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I have $31,000 in credit card debt at 3.9% for the life of the loan, and I am having the payments automatically deducted from my checking account so that I am never late and never lose the great interest rate. I have a remaining mortgage of about $136,000 at 5.63% for the next 4 years, after which it varies. I am recently unemployed, and with no job and lots of credit card debt, I am not a good candiate for refinancing my home for a lower fixed rate.

Given that, when I have extra money, is it better to pay down the credit cards (because credit card debt looks worse to a bank than a mortgage), or is it better to pay down the mortgage (because the interest rate is higher and it will surely increase after my fixed period ends)? The final consideration is that if I pay down the credit card debt fastest, then there will be one less bill to pay per month and that will happen sooner than if I attack the mortgage. During times of unemployment, monthly outlay can outweigh other factors.

Thanks,

Shortell
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One other factor to consider is the mortgage interest is tax-deductable, while the credit card debt is not. I don't have a good formula for figuring out how much of a difference that makes, but with those interest rates as close as they are, it might be enough to make the credit card the smarter payoff.

Good luck!!
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This is a tough question - there is certainly an immediate benefit from putting any extra toward the house, due to the interest rate being higher (5.63 vs. 3.9). However, if you are itemizing, the effective interest rate of your mortgage might actually be costing you less than 5.63%. If you are in the 25% tax bracket, for example, the 5.63% might really be costing you only 4.23%. So, in that case, it's still higher, but not by much.

Then you have to consider what it might go up TO when your rates go up after 4 years. And how much equity you have in your house, too. If you get a job soon, pay extra toward "something", you might be able to refinance in a year or two. Why do you have an ARM in the first place - were you thinking you might move soon?

You mentioned that your payments for the 3.9% CC debt were being automatically deducted - is this all on ONE credit card? Or spread out amongst a few? This might make a difference because paying off one might increase your cash flow.

E-fund? Living off it now?

It's hard to answer your question - so many unknown variables.

jrsmith13
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During times of unemployment and/or times where cash flow is an issue, I think the most important thing is to ensure you have a roof over your head. I will not get into the aspects of selling the house and buying something cheaper or renting, those are decisions you need to make.

If it were me, I would make the mortgage payment my first priority and ensure that it gets paid on time each month. Then, additional funds would go towards the credit card debt. I would snowball all non-mortgage debt before snowballing my mortgage. For me, that reason mainly lies in the fact that the mortgage is usually a much larger debt and is usually at a similar rate. Also, there are tax advantages to mortgage interest whereas there are no advantages to other consumer debt interest.

I have not plugged the numbers into the snowball calculator but take a look and see what the overall interest paid will be with each scenario and factor that into your decision.

dt
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My first thought on seeing that your unemployed, is that extra money should go into an emergency fund. Since you are talking about having extra money, you seem to have another income source. What would happen if something happened to that source. You might want to have at least a couple months of mortgage and credit card payments saved so that those won't fall behind.

That said. I would pay off the credit card debt. I don't know how much you will be able to pay it down in the next 4 years, but it might be enough to allow you to refinance the mortgage before the rate increases.

Barbara
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This may sound harsh to some people, but in times of real need such as yours, I think you should concentrate on your mortgage payments. If you get behind with those, you lose your house. If you fall behind in CC payments, your house is still yours. Apply ALL extra money to groceries, roof over your head (mortgage), utility bills, stuff like that. Leave the CC payments as is. No extras to the CC's.

Louise
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This may sound harsh to some people, but in times of real need such as yours, I think you should concentrate on your mortgage payments. If you get behind with those, you lose your house. If you fall behind in CC payments, your house is still yours. Apply ALL extra money to groceries, roof over your head (mortgage), utility bills, stuff like that. Leave the CC payments as is. No extras to the CC's.

I would be inclined to disagree with some of this statement... when I got my mortgage, I was told that if I ever anticipated having a problem making a payment (due to unemployment, injury, whatever), to be honest and up=front with them about it. The mortgage company does NOT want to foreclose on your house, because it's a PITA and quite expensive as well - they will work with you to make sure that your account can remain in good standing.

CCs, on the other hand, could care less about your financial status (your income, I mean), and any missed, late, or underpayments will just serve to ruin the credit rating (important for getting a new job sometimes), as well as run up the balance with interest and fees.

I would suggest you call the local office of your mortgage handler (NOT the Customer Service Center!!) and speak with one of their loan counselors about the situation... find out their opinion. As the previous poster said, you want to keep the roof over your head - surprising enough, that's what the mortgage company wants as well - and will be willing to work with you to keep it.

-Steve
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Do you have an efund? Is it funded to the six month level? I think my most honest answer, from my heart of hearts, is to put any extra money in an efund until you have found a new job, so that you can continue to make your mortgage payment and credit card payment in the near future.


--Booa
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Since you say you are unemployed, I would pay neither faster. I would only pay minimums. If you don't know how long it could be until you find a job, you probably need any "extra" left in the bank to live off of.

I would wait until I had a job again, then once that was stable, and I had some savings (e-fund, just in case) begin paying extra on one (probably the credit cards).

Good luck to you!
DizChick
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