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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308557  
Subject: Re: Order of paying off? Date: 10/17/2013 7:44 PM
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Glad you have gotten closer to being normal and congrats on paying off some of your debts! Good luck to your wife in finding a new job.

I have 11,000 due to me above my regular salary between now and the end of the year due from the contracting job.

Is the $11k for the contracting net of taxes? If not, how much do you need to set aside for your quarterly payments out of that $11k?

I would like to use this to pay down debt. The question is which
account?!

Simple snowball rules say you pay off the next higest APR, but that
is our primary mortgage. Also the BoA CC will not be 0% forever.

This is what I am proposing. Pay down the HELOC. Just prior to the
0% going away, pay off the BoA CC with a check from the HELOC.

What is the conventional wisdom of the board?


In general, I would lean against planning to pay down the HELOC and then writing a check to charge it back up. For starters, you are paying off your lowest cost loan. Assuming you can write off the interest on the HELOC, your net interest cost is probably in the 1.75% range. Even if you can't write off the interest, you are still only at 2.49%, at least for now. Additionally, you may be taking on several risks when you plan to use a HELOC in the future:

- What is the value of your home? You currently have $127k in loans against your home. If your home is not worth in the $160k range, so that your Combined LTV (CLTV) is less than 80%, you run the risk of BoA cutting your HELOC credit line as you pay it down, since many HELOC lenders don't allow additional borrowing above a CLTV of 80%. If this is the case for your loan, you may not be able to draw money from the HELOC to pay off the credit card.
- How old is the HELOC? Are you approaching the end of your draw period? After the initial draw period (often either 5 years or 10 years), a HELOC will enter a repayment period where you can no longer draw additional money from it, only make payments. In some cases, it remains a variable loan, in other cases, you may have the option to change it to a fixed rate loan. But in either case, your HELOC is no longer an available line of credit for you to draw from - you would need to refinance into a new HELOC to be able to continue to draw money from it. So, if your draw period will end before Aug of next year, you won't be able to get the money from the HELOC to pay off the credit card.
- If house valuations, either local to you or nationally, take a big dive between now and next August, BoA could decide to close your HELOC to new draws. During the financial crisis, a lot of HELOC lenders cut or closed HELOC lines, so it's not unheard of that this could happen.
- I assume the HELOC is a variable rate loan? Do you know what the index is, and if there are any caps on the loan? If there are no caps and the prime rate ends up north of 15%, as it has in the past, you could be paying some pretty high interest rates on your HELOC. (Yes, it's probably going to be less than credit card rate, but it still might be pretty big.)
- It's a loan against the place you live, which means if something really bad happens, you could be out on the street. If something really bad happens and you can't pay your credit card, you may end up in court or with lots of collection calls, but you won't end up on the street.

If there is other info you need, please ask.

What are the minimum payments on each of your debts? Is the medical debt at 0% for life? Or will they start charging interest on it at some point, too?

Without knowing the minimum payment amounts, the terms on the medical debt and assuming that the $11k is net of taxes, and that you are pretty solid on being able to have a $500/month snowball for the next 9 months over and above the minimum debt payments, I might suggest the following strategy:

First, I would examine your emergency fund strategy. I know you just refilled it, but would you be comfortable with less money in the e-fund - say $5k - while you are paying down your non-mortgage debt? If you would, I might suggest the following strategy:

Your minimum payments on the BoA credit card will probably mean you will need around $11k - $11.5k to pay it off next July - before it starts charging interest. I would take $5k from your emergency fund, plus $4300 from your contracting payment, and pay off your wife's car. That will free up the car payment you are making to add to your $500 snowball.

Then I would set aside the other $6700 from the contracting payment, plus another $550/month ($500 from proposed snowball, plus $50 from your wife's car payment) into a savings account to pay off the BoA credit card. By next July, you would have $11,650 in the savings account, which should be enough to pay off the credit card. (Until you use this to pay off the BoA credit card, this could potentially serve as a back up e-fund, if things get really bad). In July, pay off the BoA card from the savings account. Put any additional money back into your e-fund or towards another debt.

In the meantime, take the rest of your wife's car payment and put it towards either your car payment or the medical bills - partly depending on whether the medical bills are always going to be at 0% or not, and how much you want to pay off the medical bills vs. paying off your car. Snowball those 2 debts until they are both paid off, then put that snowball toward the HELOC.

Once your wife gets back to work, you can put the amount of her paycheck (over the unemployment that she was getting) towards the HELOC.

If the HELOC rate starts to increase in rate, you can re-evaluate your snowball strategy. But assuming that you are able to deduct the interest on the HELOC, the HELOC rate would probably need to get above 3.8% for the net interest rate to be higher than the rate on your non-deductible car loan.

AJ
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