What debt to pay when/what categories to save for first?

Hi everyone,

 

i am slowly starting to make my way around YNAB and budgeting. I am really, really bad at it and have spent thousands of dollars I wish I had back.

I am trying to figure out how best to pay down my debts.

I have put together a monthly budget with as many true expenses as I can think of (eye opener!) that cost a lot (things like children in school). I understand that I should be funding those first but also have some upcoming debt payments I have to make.

 

For personal spending I owe:

Individual $2000 (no interest need to make some kind of payment in January 2021)

Visa $4775 (24% interest - about $115/mo min payment right now)

Line of Credit $10,000 (7.2% interest - about $60/mo interest payment)

Individual $13,000 (no interest - I currently pay $200/mo)

Individual $30,000 (no interest) due August 2021

TotaL: $59,775.00

 

For a house mortgage, weird story won't go into the details but for that debt i have:

Personal loan $5000 (no interest due February 2021)

Line of credit $45,000 (4.6% interest) - currently paying $60/week, just over the minimum payment

Personal loan of $90,000 (no interest due August 2021)

Total: $80,000 (currently pay $240/mo on the line of credit )

 

For assets (not including salary):

I will be receiving about $65,000.00 cash sometime in the first half of 2021.

I will be receiving about another $50,000 in a year (but after the $90,000 loan has to be paid)

I have other somewhat small chunk in an RRSP and a healthy RESP for the kids.

I own a rental property that pays for its own mortgage and expenses and profits about $10,000/year. Right now the profits are about $5000 sitting in a chequeing account that I think I should leave for a rainy day)

 

I think this is what I should do but looking for feedback:

1) continue the minimum payments I am currently paying on my personal visa, personal line of credit, the $13,000 personal loan, mortgage line of credit

2) make a min payment ($500) on the $2000 individual loan in January 2021

3) save like crazy for the $5000 I have to pay on a personal loan in February 2021

4) continuously fund my true expenses with whatever is left

these next ones are my real questions:

5) how can I best use the $65,000? fund true expenses? pay debt? savings?

6) get a mortgage with an interest rate that is lower than 4.6% (my lowest debt interest rate) and pay off all the debt or as much debt as i can afford in monthly mortgage payments in which case what is the best use of my $65,000 - a lower mortgage/savings/directly on debt?

7) leave the rental property alone except when it has accumulated some profits put it toward personal debt or use it to invest in the property/another property?

8) do what in what order?

 

I'm sure I'm being clear as mud. Thanks so, so much!

Jasmine

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  • Can you clarify what happens on your no interest debts after their due dates? Are debt collectors coming after you? Is that the start of interests being applied? Do they apply on the balance at the date the interests start or do they apply retroactively to the whole period of the debt?

    Like 1
    • Ceeses Nothing happens after the due dates of the no-interest debts. It's a complicated story :) However, because of personal relationships I cannot not pay them at least close to the due date. The $13,000 one which I pay $200 a year can stay that way although it would be preferable to pay it off faster.

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  • Hi! Newbie here too. I strongly suggest you go to a website called undebt.it. You enter what got can afford each month and what your minimum repayment amounts are. It will show you every repayment method there is and which one will have you debt free first.

    Like 2
    • Sky Blue Disk thanks so much!

      Like 1
  • The rental has True Expenses as well. Is that $10k profit per year after putting money away for a new water heater, furnace, paint (every 7ish years), hail deductible, etc.?

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    • dakinemaui  OMG somehow I missed that? Ok well I will start putting the profits into true expenses categories. I am setting up a separate budget for the property.

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  • You have $140k in personal loans. Is that from friends/family? I would prioritize those above all other debts.

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    • dakinemaui Yes, ok, good to hear. that's how I feel, the situation doesn't feel good. I'm hearing that, again, a mortgage to over debts works best - financially and emotionally. The $30,000 one due next summer I do not need to pay earlier because it is part of a divorce settlement. Long story but basically what happened is I got a finalized divorce, quickly after closed with an offer on the house based on thinking I could get a mortgage but because rental property mortgage transfers (part of the divorce deal) didn't happen (ex couldnt get a mortgage) I was obligated to come up with cash. My ex then "lent" me $90,000 which I need to pay back by next summer. He also needs to pay me $60,000 by next summer but I am counting it as $30,000 because we agreed if I don't we will put the $60,000 toward it. I WILL be able to get a mortgage this spring and I am thinking I would rather owe $60,000 on a low interest mortgage and have that $60,000 cash . . . .?  It's all very complicated and I have trouble thinking about it clearly.

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  • You can refinance the mortgage right now with lender credits to cover costs. If that rate is lower than your current rate, that's an easy choice. Whether you increase the term from the remaining time is a separate question. 

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    • dakinemaui I do not currently have any mortgage. I am eligible for one at the end of February (when my probation on a new job ends). What are lender credits? Also, can you explain what you mean by 'whetheryou increase the time . . . ."? Do you mean increase the amortization of a mortgage? How is this a separate question?

