If you're fortunate enough to have come into some money that will allow you to pay off some of your debts, deciding what to do with it can be a bit of a challenge, especially if you owe various types of debt to different lenders. When it comes down to it though, the shrewdest thing to do is to put your cash where it's going to save you the most money.
If the amount of interest you pay on your credit cards is higher than what you pay on your mortgage, your best bet will be to pay off your card debt with any disposable income or extra savings you have. If you're paying 15 percent on your credit card debt and 4 percent on your mortgage, you're going to save more in interest payments by clearing your card debt first.
Taking out a low-cost loan to pay off your card debt could make using your spare cash to pay off some of your mortgage a sensible move. If you can secure a loan that charges a lower rate of interest than your mortgage, paying off your home loan first will make more sense. You'll need to have a pretty good credit profile to successfully apply for a loan that charges less interest than your mortgage though.
Balance Transfer Deals
For those with very good credit scores, paying off their mortgage first while moving their credit card debt to different lenders offering 0 percent balance transfer promotions could be the way to go. You'll be reducing the amount of interest you pay your mortgage lender while paying next to nothing on your credit card debt. You'll need to be conscious of the fact that balance transfer providers typically charge a fee to take on your debt, but you'd need to have an extraordinarily large balance of credit card debt for this to make the exercise a waste of time.
Early Settlement Fees
Check your mortgage agreement before deciding to pay extra towards your home loan. Your lender could hit you with fees for overpaying your mortgage. You may find that you're able to pay off a little extra each month without triggering a charge though. If you have a substantial sum that you're able to pay toward your home loan, taking a hit on the fees could work out cheaper than continuing to pay interest on the portion of the loan you're able to pay off.
Michael Roennevig has been a journalist since 2003. He has written on politics, the arts, travel and society for publications such as "The Big Issue" and "Which?" Roennevig holds a Bachelor of Arts in journalism from the Surrey Institute and a postgraduate diploma from the National Council for the Training of Journalists at City College, Brighton.