Strategy 40 of 107
Kill the costlier debts first, then roll everything into the mortgage
What it is
List every debt with its rate. Any debt costing more than the mortgage (cards, personal loans, many car loans) gets the extra money first; that is the higher return.
Steps
- List every debt with its rate. Any debt costing more than the mortgage (cards, personal loans, many car loans) gets the extra money first; that is the higher return.
- Pay minimums on the rest and put every spare dollar on the highest rate until it is gone, then the next.
- When only the mortgage is left, every freed payment goes to its principal.
Repeat: Each time a debt is paid off.
Measure: Total freed monthly payments once the costlier debts are gone.
Try it in the calculator Enter its amount in "Monthly non-income amount to principal". Add a payoff goal of 5 years to see what is still needed.
Risks
- Running balances back up undoes it.
- Keep a small emergency fund so a surprise bill does not go on a card.
Who it fits
Average household, Single, Newlyweds, Married couples, College students, No high school diploma, No college degree
Needs
Has car, card or other loan payments
How predictable
Most predictable: once in place, the payoff date is arithmetic
A worked example (hypothetical, not guaranteed)
Picture a hypothetical household (average household). They owe $300,000 at 6.5% with 30 years left. The required payment is $1,896 a month, and that payment, which comes from income, never changes in this example.
They follow the steps: list every debt with its rate. Any debt costing more than the mortgage (cards, personal loans, many car loans) gets the extra money first; that is the higher return.
Suppose it brings $600 a month on principal from this strategy, not from the paycheck. The loan would be paid off in 16 years 3 months instead of 30 years, saving about $196,219 in interest. To finish in five years, they would still need about $3,374 a month more from other strategies. That is why the five-year sequences stack several at once.
The amount above is chosen only to show the arithmetic. It is not an estimate of what this strategy will produce for anyone. Put real numbers from the fact finder into the calculator.
Sequences that use it
- Military family stack: While on active duty, the 6% cap at the old payment; clear costlier debts; after service, a streamline refinance before the cap ends.
Sources and more information
- Fidelity: Debt avalanche versus debt snowball fidelity.com
Where to get help
- CFPB: Find a HUD-approved housing counselor (free or low cost) consumerfinance.gov
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