Which Debt Should You Pay Off First? It’s NOT What You Think

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Nearly everyone on the web and in the financial press is telling us to get out of debt. Get out so you can save more, so you can retire early, so you can improve your credit score, so you can just get out of debt. But what if you have several debts—credit cards, a car loan, an installment loan (or two), a student loan and a mortgage. Which debt should you pay off first? Or does it even matter?

I think it does, in fact, I think it matters a whole lot. Some loans are just more…dangerous…than other loans, and need to be paid off sooner. This is especially true if you’re struggling financially. You should make a priority to pay off the loans that have the greatest potential to cause you the greatest problems in the event you can’t pay them any longer.

What Debt Pay First

Which Debt To Pay First?

Here’s my attempt at establishing that priority, and the reasons why for each. Feel free to disagree!

1. Car Loans

Most people start paying off debt with their credit cards, but I disagree. A car loan is a secured loan, which means that if you stop making the payments for any reason the car will be repossessed by the lender. If you hit on hard times and can’t pay your bills, the last thing you need to have happen is to have your car taken away.

You need your car to commute to your job, to run your business and to live your life. If it’s gone, you’re ability to pay your other debts will be gone with it.

Maybe this is just my thinking, but a car loan is really the most “strategic debt” that you have. A debt chain reaction will be set off if you lose your car, one that you may not be able to recover from any time soon. Get your car free and clear as soon as you can, then you’ll have time to deal with other debts.

2. Other Secured Loans

These loans could be debts taken to buy furniture, household appliances or to replace major components of your home, like a furnace or central air conditioner. And like a car loan, they’re secured and that’s why you want to pay them off ahead of unsecured debts. If you fail to make your payments for any reason, the lender will be able to take the collateral from you.

That may not be a problem if the collateral is furniture or a boat—you can live without those. But if it’s your computer that you use for business, or your air conditioner in the summer time, life will get ugly in a hurry.

These are worthy of being paid off right behind your car loan.

3. Student Loans

This is a sticky subject. Because they tend to be large and generally carry low interest rates, most people prefer to leave them alone and take every one of the ten, 15 or 20 years they have to pay them. But that’s not always the best course of action.

Though we may not think of it this way, it is a reality that student loans are unsecured debt. Even though they’re typically the size of car loans or even larger, there’s no asset beneath them that can be sold to pay them off if you get into financial trouble. Worse, they can’t be discharged in bankruptcy. In fact, except under certain very limited circumstances, you can’t settle them with the lenders in the way you might be able to with credit cards. For that reason, paying off your student loans deserves a higher priority than for credit cards.

4. Credit Cards

This is everyone’s favorite payoff! And why not? Credit cards are really annoying, at least when it comes time to pay them! But at the same time they’re aren’t as threatening as any of the above loans if you can’t pay them.

Sure, credit card lenders have remedies they can pursue against you, like nuking your credit, torturing you with collection calls, charging default interest rates and implementing judgments and garnishments. But they can’t take away your livelihood or kick you out of your home—that lowers them in the pay off hierarchy.

Usually, you can also settle your credit card accounts for less than what you owe, and there are even agencies—some of them non-profits—who will help you arrange this. In addition, though lenders can seek legal remedies against you, they often avoid going too far lest they push you into bankruptcy protection. Credit card lenders don’t do very well when that happens.

The popular “debt snowball” method really is the best if you have multiple credit cards. Pay off the smallest one first, then work your way up to the bigger ones. Each little one you pay frees up more money to pay off the bigger ones.

5. Mortgages

The reason for putting mortgages in last place? It’s typically your biggest debt and it will take many years to pay it off early. Also, even when you start paying it off, your mortgage won’t go away any time soon. Your house payment will remain fixed until the mortgage is completely paid off, as in zero balance. Since that will take many years to accomplish, the mortgage should be a low priority.

[Is it better to rent or own a home? <–What do you think?]

A couple of other things to consider in connection with a mortgage, one being that the payment is paying for something tangible—the use of your home. You’d have a rent payment if you didn’t own your home, so it’s not like the mortgage payment is something extra or extravagant. There’s also the tax benefit of having a mortgage. Since you get a break on your income taxes as a result of having your mortgage, paying it off should be less urgent than paying off debt that has no tax advantage.

