expenses. With the house being upside down, I'd really want to get it back right side up again - how long would that take with the new mortgage and original payments?

 

Otherwise, I'd tackle the student loans first from the rest of the debt, as they are non-bankrupt-able. I'd want them GONE asap, before I started on the Credit cards or anything else. if you had a major income loss, you could always let the Credit cards go and they would disappear after enough years from your credit report, but the student loans will follow you FOREVER.

 

With federal student loans at least, you can get a forbearance or deferment. I agree, never ever default on student loans! And never consolidate them between spouses. You would have to just completely ignore them to default. They grant forbearances and deferments rather easily upon request. Credit cards will not work with you the same way.

[Ameena]

With federal student loans at least, you can get a forbearance or deferment. I agree, never ever default on student loans! And never consolidate them between spouses. You would have to just completely ignore them to default. They grant forbearances and deferments rather easily upon request. Credit cards will not work with you the same way.

 

Not always. I know of several people who were forced to default because they could not prove they were unemployed & had no income coming in. It's a big crack in the program - if you were self employed or worked a job where you are not eligible for unemployment, there is no legal way to prove you are not employed that will satisfy federal student loan standards. They will not accept a notarized or sworn statement to prove unemployment, which I think is absurd.

[JFSinIL]

Pay off the high interest stuff first, rather than putting extra into the house to pay it off sooner. Housing value may go down - those high interest loans won't unless you pay them off. Once they are paid off, you can put any extra money into the house. And I agree with everyone who said to get those student loans paid off first! My hubby paid off his last student loan the same year our first kid started college! You do NOT want to take that long to pay them off!

[AlmiraGulch]

 

Not always. I know of several people who were forced to default because they could not prove they were unemployed & had no income coming in. It's a big crack in the program - if you were self employed or worked a job where you are not eligible for unemployment, there is no legal way to prove you are not employed that will satisfy federal student loan standards. They will not accept a notarized or sworn statement to prove unemployment, which I think is absurd.

 

 

This is crazy! I've gone both the deferral and forbearance routes several different times over the course of the many, many years I've had student loans (undergraduate and graduate) and I've never even had to prove unemployment (which was only the case once). Typically it was "financial hardship" when my ex was fired from another job, so we didn't have as much family income. All I ever had to do was fill out a form and send it in and it was always granted. Every time. How terrible for those people!

[AlmiraGulch]

Pay off the high interest stuff first, rather than putting extra into the house to pay it off sooner. Housing value may go down - those high interest loans won't unless you pay them off. Once they are paid off, you can put any extra money into the house. And I agree with everyone who said to get those student loans paid off first! My hubby paid off his last student loan the same year our first kid started college! You do NOT want to take that long to pay them off!

 

I've been paying student loans for 20 or so years, off and on. Undergrad took forever, and it appears that grad is going to take even longer. I don't like it but I don't really begrudge it too much. It is what it is, and I don't regret my education. But yeah, I'd like to be done with it sometime before I retire! :huh:

[Kim in Appalachia]

I would definitely want to pay off the car and student loans. With the CC's the issue is, will you run up more debt on them? If you always have or will keep debt on those, then pay off the car and student loans first. It does no go to pay off the CC then run up more debt, KWIM?

 

As for the mortgage, I totally get where your dh is coming from. The thing with the mortage is, it really does snowball. A little bit payed towards the principle now really makes a large dent in the thing in the future. You can get a large future payoff for just adding a little bit to your monthy mortgage payment. The straight, smart thing to do is to tackle the other loans first (mostly because you can see it disappear more quickly), but there is an arguement to be made that putting some of the money towards the house. Dollar for dollar the larger savings could really be the house.

 

I know I would probably split the difference, and put just $100 a month extra towards the mortgage, and then the rest towards other debt. If you can't control the CC debt, or it was a one time thing (emergencies happen) then get it payed off, then the student loans then the car. I would put the car last, only because it's most likely a 5 year loan with low interest, so the total dollar amount of interest may be less than the interest on the student loan.

 

HTH

[xixstar]

 

Thanks. I have it, and also FPU. This is actually a snowball method, minus the fully emergency fund (we have a decent amount, but it isn't fully funded). And that's why I agree with you!

 

Sounds like yall still need to go through the FPU together. :) Having both partners on the same page seems a bit crucial for making progress. And as DR points out often, it's not about the numbers (I'll say to most people because my dh is all about numbers) but emotions. Your partner feels more secure by paying off the house right now. Maybe getting through FPU will help him look at it differently.

 

For me, we have an underwater house we re-fi'd recently so we'd stop drowning so fast. I'm thankful for that. But being underwater (approaching $100k underwater), I won't pay extra for the fear that if something major that would cause us to stop paying for our house and we were forced to walk away, we'd be walking away with less or no consumer debt if we'd put extra towards debt. If we'd paid extra on the mortgage in that time, we'd simply be losing more on the house and be in a worse position to start again. But see, that's all about my feelings of security and emotions, all the personal part of personal finance.

 

Good luck.

[AngieW in Texas]

If you still have student loans, definitely get those paid off first. We were fortunate to not have much in the way of student loans. I got a scholarship that paid my tuition and fees for all 4 years at the state school I went to. My parents paid for my first year in the dorm. I had enough saved from high school to pay for my second year in the dorm. I worked enough part-time to keep up with my room&board my junior and senior years.

 

My dh went to a private school for one year and amassed a LOT of debt even with significant merit/financial aid. After that he worked for two years and then went back to school at the same school I was at and was able to pay for it with the money he made by working. His student loan was still significant.

 

We got married right after we started grad school. Our tuition and fees were paid for with our graduate assistant positions. A lot of our general living expenses went on credit cards. We were still able to get everything paid off within three years of graduating. That wouldn't have been possible if he hadn't already paid a lot on it during those two years between the private school and the state school. It helped that he only went to the private school for one year.

[Tammyla]

:iagree: Follow the debt snowball plan. Start with the smallest balance and pay them off one at time until you are done.