Pay off which?

Mack119 · #1 (**permalink**) 06-02-2009, 02:27 PM

I am trying to determine which makes the most amount of sense, generally I understand enough about using internet amortization calculators to handle this type of comparison, but there are a couple of items that are 'muddying up the waters'.

I currently have extra money each month that I can apply to either of these two loans for the long term foreseeable future.

Loan 1 - 30 year fixed 8.375% interest loan.
Approx. 26 months into loan - have been overpaying it by $65.00 each month for the past 22 months.
Regular payment $290.00
Current Balance : $35,000.00

Loan 2 - 20 year fixed 6% interest only HELOC.
Approx. 18 months into loan - have been paying interest plus $20.00 per week.
Regular payment : $125.00 ( interest-only )
Current Balance : $25,000.00

I have approx. $225.00 per month that I can apply to either of these amd am trying to determine which offers the best return on that investment.

Traditionally I would say Loan 1 is the more optimal - but I'm having trouble getting an accurate amortization schedule for an interest only loan - that I'm trying to compare different levels of principal overpayment.

Also, the fact that I've overpaid at one level for 2 years and now want to overpay Loan 1 at a very different level makes it's amortization schedule a bit tricky as well. I think I have that 'close enough'.

Anyone have any thoughts?

Thanks for any insights you might have.

Salty Dog · #2 (**permalink**) 09-15-2009, 12:52 PM

Cash Is King Today.

kenty · #3 (**permalink**) 09-15-2009, 06:41 PM

I would think you would want to get the higher rate paid down first.

Debt_mgt · #4 (**permalink**) 09-28-2009, 06:11 PM

Unfortunately, lenders are not going to give a new loan for an amount that is greater than the current value of the property. If you were forced to relocate, you would not be able to sell the property for enough to pay off the loan, so it would essentially be a guaranteed loss. Since you will be facing an adjustment on the payment in the near future, there is potential to ask the current lender for a loan modification. This will only happen if you are able to show a need (i.e. the new payment will be higher than you can reasonably be expected to attain) and ability to pay the modified terms. Of course the modification needs to be reasonable and does not cause the lender to lose more than they would lose in a foreclosure.

You might consider talking to a local HUD housing counseling agency that specializes in loss mitigation. They would be able to review your budget and situation and determine if you have a reasonable case to present to the lender. It is possible that they will tell you that you make too much money for the lender to make an adjustment and that you will have to live with the current terms, but they will have the tools to determine that for you. You can find a list of agencies by state on HUD. com website

Vytautas · #5 (**permalink**) 10-02-2009, 06:37 PM

Both loans are pretty long term so obviously you won't be able to throw a lot at one to get rid of it quickly. I would pay the minimum payment on the second loan and allocate the extra $20 you've been paying on it to the first loan along with any extra money you can spare (it is pretty long term so you shouldn't sacrifice everything just to pay it). I would solely base this decision on the higher interest rate due to the long time frame you are looking at already. Just get as much as you can paid onto it and make it a regular payment so you don't have to cut down in case of hardship. Also, make sure you have a decent emergency fund built up so you aren't forced to go back to paying minimums on both loans.

dwilk12 · #6 (**permalink**) 11-11-2009, 02:50 PM

Always pay off the smaller ammount first. Doing that will gain you momentum in paying off all your debt and make you fell better.

Sabunabu · #7 (**permalink**) 12-06-2009, 07:58 PM

Pay off the higher rate loan first. Your "savings" is essential 2.375% over the life of both loans.

However, if there is a need to pay down one over the other, that trumps any decision based on rates solely.

Credit Girl · #8 (**permalink**) 01-05-2010, 05:43 PM

I would agree with Sabunabu. Pay off the higher rate loan first that way you get rid of that entirely and then you can take your time on the lower rate loan after that way you don't use all your money simply on interest.

equity space · #9 (**permalink**) 04-30-2010, 08:34 PM

Always pay off the higher rate loan. Low interest rate loans are "cheap money," and it's not benefit to pay them off quickly.

jmross@lifesmartsites.com · #10 (**permalink**) 05-03-2010, 09:29 PM

I agree too, it would be best to concentrate on paying off the higher interest rate loans first.

FHA Loan · #11 (**permalink**) 05-19-2010, 02:17 PM

Both loans are very long term... so going after the one with the highest rate is going to save you more over the life of both loans.

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