This past Monday, I sent Lending Club a final check for $1, 582.05 â€“ thus settling our Lending Club loan and reducing our creditors to four. The debts we owe are now limited to two student loans and two mortgages. Today, I’m asking for your advice as to which we should repay next.
Only student loan and mortgage debt left
Remember the Jeep that I totaled and had in the shop for 8 months last year? Well, I didn’t technically own it until three days ago. Last August, I consolidated the amounts owed on my Jeep and the debt still owed on the credit cards that I shredded with a Lending Club loan of $11, 000. It took less than seven months to settle those debts once we got focused.
Now the only affiliation I have with Lending Club is that of an investor extraordinaire, and I’m setting my sights on the next debt in line – I’m just not sure exactly which one to pick. Here’s a list of our remaining debts we have left:
- First mortgage = $118, 950 at 5.5% fixed with 20 years remaining (recently refinanced)
- Second mortgage = $39, 700 at 8.8% fixed with 27 years remaining
- My student loan = $31, 850 at 6% fixed
- Her student loan = $34, 200 at 4% fixed
Unless something unexpected happens, we should have at least $1, 500 in extra cash to put toward our debts each month. This is above and beyond our regularly scheduled payments, so we should really be able to accelerate our debt reduction.
I was planning to shift our debt snowball to our secpnd mortgage until it dawned on me… What if the housing market rebounds?
Repay student loan first?
Should I repay my student loan before my second mortgage? Here are some of the factors that are influencing my thinking:
- The housing market might rebound. We plan to sell our home as soon as we can get what we owe on it. If we focus on the student loan and the market rebounds, then I can repay my mortgages with the proceeds from the house sale, and my student loan will have been greatly reduced.
- The mortgage interest deduction. If I repay my student loan first, I’ll still have a much larger interest deduction to claim come tax time 2010 and 2011.
- Student loan debt is not dischargeable. Not that I would ever file bankruptcy, but the simple fact that student loan debt is not dischargeable in bankruptcy makes me question if it would be wise to make this a priority over a second mortgage.
- The psychological factor. I’m the type of person who would rather focus on paying off a higher interest loan to realize the savings (i.e., our second mortgage), rather than paying off a smaller loan for a psychological boost.
Repay second mortgage first?
I’m already leaning toward paying off our second mortgage first, chiefly because the rate is 2.8% higher than my student loan rate, and 4.8% higher than my wife’s. So… If you think it’s better to pay off my student loan off first, you’ll need to convince me.
- Higher interest rate. As I mentioned above, our second mortgage interest rate is considerably higher than the rate on my student loan, so I stand to save more on interest paid by attacking this debt first.
- The housing market probably won’t rebound quickly. I’m not a real estate agent or an economist, but I believe that both would agree that the housing market will not rebound to 2007 values anytime soon.
- We want to sell ASAP. To be honest, I would like to sell my home tomorrow… And I certainly do not want to wait 5 – 10 years or possibly longer for the market to get our heads above water. By paying down this debt, we’ll be able to sell sooner.
Value of my home vs. amount owed
Lastly, I wanted to throw out some more numbers to help you understand the decision we’re facing. It’s important to keep in mind that I live in Michigan, and that our housing market is worse than most. My home was originally appraised at $170, 000 in April of 2007, and our purchase price was $165, 000. When we refinanced our first mortgage last week, the lender estimated the current value of the home at $120, 000 though I’ve seen online estimates as low as $107, 000.
Which should we pay off first?
If you were in my shoes, would you focus your debt sledgehammer on the second mortgage, thereby enabling us to sell our home and downsize ASAP? Or are we better off knocking attacking our student loan debt? Whichever you think is better, I’m very interested in hearing your reasoning.