Loan Strategy

My first priority is paying off our credit card debt. It's the biggest monthly burden, drags down our credit scores, is viewed negatively by insurance companies and lenders, and causes the most angst (especially when the credit card companies change the repayment terms by adjusting interest rates and hiking minimum payments!).

But when the credit cards are gone, we'll have to decide what to tackle next. Aside from car loans, the major debts would be student loans and the mortgages. We have two student loans, each with about $25k owed, our second mortgage at around $27k, and our first mortgage at approximately $138k. I'm not going to even think twice about the primary mortgage, but the other three are all on my list of things to pay off quickly and ahead of schedule.

The student loans are on a 20-year repayment plan, with nearly 16 years left. The interest rates are pretty low, around 3.5% (fixed). They're through the federal government, and Hubby & I each have our own. If we are tight on money, we can easily put either or both into hardship deferral without any negative consequences. Student loan interest is tax-deductible for both state and federal income taxes. And if one of us dies, that person's loan is forgiven - I wouldn't be stuck paying off his, or vice versa. The down side is that if we were ever to declare bankruptcy, the student loans cannot be discharged.

The second mortgage is a 15-year balloon at just under 10% (fixed). We have 11.5 years left of payments, at which point we'd either have to pay a lump-sum (I think of approximately $20k), or we'd have to refinance and roll in the remainder. The mortgage interest we pay is tax deductible for federal income tax, but only if we itemize (which is highly likely for at least the next 5 years, and quite possibly longer). We would be able to eliminate this debt if we declare bankruptcy or gave the house back to the bank, and could get away paying pennies on the dollar if we did a short-sale.

Although this is one of those situations where Dave Ramsey recommends paying the student loans first, because the outstanding balance on each loan is smaller, I really can't convince myself of the wisdom in that. Pretty much every way I see it, paying off the second mortgage before the student loans makes infinitely more sense.

Income vs. Net Worth

Yesterday afternoon, while my sister was visiting, the subject of debt/net worth came up. I mentioned that we had a negative net worth, and she couldn't figure out why- by her reasoning, I make far more than her and her boyfriend combined, plus we have a second full income... so Hubby & I make about 4X what they do.

Not counting the money we've sunk into repairs and improvements (about $30k over the past 3 years), we've lost quite a bit on the house due to fallen property values... around 20-25% from what the purchase price. The house has dropped over $40k in value, and we're currently upside-down on the mortgage by $25k. Our monthly mortgage & utility payments are roughly four times greater than their monthly rent & utilities... so having a higher income hasn't really helped to give us a greater net worth in that area.

We owe over $50k in student loans currently, all locked in at low interest rates. Since we have so much other debt, it's not worth paying this off quickly - but it's a huge hit on our net worth. By comparison, they have less than $10k in loans... though they're still in school, and that balance is rapidly growing (while ours is slowly decreasing). We are paying on three out of four of our student loans, whereas theirs are all deferred right now.

We have two newer vehicles that we're making monthly car payments on, costing us nearly $800/mo. Since we have loans on both vehicles, we also are required to carry full coverage auto insurance, which adds about $100/mo in expense (solely for collision & comprehensive) - we'd still have to pay at least for basic liability if the cars were paid off. They own both of their vehicles outright, saving them on monthly payments and on insurance, but their cars are high-mileage and have numerous mechanical problems. They both function reasonably well, but I certainly wouldn't feel comfortable relying on either vehicle to get me to/from work daily, at least not without several thousand in repairs and maintenance.

And finally, we have far more consumer debt. It's down quite a bit from it's all-time high, but we still owe over $24k. Our minimum monthly payments are currently over $900/mo. By contrast, they owe less than $5k in credit card debt, and are seriously delinquent on it. They're planning to save up some money and offer the credit card companies a settlement for about 50% of the original balance (before all the late-fees, over-limit fees, and interest were tacked on). If they can convince the card companies to take it, they'll pay less than $1500... but in the meantime, they aren't paying a dime.