Small Principal High Rate Debt vs Very Large Principal Low R

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DDMP20
Posts: 315
Joined: Thu Feb 26, 2015 10:12 am

Small Principal High Rate Debt vs Very Large Principal Low R

Post by DDMP20 »

Small Principal High Rate Debt vs Very Large Principal Low Rate Debt

If someone were to inherit a windfall, let's say 10 - 20K would it make more sense to put toward a mortgage with a large balance and a lower rate or a credit card with a smaller balance but a higher rate?

I've heard many people say that the high rate debt should be paid off first and the situation often is credit cards vs mortgage but I've never found this to make sense if you're going to see the mortgage to term.

I think prime is something like 3.5 right now and most credit card companies are going to add a minimum of 5% on top so it seems like the best rates possible at the moment that are not teaser or balance transfer rates are roughly around 8% and the best mortgage rates for fixed 30 year mortgages are around 3.5 - 4 depending upon if points are paid or not.

Unless your credit card balances are very high (I've never carried a balance much more than $1000) or you're actually being gouged with a rate of 20+ it seems to me that a windfall would be better put toward a mortgage as the more you can hack off the principal, especially early on in the term, the more you will save over the long run in interest costs, the quicker you will shift the interest to principal applied with each payment in your favor, and there exists the possibility of shortening the mortgage.
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bberris
Posts: 2412
Joined: Sun Feb 20, 2011 8:44 am

Re: Small Principal High Rate Debt vs Very Large Principal L

Post by bberris »

Those "many people" (Many, Louisiana?) are correct. While you would possible save more on interest cost in constant dollar terms paying down a long term note, those interest savings are far in the future. Those far-in-the-future dollars need to be discounted to the present day.
basspond
Posts: 1500
Joined: Wed Nov 27, 2013 3:01 am

Re: Small Principal High Rate Debt vs Very Large Principal L

Post by basspond »

If the person will still carry credit card debt, then it doesn't really matter. If the credit cards are paid off or will be paid off, and then paid off monthly, then credit card. Then use the "credit card" payment to pay down the mortgage.
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