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    • dakinemaui But what I think you're saying in general is get a mortgage big enough to pay  all the debts (and in the mean time pay minimus exce;t the $5000 one due February)?

      If/when I get a mortgage, do you have feedback about whether to get it closed or open?

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      • WordTenor
      • I have the honor to be your obedient servant
      • WordTenor
      • 1 mth ago
      • Reported - view

      You owe as much related to your house as I do on my mortgage; it may as well be a mortgage. Why aren’t you eligible for a mortgage if you have a house? The house is the collateral for the mortgage.

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    • WordTenor See above. I am not currently eligible for a mortgage because 1) my name is on two other mortgages (2 rental properties being divided through a divorce) because my husband cam't currently get a mortgage and the transfer hasn't happened yet 9which will change fairly soon) and 2) started a new jon this fall and on probation until February. My broker has reassured me getting a mortgage will not be a problem at that point.

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    • Alice Blue Sander said:
      get a mortgage big enough to pay  all the debts

      That may be a possibility if the value of the property is high enough. The ratio of the loan amount to the value of the house is important. The rate you'll get -- and even qualification -- depends on that. As an extreme example, you won't be able to borrow $150k when the house is only worth $100k. You'll typically also have to pay mortgage insurance if that ratio is above 80%.

      A mortgage broker can help navigate these sort of issues once things settle down.

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      • WordTenor
      • I have the honor to be your obedient servant
      • WordTenor
      • 1 mth ago
      • 2
      • Reported - view

      Alice Blue Sander Sounds reasonable. I would definitely pay off all those loans as soon as you're able to get a mortgage on the primary residence. I might also consider selling the rental property, even though it is cash flow positive. 

      Honestly this situation is complicated enough that I would suggest in the short term engaging a fee-based financial planner who has experience in divorce settlements. It sounds like some things really probably need to be sold and split rather than this "I keep this but now I'm in debt to you $X but I don't have $X." But I've never been through a divorce. However, this situation certainly isn't as straightforward as "pay this loan in this order because it is at this percentage APR." You need to be talking to both your divorce attorney and a planner who can help you look over all this, and you'll probably need a good mortgage broker, as well, who can help you figure out how to get a mortgage that will pay at least most of the loan (is it a settlement, I'm assuming?) to your ex. Good luck! 

      Like 2
    • WordTenor Thank you for all the feedback. I have realized in writing this that a financial planner is a good idea! I have a divorce lawyer and the settlement is actually more straightforward than it sounds, it just got weird when my ex suddenly couldn't get a mortgage right away. I have wondered what to do with the rental property as it is potentially a very good investment - it is in a transitional neighbourhood and will be worth a lot for more in 20 years, but a financial planner can help with that decision. Thanks again!

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    • dakinemaui Thank you so much for all your help, I really appreciate it.

      Like 1
  • I should add that the monthly $200 payments for the $13,000 I owe comes out of the rental property revenue, not my personal revenue. That feels fine t me right now as it doesn't affect the rental property that much but $200 means a lot to my personal budget. I was inclined to keep that going but now i am reconsidering and could pay it off with a mortgage.

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  • Alice Blue Sander said:
    What are lender credits? Also, can you explain what you mean by 'whetheryou increase the time . . . ."? Do you mean increase the amortization of a mortgage?

    Lender credits reduce the up-front costs in exchange for a slightly higher rate. It's entirely possible to refinance (or finance, for that matter) without any out-of-pocket expenses.

    As far as "increasing the time", I was under the impression you already had a mortgage and therefore a payment and a remaining (amortization) term. (What was originally 30 years may only be 25 years remaining today.) If you refinance for 25 years at a lower rate, you will have lower payments and pay less interest overall. If, however, you refinance with a 30 year term at a lower rate, payments will be even lower but you'll pay more in interest overall. Additionally, the rates are higher for longer terms.

    Since you don't currently have a mortgage, the "term increase" isn't really a consideration.

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  • OP stated that they have an RRSP which means they are in Canada, not the US so that may change the advice re mortgages.

    Like 2
      • HappyDance
      • YNABing consistently since 2014
      • HappyDance
      • 1 mth ago
      • Reported - view

      Canadian mortgage terms are predominantly 5-year fixed with rates calculated for a 25-year amortization, which means you have to renew your mortgage at whatever the new going interest rate is every 5 years.  Prepayment privilege (in order to deliberately pay it down faster than your amortization rate) is something you negotiate with the lender. There are a few lenders that offer 10-year products, generally at twice the interest rate of the current 5-year products, and one major bank offers a 25-year at four to five times the interest you can currently get on a 5-year.

      https://www.canada.ca/en/financial-consumer-agency/services/mortgages.html

      Check out RateHub.ca for a complete listing of Canadian mortgage rates:

      https://www.ratehub.ca/best-mortgage-rates/5-year/fixed

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    • jenmas yes I'm in Canada :)

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    • HappyDance Thank you so much for the info!

      Like 1
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