I just put the very last car payment in the mail. It’s a liberating feeling, to own my car free and clear, while it still has some years left in it. The odometer has yet to hit 40K. She’s still in good shape, except for a dent courtesy of a drunk Diamond Rio fan, and a horribly crumpled front license plate, courtesy of a minor fender bender. Both are things that can be easily fixed, I just don’t know a good body shop.
Unfortunately, having the car paid off doesn’t free up any cash, due to the fact that I am a money nazi. And I’ve got another car payment and two student loans to worry about. Not to mention my ill-timed mortgage. My ill-timed interest only mortgage. My ill-timed, interest only, 100% financed mortgage. My ill-timed, interest only, 100% financed ARM mortgage that resets in another 3 years. I know, I know, what was I thinking? All I can say is, at the time, I didn’t foresee my house suddenly losing 15% of its value. And, well, I didn’t think I’d be in the house for longer than 5 years. Which, I likely will be, seeing as I’m not exactly gaining any equity …
So now comes the hard part – do I put all that extra money to the littlest loans to get them out of the way? Or toward the monster mortgage? Or do I attack the loan with the highest interest rate? Or do I just leave all the loans the way they are, making the required payments, and invest my money elsewhere, assuming I can get a return that’s larger than my highest interest rate? Also assuming that I can keep my grubby hands off that money long enough for it to grow into something besides ‘a fabulous trip to Italy!’
Before I decide what comes next, though, I think I’ll take my car for its first fully-owned spin around town.
5 replies on “woohoo!”
1) refinance the mortgage to a fixed rate, pronto
2) hit the highest rates first
Those questions were probably rhetorical, but I like talking about personal finances, so I’m going to pretend they weren’t.
Here’s my general philosophy:
You should pay off the highest interest, non-tax-deductible loan first, and then move to the next highest interest loan, and repeat until finished.
Any loans less than about 4% APR, like many student loans, you should pay off as slowly as possible. This is especially true with student loans since the interest is often tax-deductable. Put the money you would be sending them in a high interest savings account, like at ING Direct, or in CDs or some other safe investment. In a few years you’ll have a bunch of money in the bank earning more interest than the loan is costing, and you can use it to pay off the loan at any time. This also gives you the flexibility to use the money for something else in a pinch.
You’ll have to do some calculations to see whether or not it’s worth paying down the mortgage early, since it’s also tax deductible. Assuming the interest rate is pretty low, in many cases it isn’t worth it. Many people end up with a ton of money tied up in real estate (by way of their houses). You generally want to limit your exposure to any one asset class, and real estate is no exception. Financially, paying off a mortgage really only gets you a bunch of money tied up in an investment that (historically and over the long term) only earns 2 or 3% a year over inflation (not so good). Although it can be a big thing psychologically.
…Or you can do like I do and spend it all on your honeymoon, that makes all these decisions much easier. 🙂
Hemishpire is right in that right now you can often get a 30 yr fixed for the same rate as an ARM. Penfed is the awesomest, check them out.
However, interest rates may be coming down again, so you may want to hold off…
Thanks for the advice! Can you refinance if you are upside down in your house, in a big, big way? (And you don’t have cash on hand to make up the difference.)
I know I shouldn’t worry about the student loans, but I could get them paid off in 6 months with what I’m not paying on the car anymore … I think it’s more a psychological thing, to ‘get them out of the way.’ Without them, it’s only a house and a car that I owe money on … not some edumacation that I’ve forgotten most of already …
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