“Dear Steve,
Putting it nicely I want to “tidy” up my debt. I want to get my ducks in a row so my husband and I can eventually buy a different house. Here’s my financial picture:
- Together my husband and I take home: $5800/month
- Secured Debts: Total: $1503/month broken down as the following:
- 1st mortgage approx 72,000 @ 6.75% 30 year $643/month
- 2nd mortgage apprx $18,900 @ 8.99% 30 yr $152/month
- Student Loan $205/month
- MOnthly Living Expenses: $2116
- Unsecured Debt: Line of Credit and Credit Cards $654/month
- Total Debt $30,310
We owe about $90,000 on our house and it could appraise around $100,000. What should my first plan of action be: refinance (if possible) my mortgages or just keep plugging away at my debt. I’ve been doing Dave Ramsey’s snowball debt reduction and have found some success, it’s just staying focused. How do you suggest me getting out of debt?
Laurie”
The Answer:
Dear Laurie,
Adding up the expenses you gave me they total $4478. That is a difference between your income and expenses of $1,322 a month.
Of that amount I would suggest that you save 50% of the leftover money in a boring old savings account. This is for two reasons. First, I want you to build an emergency fund and second, you may need to use some of that cash to help you with your future move to your new home.
Based on your mortgage rates, I think you should look into refinancing both mortgages into a new single loan if you can. Contact a local mortgage broker to find out what deals might be available. With interest rates currently much lower than you are paying, a new mortgage with a lower interest rate can save you quite a bit each month and you could use that money you are paying now in interest to actually lower your other debts.
I find the snowball approach is a good way to reduce debt and provide emotional satisfaction that debts are getting knocked off. Nothing wrong with the debt snowball method.
But before you contact the mortgage broker, please get a copy of your consolidated credit report with the credit score option. This consolidated credit report is the same one I use and love. The consolidated credit report will show you exactly what you need to do to increase your credit score and with a higher score, you can get lower interest rates on the mortgage.
