Welcome to another installment of #AskGradMoney, where on Facebook, Twitter or Instagram, you can send any or all of your money, stock market, budgeting, retirement, estate planning -- literally any money question to GradMoney and we will respond in the form of a blog post so other folks can benefit from our response. If you wish to have your name published with the question, just let us know, otherwise you'll be listed as "anonymous."
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"My wife and I have minimum monthly mortgage payment ($1,500 per month with $200,000 left to pay) is reasonable at 3.8%, while our credit card debt is quite high (over $30,000) and the current APR is about 14%. If we have extra funds at the end of each month, should we use that to pay down the principal on the mortgage or towards paying off the credit cards? Or some combination of the two? Thanks."
First of all, I commend you for having extra funds each month while paying off a mortgage and credit debt - it shows that you are budgeting your money quite well.
This answer is actually quite a simple one: always look to pay the higher interest rate debt first. If you think about it, $1,000 extra principle toward the credit cards ends up saving you over $10 in interest in the first month, and then every month after that. With the mortgage, $1,000 towards the mortgage will only save you about $3.23 in interest each month. Take a look at where you're going to save the most on interest and dedicate funds to eliminating that first.
Additionally, the interest on your mortgage payments may provide you with an itemized deduction when you do your taxes. In other words, not matter what you end up paying in interest on the mortgage, generally you can use it to lower your taxable income meaning you will owe fewer income taxes. Credit card debt on the other hand, is NOT deductible anywhere on your taxes, so continuing to pay the interest on this for a long period of time is just not worth it.
I wish you all the best in your financial journey!
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