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Paying Off Loans the Smartest Way - Help Please!

gamegrrl
Frequent Contributor

Paying Off Loans the Smartest Way - Help Please!

My husband and I have excellent credit. We have no credit card debt. No student loans. We do have a HELOC with a balance of about $49K. Last March, we locked in that total balance to a fixed rate of just over 7% for 30 years. We also have an auto loan with a balance of about $13.8K at 4.91%: It was a 72 month loan and we have 34 payments left.

 

That said, I just paid of my own auto loan, which frees up an additional $370/mo in our budget. I want to use that to pay off these other two loans in the smartest possible way.

 

My first instinct was to throw it all at the HELOC. Today I started wondering if it might be better to pay off the auto loan and add that $437/mo to the $370 and THEN start hacking away at the HELOC.

 

So what's the best way to wrangle this? I've been going crosseyed trying to figure this out. I could use some solid advice based on math more than instinct-based feedback. Thoughts?


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Message 1 of 6
5 REPLIES 5
SouthJamaica
Super Contributor

Re: Paying Off Loans the Smartest Way - Help Please!


@gamegrrl wrote:

My husband and I have excellent credit. We have no credit card debt. No student loans. We do have a HELOC with a balance of about $49K. Last March, we locked in that total balance to a fixed rate of just over 7% for 30 years. We also have an auto loan with a balance of about $13.8K at 4.91%: It was a 72 month loan and we have 34 payments left.

 

That said, I just paid of my own auto loan, which frees up an additional $370/mo in our budget. I want to use that to pay off these other two loans in the smartest possible way.

 

My first instinct was to throw it all at the HELOC. Today I started wondering if it might be better to pay off the auto loan and add that $437/mo to the $370 and THEN start hacking away at the HELOC.

 

So what's the best way to wrangle this? I've been going crosseyed trying to figure this out. I could use some solid advice based on math more than instinct-based feedback. Thoughts?


It seems obvious to me that concentrating your payments on the HELOC, which has the higher interest rate, is the way to go.

 

An additional reason for doing that, although not major in your case, is that getting the auto loan down to zero might cause a slight ding in your scores.

 

But of course if your primary interest is having the peace of mind of a clear title to your car, then pay that down first.

 

 


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Message 2 of 6
gamegrrl
Frequent Contributor

Re: Paying Off Loans the Smartest Way - Help Please!

Thanks for your response! I do think that putting all that extra money towards the mortgage is the smartest thing because:

  • It has a higher interest rate
  • We are early in the loan and putting extra towards the principal has a higher rate of return at this point

Our primary goals related to paying off these loans ASAP are:

  • To pay as little interest as possible overall
  • To minimize our monthly obligations as quickly as possible in preparation for my drop in income in four years
  • To minimize the financial burden on my husband should I croak, which is definitely a possibility
  • To free up additional money for savings (IRAs, etc.)

I was unexpectedly forced to retire due to health reasons a year ago. Thank goodness I had the sense several years ago to purchase (after tax) Long Term Health insurance, which is a lifesaver. However, the income from that will end in four years (March 2023). By that time, we need to have our monthly obligations pared down to a bare minimum.

The car will be paid off by then (Nov 2021), even with no additional payments towards the principal. The payoff will come about one year before my income takes that drastic drop in 2023. However, we are very early into the 30 year mortgage. The monthly payment is $335.

I just want to make the smartest moves.


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Message 3 of 6
Revelate
Moderator Emeritus

Re: Paying Off Loans the Smartest Way - Help Please!

Smartest = paying off highest APR first.

 

Actually it's really that simple to SJ's point Smiley Happy.




        
Message 4 of 6
Kforce
Valued Contributor

Re: Paying Off Loans the Smartest Way - Help Please!

If "smartest way" means money, pay all extra to the HELOC.

 

If you put extra on the car, it will be yours in 18-months, giving you something to sell and extra cash flow.  If the time frame might be moved sooner than expected, going this route is something to consider.

 

I ran the numbers and car first cost you $800 over the next 4 years.

Not sure $200 a year is enough to rule out car first if time is a factor.

With a number, it lets you make a more informed decision.

 

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Message 5 of 6
CreditInspired
Super Contributor

Re: Paying Off Loans the Smartest Way - Help Please!

Kudos to you for thinking about this so far in advance. Very impressive.

My thoughts about this is slightly different from others but it’s only my 2cents and please take it as brainstorming.

Does your husband’s job offer a 401K, 403b, or any type of retirement plan. If yes, is he putting as much as he can for the tax break? If no, he could increase that with the extra $370 (or part of) you have coming in.

Although, the HELOC is 7% interest, you are able to write it off. I think that’s something to think about. And you can always throw an extra $100 or so monthly at the principal.

The auto loan for 72 months. I like the idea of getting that paid off sooner than 3 more yrs because Murphy's Law—you just know at 7 yrs old, it’ll start breaking down and you’ll either need a new auto or the maintenance will become insane.

Again, I’m so impressed and GL2U.

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