Finally, if you plan on selling your home in the foreseeable future, there’s probably no point in working to pay down the mortgage. It will be paid off when you sell the house.

Is this debt pay off priority a bit unconventional? Probably. But when it comes to personal finance, I think it’s always worth looking at things from outside the box.

What to you think the priority should be when it comes to paying off debt?

photo credit: Freedigitalphotos.net

What Is Private Mortgage Insurance, And Is It Really Worth It?

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When I was a kid, one of the things that I remember about home ownership is that people would have to save up for a long period of time in order to be able to put down at least 20% of the purchase price of the home as a down payment. However, over the past 10-15 years, the practice of planning a home purchase based on when you could save up a 20% down payment has essentially become obsolete.

What Is Private Mortgage Insurance (PMI)?

Because of this failure to come up with the standard down payment, more and more people began paying private mortgage insurance premiums during the real estate boom of the mid 2000s. Private mortgage insurance (or PMI) is insurance that is in place to ensure that mortgage lenders do not lose money in the case where a mortgagor is not able to repay the loan, and the full costs cannot be recovered even after a foreclosure and sale of the property.

Because of this, private mortgage insurance is usually required when the borrower is putting up less than 20% of the purchase price or appraised value of the home. The cost of your insurance will vary depending on the size of the down payment and the loan and the location of the property (like one of these retirement havens), but they typically amount to about one-half of 1 percent of the loan – which would be about $2000 a year on a $400,000 house.

PMI definitely makes sense from the lender’s perspective, since they are taking on more risk by extending a loan that is at or close to the value of the property. In some cases you will actually pay an upfront premium in addition to the ones baked into your mortgage payments.

PMI is an extra fee that can add a substantial amount to your monthly mortgage payment (especially when you consider interest, homeowner’s insurance, and taxes), and you may be required to pay this amount until the equity you have in your home reaches the twenty percent threshold.

How To Stop Paying Private Mortgage Insurance:

If you currently owe less than 80% of the value of your home and are still paying PMI, contact your mortgage company immediately for instant savings (it issupposed to be canceled automatically once you owe less than 78%). They will require proof that your equity position is stable and is more than 20%.

That “proof” will come in the form of an independent appraisal. Unfortunately, you are usually not given a choice regarding the appraiser or the total amount of the fee; but at least you get to pay for it (sometimes at a cost of $500 or more)!

If you still owe more than 80% of the value of your home, but you have enough money in savings (“enough” is relative), it may make sense to pay down your mortgage in order to stop paying these fees.

My Thoughts About PMI

Waste Money

To me, it doesn’t make sense to pay insurance premiums for a plan that doesn’t even cover me . I wonder how many people actually add PMI to the equation when figuring out if it’s time to buy a home. What was that? Most people don’t make any calculations when trying to buy a home? Well, then I guess they won’t mind paying an extra couple of hundred dollars (with the home prices in my state) per month in order to grab a piece of the “American dream”. Maybe you can buy a home overseas instead! 😉

Seriously, how many other types of insurance can you think of where the one paying the premium doesn’t benefit at all from the protection offered by the coverage? And to me, if a loved one benefits, then I benefit, so you can’t add any types of life insurance to that list.

If you have crunched the numbers and you can tell me that it is better for you financially to rush into buying a home with little to no down payment and paying PMI, then maybe there may be some merit to this; but as far as I can see it (in most cases that I have observed), it is a huge waste of money, and it is another cost of being financially unprepared and undisciplined!

Photo credit: Freedigitalphotos.net

A Few Things To Keep In Mind When Trying To Save Money On Car Insurance

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Throughout life, you will come to points where you have to insure various items to protect their value in the case of an accident. Of all the insurance payments, you will have to make. Auto insurance will be one of the largest and most financially demanding options you must decide upon. Here are a couple of things that we might not normally consider when trying to save money on car insurance.

Simple Tips To Save Money On Car Insurance

Go With A Proven Car Insurance Provider

When choosing an auto insurance policy, look into the quality of the company. The company that holds your policy should be able to back it up, click here to get car quotes online. It is good to know if the company that holds your policy will be around to take care of any claims you may have.

