Should I pay off my vehicle or one of my mortgages?
-$40000 truck financed at 6.9% fixed APR for 84 months (less than 6 months old) -$30000 2nd mortgage at 9.5% fixed APR on a 15 year balloon (had for 18 months) -$125000 1st mortgage at 7.125% fixed APR on a 30 year conventional (had for 18 months) -$13000 boat financed at 5.9% fixed for 120 months (4 years down, 6 years to go) Amounts above are current estimates, not representative of the original loan balance. My gut reaction is to pay off the 2nd mortgage first because it carries the highest interest rate. However, it's my understanding that the interest paid on my mortgages is tax deductible, so would it be smarter to pay the truck off first? I've already talked to a CPA and a financial advisor and am only being told that I should do what I'm emotionally comfortable with. I could care less about emotion...I want to do what is financially sound. So what is the smart move here and why? My taxable income between now and October 2008 will be approx. $166,000 USD. Thanks!
Public Comments
- I think that you should pay off the loans with the highest after tax interest rate. Do you know what your tax rate is? I suppose if you take the income taxes you paid for 2006 over your income in 2006, you'd have your tax rate. Then if you reduce the home loans by the tax rate, you'd have an approximate after tax rate. But of course, the amount of deduction generated by the home loans reduces over time.
- my first reaction is to go with the 2nd mortgage also, mostly because it's on a 15-yr balloon and who knows what interest rates will be like over the next few years. another idea is to pay a couple of the smaller loans off (like the boat and the 2nd mortgage), that way you have fewer loans and fewer payments to worry about. good luck!
- If you're at $166,000 Taxable Income then it would seem that the 2nd mortage after tax percentage would be around 6% (may be less depending on your state). So based on %, it looks like the truck is the best option (although you didn't say if the truck was used for business, and therefore the interest on that loan may be deductible too). Your other option is to pay off the boat. Since you probably have a fairly small balance on the boat, and such a large balance on the truck. The boat loan will be easier to pay off, and once it's paid off it will free up cash to help pay off the truck faster. BTW - Financial Advisors could care less about which loan you pay off first. After all they don't get a commission on that.
- Depending on your tax situation, I'd get rid of the car and boat loans first even though they're lower interest. They're not tax deductable. Of course, if you can't deduct your interest on your mortgages every year, then I'd get rid of the 2nd mortgage first on the years you can't itemize your mortgage interest. It is nice to own your home free and clear and not worry that it will be foreclosed upon. Perhaps you should sell the boat to pay off the car.
- Normally I'd say pay off the truck 1st because the interest on your 2nd mortgage is tax deductible. However being that your 2nd mortgage has a balloon payment you might also consider refinancing that loan to one with a fixed rate and no balloon payment....and take advantage of declining interest rates. Balloon payments can hit you hard when they come due!
- I would pay off the truck and boat loans first and refinance the 2nd mortgage at a lower fixed rate (rates just dropped) or refinance the 2nd mortgage with a home equity line of credit that floats with prime. Since vehicles depreciate so fast, you'll never recover the interest you're paying on those loans, but you should recover all the interest you're paying on the mortgage loans. Plus, you have the ability to deduct the interest on the mortgages.
