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Wednesday, January 5, 2011

Frugal doubt. . . .

I sort of knew this was coming. Inevitably at some point after I've made a decision I start to question myself. In this case, I'm questioning whether I should pay off my second mortgage first, or wait on that and pay towards my student loan instead.

I keep thinking that I may be throwing good money after bad by paying down my second mortgage. After all, if (and this is a big IF) the housing market ever recovers (or just stops resulting in decreasing value) then I may be able to sell my house without creating equity by paying off my second mortgage debt. Right? Here's what I read in a recent US News article about who will continue to struggle in 2011:

Homeowners. Americans have lost about $9 trillion worth of household wealth since 2007, largely because of falling home values. The rout isn't over, unfortunately. Most forecasters think home values will decline another 5 to 10 percent in 2011, as high unemployment causes more foreclosures and a glut of homes pushes prices down. The good news, if there is any, is that the housing market may finally hit bottom in 2011, with home values stabilizing after five years of declines. That doesn't mean home prices will shoot up any time soon. But once buyers believe that prices have stopped falling, they'll be more inclined to buy, the first step back toward a healthy housing market. Stabilizing home values will also help owners do better financial planning, since they'll have a firm idea what their home is worth.
Sigh.

Meanwhile, I could be working on that student loan, almost half of which may be paid off by the generous gift of a family member. Meaning that I could, potentially, have my student loan paid off by mid-2012. At which time I may be able to sell my house and just break even. Right?

Or is this just a case of 'six of one, half-dozen of the other'?

9 comments:

Cassie said...

If the interest rates are similar it's a 6 of one, half a dozen of another. The mortgages will have to be paid back when you sell your house either way, unless you can convince your bank to allow a short sell. Paying more into the mortgage now just means that theres a less likelihood of that being the case. If you put more money into the mortgage and don't have to short sell, you'll get the difference back when you sell the house. That money could then be used toward the remaining student debt. Either way, picking which debt to pay off first is ultimately a personal decision, because paying off any debt is always a good decision :)

Andrea said...

Blessings and prayers,
andrea

Nancy said...

Maybe you need to look at the interest rates. Which eats up the most bucks in interest?

Erin said...

We're right there! Trying to decide if our Eastern Washington home is actually upside down or just holding on to the value of our loan (darn it...there went the money we put down). But now what? Should we pay it off or try to get a big savings account. A lot depends on the housing market and we've concluded we'll know more this summer. Sigh.

Anonymous said...

Are they at similar interest rates? Sounds like you know what the value of paying the student loan is, but not the mortgage. In Canada real estate prices are increasing modestly and we were later in being in trouble so maybe all of North America is getting better? Flip a coin -- maybe you can see what you want to do while it's in the air by hoping for one or the other. Or just wait till you need to decide.

Finally Frugal said...

Very good points about the interest rates; they're about the same: 8.25% for the student loan and 8.9% for the second mortgage. Since the student loan is literally twice the balance of the second mortgage, though, I suppose I'm actually paying more interest on that one (about $400 a month just in interest! Ouch!)

@ Erin: Yep, I read all the real estate blogs/economic forecasting news I can get my hands on, and no one seems to know where the housing market is headed. So frustrating!!!

Anonymous said...

So the interest rates are the similar. Are the payments similar?
Look at your cash flow and see if that gives you a clue what to do.

If you sell the house, the 2nd will be gone, hopefully, but the student loan will remain. If you were not going to sell, I'd say pay off the 2nd, but I know you plan to sell.

Which one can you pay off sooner if you applied all the extra to it? I'm a big fan of easing your cash flow. Once you pay off one of them, obviously you can tackle the other one full strength... so which one can you pay off first?

And finally, are both of them deductible, as in interest? Not that that helps cash flow any - just one more thing to consider.

Keep playing with the numbers and the answer will come to you. Good luck!

marci357

Anonymous said...

I will say that a lot of regular everyday people seem to think, at least in MY area, that the bottom is here for the housing market. Houses are being grabbed up now for investments.

I just made an offer on one myself.

Until all the foreclosures are bought up, the price of houses can't go up as there is a glut right now of foreclosures bringing down the price of all homes.

So while I can't say when the market will head up, I can say that people are starting to grab the foreclosures, which is the first step that has to happen.

marci357

Anonymous said...

What about using half your cash on each -- $10,000 to the mortgage, $10,000 to the student loan? You might have the satisfaction of seeing the difference (if any)in 6 months or a year. ??

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