You can take a look at the Better Business Bureau’s or Consumer Affairs websites in order to check for complaints against your top choices. Asking your friends, coworkers, family members, and even neighbors about their experience with certain auto insurance providers can also help you to narrow down your choices and find a reputable company.

Save Money on Car Insurance

Buy Only What You Need

Don’t fall prey to buying insurance coverage that you do not need. Research your needs on your own, or ask the insurer if it is a must that you purchase all coverage they mention to you.

One example of this would be roadside assistance coverage. If you have roadside help through some other means such as your credit card (one of many credit card benefits) or through some sort of membership elsewhere, you do not need to purchase it from your insurer.

If you own a small business requiring the use of company automobiles, vans, or trucks; business auto coverage is a must. Business auto insurance coverage can usually be added to a business insurance package made available by insurance companies. If you or your employers are driving company vehicles, it is critical that you are covered in case one of them gets into an accident.

Handling Teens and Multiple Drivers

Your teenage driver’s insurance will cost you much more than yours for a while, but if they took any formalized driving instruction, be sure to mention it when shopping for a quote or adding them to your policy. Discounts are frequently available for driving instruction, but you can get even bigger discounts if your teen took a defensive driving class or other specialized driving instruction course.

If your car is insured with multiple drivers and one of them stops using the car, notify your insurance company immediately. It can reduce your premiums significantly in many cases. Young drivers, old drivers, and drivers with bad records all boost your premium. Get them removed from your policy as soon as you can.

Using The Internet, and Trimming Coverage

Usually, you can find some of the best insurance deals on the web. This is because selling directly to customers cuts out costs, like an agent or having a ton of local offices; so the insurance companies get to keep a little more for themselves. This also will trickle down to you in the form of a small discount. There are even some companies and/or that will perform car insurance comparisons on your behalf.

Consider suspending coverage on a vehicle you are not actively driving to reduce your premium payments. Often, you can suspend coverage except comprehensive on a vehicle not being driven, which still provides protection should the vehicle be damaged while garaged or parked – although, if it is not being driven, it may not be worth the extra cost of comprehensive coverage.

However, check with any lienholder or your state to make sure you are adequately covered and complying with loan requirements before suspending coverage.

Consider A Hybrid

Hybrid vehicles are really underrated in terms of insurance prices. So if you want to save money on car insurance, you might want to look at purchasing some type of hybrid vehicle (such as the Honda NSX). Apart from the great tax savings, you will also stand out as a low-risk driver in a hybrid, and thus your insurance premiums will ultimately drop.

When it comes to purchasing a hybrid, just make sure that the added cost will be worth it when considering lower fuel costs, any tax credits you may receive, and paying less for your car insurance.

Though simple, the tips listed above could save hundreds of dollars per year on expensive auto insurance payments. The point is, take your time and calculate your costs carefully. Get ahead of the curve and be prepared for what you will need to pay before you even go to get your vehicle. Knowledge and research is the key to saving.

photo credit: Freedigitalphotos.net

Requesting Disaster Assistance After Hurricane Irene

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Yesterday, President Obama issued a Major Disaster Declaration for damage resulting from Hurricane Irene in New Jersey, which makes many New Jersey residents eligible for a number of Federal disaster relief programs. The U.S. Department of Homeland Security’s Federal Emergency Management Agency (FEMA) announced that federal aid has been made available to certain people in need of disaster assistance in the State of New Jersey to supplement state and local recovery efforts in the area affected by Hurricane Irene beginning on August 27, 2011, and continuing.

What Does Disaster Recovery Assistance Entail?

According to the FEMA website, there area number of federal disaster recovery assistance programs that can be made available (as needed and warranted) under the major disaster declaration, which was issued by President Obama for the State of New Jersey.

