Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
According to Dave Ramsey's book, you should pay off both cars first and roll the payments into your 2nd mortgage. Having two loans paid off at one time will be better than one loan paid off no matter what the interest rate.
I am going to disagree a little with the other posts. I am going to assume that you have the cash flow to continue to make the two car payments, otherwise you would not have asked the question. The interest rate on the second mortgage is by far the highest, that means each month that actually COSTS you the most. The second is amortizing over a much longer period than the cars, that is why the car payments are higher. But, if you can pay off the highest cost loan, at the end of the day the credit you obtained will cost you the least.
I am going to disagree a little with the other posts. I am going to assume that you have the cash flow to continue to make the two car payments, otherwise you would not have asked the question. The interest rate on the second mortgage is by far the highest, that means each month that actually COSTS you the most. The second is amortizing over a much longer period than the cars, that is why the car payments are higher. But, if you can pay off the highest cost loan, at the end of the day the credit you obtained will cost you the least.
But why give up the tax advantage of writing off the interest for the second mortgage on income taxes? The vehicles are an expense all around, with no benefits in the long run. You can't write off the interest paid on the vehicles at tax time, so wouldn't it make sense to pay them off and continue to get the interest from the second mortgage as a tax write-off for the next 3 to 5 years?
I think if you punch through all the numbers, paying off a loan that costs 7.5% rather than one that costs 1.9% will be cheaper, tax consequences included. But, that is absolutely the analysis the borrower\op should do, which choice will be the cheapest in dollars and cents. And that still assumes that the cash flow is not going to be an issue.
I don't think I saw it mentioned yet, but how about paying off the 5% car loan and putting the remainder towards the 2nd mortgage? This way you reduce the interest portion on the second mortgage while keeping it for the tax deduction and have the option of putting the car payment towards the other car or 2nd mortgage.
Interesting debate - this could be a great question in an econ 101 exam
Some points to consider:
1) If you pay off the 2nd mortage you are still likely to have access to the line of credit. This may be an advantage. Paying off the car loan and it will be done. With your credit not really an issue but still something to think about
2) The tax advantage is not quite as crystal clear as it seems. First you pay the full amount today and then claim back the deduction the following year in your tax return. So there is some small drag on the tax benefit
3) With such good credit you may want to look at just re-financing your HELOC. I have a HELOC at Prime-1% so right now I'm paying a whopping 2.25%! 7.5% seems high. If you managed to build some equity you may just be able to re-fi into one fixed rate loan, fixed rates are very low right now if you come under the $417k levels
Do you have an 8 month emergency fund? If you do then I would pay off the 5% car and the rest to the second mortgage.
Someone suggested refinancing the 2nd mortgage, I don't think second mortgages exist anymore.
I would only pay off the 2nd mortgage first if you wanted to refi the first mortgage. That way you would have LTV of 80% or less. What is the interest rate on your first mortgage?.
The interest on the 1.9% car is so low that I would pay that last regardless.
I faced this situation a few months ago. Even though the car payment was a little higher, and the balance a little lower, than the 2nd mortgage...and even though the 2nd mortgage interest was deductable...we paid it off instead of the car. We were then able to refinance the 1st at a lower interest rate with our bank. Now I can refinance again should the rates drop even lower, at no cost, without having the 2nd hanging over our heads. And by applying the savings to the car it will be paid off in about 14 months instead of 3 years.
It's exactly the opposite of what conventional wisdom said to do but we did it anyway and have no regrets.
Our primary mortgage is at 6.3% interest rate. We found out that refinancing would only save us about $75 a month since our house was inexpensive. If our house was much more expensive than it is now, we could save hundreds by refinancing. In fact if we were to refi it would be to a 15 yr. fixed rather than a 30 year. We thought about it, but we will probably sell in about 2 years. We decided not to refi due to possibility of selling in 2 years. That would put us living in our starter home a total of 5 years.
I like the idea of going ahead an paying the car loan off that has the highest interest rate and leaving the second one with the 1.9% interest to mature.
hmm...but I also like the idea of just having the 2nd mortgage payed off and having more net worth or equity to our name.
Thanks for all the suggestions. Sounds like there are no wrong answers to my problem.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
