Before I rented out my rooms to roommates and even before I started graduate school, my debt ranked in the following order from the highest amount to the lowest amount:
- First Mortgage ($142,000 @ 6.125%)
- Second Mortgage ($35,500 @ 8.375%)
- Undergraduate Student Loans ($18,200 @2.625%)
This past week, I just realized my second mortgage is not my second highest piece of debt that I own. This debt has dropped to third, making my student loans my second highest. The new ranking of my debt is as follows:
- First Mortgage ($138,000 @ 6.125%)
- Undergraduate Student Loans ($18,200 @ 8.375%)
- Second Mortgage ($16,200 @2.625%)
The Overall Picture
It’s obvious why I’m focusing my efforts to pay off my second mortgage. The 8.375% interest rate is just too high and I hate giving money to the banks.
In 2005, the size of this second mortgage seemed insurmountable. I admit, I had no idea what my long term plans were for buying a townhouse. All I knew was I wanted to be in the red hot real estate market and didn’t have any money to put down. To get myself into a piece of property, I financed the entire price of a townhouse by acquiring an 80/20 loan, where the 20 percent down payment is treated as another mortgage, but comes with a catch – a higher interest rate.
I made the minimum payments, trudging along without any goals to aggressively pay off the 8.375% mortgage, hoping the real estate market would sky rocket. Instead, in 2008, we all learned that the economy tanked bringing the real estate market along with it. Now, I got a townhouse where I can’t even think about selling without selling short.
My plan of attack was to pay off the mortgage balance and use it as an asset. After I graduated with my graduate degree, I figured I’d keep renting out my spare rooms to pay off debt.
With the second mortgage having the highest interest, it made sense to tackle this one first. With that as my end goal, you can see why the balance of that mortgage stands as it does today. I have nearly all my payments set on automatic payment. With automatic payments, you never really think about making payments, it just happens. By doing so, I lost track of my debt balances and the debt I was replaying eventual dwindle below my other debt balances.
Paying off Debt versus Saving
For those that ever thought about forking over a large sum of money your hard earned money to pay off a chunk of debt, it’s a hard first step. I know the feeling. You have this large debt and nice sum of cash. It makes sense to use that cash to pay off the debt, but there’s a slight hesitation that builds up because of fear that you might actually need a large sum of cash for emergency purposes. This is certainly a valid point. I can’t argue with someone that has an emergency fund built up. I have one too, but I also have reduced my emergency fund to pay off a chunk of my debt.
There’s nothing I can that get you to overcome these fears, what I can tell you is how paying of debt feels. If you feel comfortable with have a large sum of money, then by all means go ahead and do what makes you feel comfortable. I know what makes me feel comfortable and that’s being debt free.
The Psychological Aspects of Paying off Debt
Having debt paid off is a good feeling. When I paid off my car loan, it felt good to be rid of that loan and freeing up my budget with the lack of monthly car payments. With my second mortgage being ranked my smallest amount of debt, there’s a sense of accomplishment as the proverbial saying “I can a light at the end of the tunnel.” This 30 year loan is on pace to paid off in less than a third of its life. In fact, if everything goes as to plan, this second mortgage should be completely paid off by the beginning of 2011.
So, I’m a little more than a year off from feeling the same sense of euphoria when I paid off my car loan. It’s going to be a good feeling and I can’t wait.
The accomplishment of having my second mortgage debt drop from being my second highest debt to the lowest would not have been feasible without renting out my spare bedrooms. Without the rental income, I would have been making the minimum payments and would have another 24 years to be before the second mortgage is paid off – a long time before I see any light at the end of the tunnel.
If you haven’t felt what’s it’s like to pay off debt. I suggest you try it and I hope you’ll be able to see the light at the end of the tunnel.