| Pay off car or refinance mortgage??? |
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reachingforgoals
First Time Poster
Cash: $ 0.25
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Joined: 28 Dec 2005
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| Pay off car or refinance mortgage??? |
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My husband and I currently have two cars, each with a monthly payment, and an interest-only mortgage with a 4.35% interest rate. This is our only debt. We have been paying a little bit more than just the interest on the mortgage for over a year and the interest-only period is set to expire in March 2007, at which time, if we do nothing, the loan will turn into an ARM. HOwever, we do have the option to refinance the mortgage at any time. My 92 year old grandfather has decided to start gifting out his estate while he is still alive and able to see people enjoy it. Within the next 6 months I will be recieving a monetary gift from him. At that point, one of our two cars will already be paid off. The gift money will be enough to pay off the second one (about 6% interest on that loan). My question is, should I pay off the second car and then increase the amount we are paying toward principal on the mortgage or refinance the mortgage to get out of the interest only loan - which is a loan that most financial experts frown upon? My only concern about refinancing the mortgage is that interest rates have risen. Any suggestions would be appreciated. Thanks.
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Wed Dec 28, 2005 2:29 pm |
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Rolo
Yo' Daddy
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Location: Colorado/Florida
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| Re: Pay off car or refinance mortgage??? |
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Noooo!
Don't pay off the car (6%). Both of my cars are 5.75% and 6.1% and I could pay them off, but that would be unwise: my money earns much more than 6%.
If you pay down the mortgage, you are still stuck with the ARM and have not solved the impending problem.
quote:
Originally posted by reachingforgoals
March 2007, at which time, if we do nothing, the loan will turn into an ARM. HOwever, we do have the option to refinance the mortgage at any time.
Get to it. Somebody's gonna make up for that great rate you've been getting all this time. Try to get a fixed at 6.5% or less. What is the ARM tied to? (Prime plus ...? What would it be right now?)
Treat these as separate issues, not all lumped together. Think about how you are going to invest the windfall rather than arbitrarily pay stuff off.
"Expect me when you see me."
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Thu Dec 29, 2005 2:13 am |
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ChrisH
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I agree. The ARM is much more important than the auto loan.
Additionally, the auto loan is for a much shorter period of time on a lot less money. Refi on the home makes much more sense in the long run.
It's easy to think short term like "I wouldn't have to pay the car payment any more." However, it's the long term refi that really saves you the money.
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Sat Jan 07, 2006 3:27 am |
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domingo3
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Just to re-iterate what's being said above:
While paying off loans may have psychological appeal, it's not necessarily smart to do so. I'd strongly recommend making only minimum payments on your house and your car. Take the extra cash and invest it-
401K up to employer match (if available)
Roth IRA (if eligble)
401K or taxable account or college funds for kids
Based on historical averages, you will earn more interest on your money if you invest it than you would have saved by paying down your debt. On top of that, your mortgage interest is tax deductible, so you're saving even more.
Keep in mind, that this approach is only smart if you invest the money rather than pay your debt. If you do anything else with your money besides investing it, you would have been better off to pay extra on your payments, like you've been doing.
One exception to what I've said, if you have less than 80% equity in your house, and you are paying PMI, it might be worthwhile to pay down to where you don't have to pay PMI anymore. PMI is a lender requirement. It does you no good, and it's just money you're throwing away.
Nobody can tell with certainty what the future holds for interest rates. They are rising right now. If it was me, I would lock in a fixed mortgage now, because my guess is that next year, the rates will be higher.
Back to the cars for a quick minute. I looked back at your message and saw you didn't mention what interest rate you're paying on your cars. Usually the interest rates are low, but if you're paying a higher rate (higher than 8 percent or so), I'd recommend paying them off. If the rate is low, just stick with the minimums and take advantage of the low rate to use that money for investments.
Please post back with any questions and let us know if this helps.
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Sat Jan 07, 2006 3:02 pm |
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