Here is a summary of those programs – taken directly from the FEMA website:

Assistance for Affected Individuals and Families Can Include as Required:

  • Rental payments for temporary housing for those whose homes are unlivable.  Initial assistance may be provided for two months for homeowners and renters.  Assistance may be extended if requested after the initial period based on a review of individual applicant requirements.  (Source: FEMA funded and administered.)
  • Grants for home repairs and replacement of essential household items not covered by insurance to make damaged dwellings safe, sanitary and functional.  (Source: FEMA funded and administered.)
  • Grants to replace personal property and help meet medical, dental, funeral, transportation and other serious disaster-related needs not covered by insurance or other federal, state and charitable aid programs.   (Source: FEMA funded at 75 percent of total eligible costs; 25 percent funded by the state.)
  • Unemployment payments up to 26 weeks from the date of the disaster declaration for workers who temporarily lost jobs because of the disaster and who do not qualify for state benefits, such as self-employed individuals.  (Source: FEMA funded; state administered.)
  • Low-interest loans to cover residential losses not fully compensated by insurance.  Loans available up to $200,000 for primary residence; $40,000 for personal property, including renter losses.  Loans available up to $2 million for business property losses not fully compensated by insurance.  (Source: U.S. Small Business Administration.)
  • Loans up to $2 million for small businesses, small agricultural cooperatives and most private, non-profit organizations of all sizes that have suffered disaster-related cash flow problems and need funds for working capital to recover from the disaster’s adverse economic impact.  This loan in combination with a property loss loan cannot exceed a total of $2 million. (Source: U.S. Small Business Administration.)
  • Loans up to $500,000 for farmers, ranchers and aquaculture operators to cover production and property losses, excluding primary residence.  (Source: Farm Service Agency, U.S. Dept. of Agriculture.)
  • Other relief programs: Crisis counseling for those traumatized by the disaster; income tax assistance for filing casualty losses; advisory assistance for legal, veterans benefits and social security matters.

As you can see, your potential benefits would include SBA disaster loans, disaster unemployment assistance, and even procuring a disaster loan from the Farm Service Agency. Many home contents insurance policies will not cover damages from hurricanes and other natural disasters, so these grants, disaster unemployment assistance payments, and loans can be a huge help to those in need! Especially when without them, you may have to resort to using pay day loans or other high-interest lending to make ends meet while you recover from disaster.

Who Is Eligible For Disaster Assistance?

According to the FEMA website, the President’s action makes federal funding available to affected individuals in Bergen, Essex, Morris, Passaic, and Somerset counties. As anyone living in New Jersey can tell, the list of eligible counties is incomplete, when compared to the damage done.

However, William L. Vogel who has been named as the Federal Coordinating Officer for Federal recovery operations in the affected area, stated that, “damage surveys are continuing in other areas, and additional counties may be designated for assistance after the assessments are fully completed.”

I would suggest that those who are in other counties check the FEMA website daily to see if their area has been added. It may help to keep in touch with your local elected officials as well, so they can advise you regarding your current options, and so that they are better equipped to speak out on your behalf.

***Update: President Obama just visited New Jersey and extended disaster assistance to the following counties: Hunterdon, Middlesex, Monmouth, Sussex, Warren, Atlantic, Camden, Cape May, Cumberland, Salem, Gloucester ***

Burlington, Hudson, Mercer, Ocean and Union counties still have a chance to be declared eligible by the time full damage assessments are concluded.

How To Apply For Disaster Assistance:

The Federal Government has set up a website that allows people to apply online for disaster recovery assistance: http://www.disasterassistance.gov

Instead of forcing you to bounce back and forth between the various Federal agencies involved, this website consolidates the application process across several Federal agencies, including FEMA and the Small Business Administration.

Ultimately, you will have to complete less forms than normal, the application process will move faster, and you will also be able to check the progress of your application online.

If you want to apply by phone rather than the Internet, you can call 1-800-621-FEMA (1-800-621-3362). Disaster assistance applicants, who have a speech disability or hearing loss and use TTY, should call 1-800-462-7585 directly; for those who use 711 or Video Relay Service (VRS), call 1-800-621-3362.

Be prepared to provide basic information about yourself (name, permanent address, phone number), insurance coverage and any other information in order to expedite the process.

Other Things To Consider

By checking the FEMA website, you can see what other states/counties are eligible for this type of aid. Also, be aware that anyone who suspects price gouging during this time is encourage to report it to the state (just follow the instructions in the link provided).

Although it would have been impossible for any individual to stop the flood waters from overtaking them, by following the information including in this hurricane preparedness guide, you can give your family the best chance to be healthy and safe during and after a natural disaster.

Even if you have not suffered damage yourself, or you do not live in New Jersey, please pass this information along to anyone who might be in the need of disaster assistance.

photo courtesy of Buzz Feed