Trying to crunch some numbers !!!!

7165 Views 10 Replies 9 Participants Last post by GregR, Aug 23, 2009

GregR

Discussion Starter · Jul 12, 2009

Here is a question for any one here with good calculating skills.

We're currently working on wiping out our debt and not sure which would be better to pay off first.

Two debts owning are:

Home mortgage of $72,000 at 5.31% locked in until 2016 with payments of $303.44 bi-weekly. Annual prepayment privilages of 25% and bi-weekly payment increase of 20%. Value of property is approx. $175,000 to $160,000.

Secured Line of Credit of $40,000 at 3.25% variable rate interest payment at $108 monthly.

We are currently debating on paying down the mortgage as much as possible until the rates on the LOC start climbing and just maintain the interest payments on the LOC for the time bieng.

We figure we can put approx. extra $2000 per month towards either debt as we just finished paying off a $25,000 unsecured LOC over the last seven months.

Any input would be greatly appreciated.

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PMREdmonton

· #2 · Jul 12, 2009

If you want to really play it safe, pay down the LOC first.

If you want to gamble a bit on how slowly interest rates get ramped up in 2010 then make extra payments on the mortgage.

In the end, I suspect the difference in the two strategies is probably relatively small so long as you keep up your excellent savings rate.

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DAvid

· #3 · Jul 12, 2009

Just about ALL financial professionals will tell you to pay down the higher rate loan first. The only exception I have seen is the the debt snowball, where folks with many small debts see a psychological benefit of paying out the small loans first, before tackling the bigger ones.

You should consider increasing your bi-weekly payment by 20%, and then apply as much as possible against the loan this year. If you are unable to apply the full $24,000 you wish to pay against the mortgage, put the excess against the LOC. Should interest rates climb and the LOC become more expensive than the mortgage, either switch to paying it instead, or see if you want to re-borrow from the mortgage to pay down the LOC (remember, many mortgages allow you to re-borrow excess payments without penalty).

DAvid

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CanadianCapitalist

· #4 · Jul 13, 2009

GregR said:
Here is a question for any one here with good calculating skills.

We're currently working on wiping out our debt and not sure which would be better to pay off first.

Two debts owning are:

Home mortgage of $72,000 at 5.31% locked in until 2016 with payments of $303.44 bi-weekly. Annual prepayment privilages of 25% and bi-weekly payment increase of 20%. Value of property is approx. $175,000 to $160,000.

Secured Line of Credit of $40,000 at 3.25% variable rate interest payment at $108 monthly.

Paying down the loan with the higher rate (Mortgage in your instance) would be a no-brainer here. When you exhaust your pre-payment privileges (I believe it is usually 25% of your initial mortgage amount, not the current balance), you'll have to wait until the mortgage anniversary. So, then you might think about channeling payments towards the LoC.

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Sampson

· #5 · Jul 13, 2009 (Edited)

>>Just about ALL financial professionals will tell you to pay down the higher rate loan first. The only exception I have seen is the the >>debt snowball, where folks with many small debts see a psychological benefit of paying out the small loans first, before tackling >>the bigger ones.

With only 7 years left in the mortgage, the majority of interest on your loan has been paid out.

With a mortgage, at least you have a security backing the loan, you are gaining value by borrowing money.

You don't mention what your $40k LOC has gone to pay.

I can imagine a few scenarios.
a) paying down the home - then you should pay the higher interest rate (mortgage) off first.
b) investments - tax dedcuctibe, you could also have gains greater than 3.5% - pay the mortgage.
c) LOC towards consumer items, misc. (something not increasing wealth, random items) - pay this down. doesnt' matter if the interest rate is high, paying any interest (leverage) is not benefiting you whatsoever.

Good luck!
Sampson

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canadianbanks

· #6 · Jul 13, 2009

I would start with the mortgage first.

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ashby corner

· #7 · Jul 13, 2009

i'd do the LOC first, just in case anything "weird" happens. Job loss or whatever. Since the interest saved will be negligible, I'd go with the scaredy-pants option.

Plus if the interest rates 'suddenly' go to 10% on your LOC, that's the best way--the mortgage is locked in till the maturity date.

that's just me.

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GregR

Discussion Starter · #8 · Jul 14, 2009

Thanks for the input

Still not 100% sure but thinking off bumping up the mortgage payment alittle just to watch it shrink then throw a large portion of extra cash on the LOC.

Will also be looking into the Smith Manouver in detail as the secured LOC was used to pay off two other unsecured LOC's at hire rates. These were used for investment purposes but it was more of a speculative buy than an income driven investment. Not sure if it would apply or not and would have to dig up some records. If it is applicable then I'll be writting off the intrest and paying the mortgage down while I wait for the market to turn around.

If there are any experts on the SM here I could greatly use some input on wither or not I can deduct the intrest for taxes in this case.

Thanks for the input everyone.

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Cal

· #9 · Jul 14, 2009

Ditto as to what Canadian Capitalist stated.

Not sure about the 'speculative' buy, but if you have statements to show a capital loss on an investment then you can claim the interest on an investment loan.

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sprocket1200

· #10 · Aug 22, 2009

5.31%? my first call would be to get that rate down...

as for strategy, I agree with highest rate first, unless there is risk of job loss, etc. then LOC may be useful to have. If you really can't decide, go 50% to each...

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GregR

Discussion Starter · #11 · Aug 23, 2009

Thanks for all the input.

We ended up increasing the mortgage payment by 20% and are putting the rest of the LOC and will work on the mortgage later on.

The rate is alittle high because when we got the original mortgage in June '06 we locked in for 10 years at 5.31% and a 25 year mortgage.

This was before we wised up and took control of our money and spending.

Since we are going to be paying to mortgage off much sooner then originally planned we are looking at lowering the term and rates now.

GregR

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