Managing Your Tax Return (What You Should be Using it For)

Spending Your Tax ReturnWhen people receive their tax returns, they are quick to spend this money on frivolous purchases that may bring them temporary joy. Even though people know there are ways to spend their tax return responsibly, the temptation to splurge on things they don’t need is too strong.

Ultimately, you can spend your tax return on whatever you want, but you should really consider what you should be using it for.

Pay Down Debts

Between student, home, and auto loan and credit card debt, people can easily find themselves owing thousands of dollars. Consumers often have no choice but to pay down their debts little by little over time, but if it is possible to make an extra payment or two using your tax refund, the debt can be repaid much faster.

Keep in mind that it would be most helpful to pay down your debts based on interest. High-interest rates should take priority since they are the most expensive. If you pay them down sooner, you will save money because you can shorten the repayment period and pay less interest.

Start or Add to an Emergency Fund

How prepared are you for the unexpected? If your car needed a major repair tomorrow, would you have the money to cover the cost? When emergencies happen people need to be prepared if they don’t want to take a big financial hit.

Emergency funds are designed to cover the cost of the unexpected. If you don’t have an emergency fund, use your tax refund to start one. And if you already have one, add to your fund. If and when something happens, you don’t have to stress about how this unexpected expense will set you back because you’ll have a financial safety net in place. 

Retirement Savings

The traditional age of retirement is 65, although some people may choose to retire earlier than that.  Your retirement may not be in the near future, but it is never too early to start saving for this phase of your life.

Just because you are retired, doesn’t mean you won’t have expenses. Between rent or mortgage payments, gas, food, utilities, and other monthly expenses, you will need to have a lot saved up since you will no longer be working. The money you save over the years will add up, so allocating some of the funds you receive from your tax return for your retirement savings will only help future you.

Home Improvements

Homeowners are responsible for their own home maintenance and improvements. It is a well-known fact that maintaining a home can be costly. Landscaping your front yard, insulating your attic or remodeling your kitchen may all be on your list of things to do, but with the cost of these home improvements being high, you haven’t been able to afford either.

Your tax return, regardless of how small or large it is, can be used to create the home you deserve. Even if you can’t tackle all of your projects at once, getting one done is better than none. Additionally, consider using the money to start a home improvement fund that can be used specifically for any home expenses you may have in the future.

Donate

Not everyone considers how they can help someone else. And when they do, they may focus on material items, such as clothes and shoes, but if there is an organization that you would like to support, why not make a monetary donation? You’ll feel good about having helped those in need, but another bonus to donating is that depending on the donation, it is tax-deductible.   

People view their tax return as free money that they can throw away. If there is work that needs to be done to improve your life or financial health, this money shouldn’t be wasted. When you receive your tax return, consider the many responsible ways to use this money that can positively impact your life.

Unhappy with your credit score or financial situation? Give Credit Absolute a call today for a free consultation!

Source: creditabsolute.com

What’s Better, Investing Your Money or Using it to Pay Off Debt Sooner?

Managing Your Finances - Investments vs Debt PayoffEvery day, people have to make decisions about their money. The choices they make have an impact on their financial health, so people have to be informed if they want to make the right decision.

When presented with the choice to invest or pay off your debt, you need to understand how each will affect you if you want to determine which is the better option.

How Can You Benefit from Investing?

Investing is one way for people to build their wealth. Whether you choose real estate, stocks, bonds or other types of investment, the many investment opportunities that surround you can benefit your financial health in more than one way.

  • An additional source of income: You probably already earn an income from working a job, but investing allows you to create an additional source of income. Depending on the investment, the return may be small, but it is still money in your pocket.
  • Reduce your taxes: Certain investments, such as retirement accounts, are tax-deductible. However, this is not the case with all retirement accounts. Additionally, there may be a limit on how much you can deduct.
  • Extra money to save for retirement: Retirement is expensive. Even though you probably won’t retire until the age of 65, the traditional age of retirement, you have to start saving early if you want to have enough money to cover all the expenses during this phase of your life. With more money coming in from your investments, you can have extra cash to put away for retirement to ensure you reach your savings goal.

How Can You Benefit from Paying Down Your Debt Sooner?

Many people view debt as a burden. Even if repaying these debts takes 20 years, they have to be repaid. But you always have the option to pay down your debt early.

Having debt can negatively impact your life, but when you pay it off sooner, you’ll experience a number of positives.

  • Save money: If you have credit cards or loans, you are expected to pay interest. The longer it takes to repay the debt, the more money you will pay in interest. By paying down your debt sooner, you will save money because less interest will be paid.
  • Improved credit score: Credit scores factor in how much a person owes. A high amount of debt can contribute to a low score, so when you pay down your debt, you will see a score increase. This increase will be slow if you take your time paying back the debt, but you can see a significant change in credit score if you pay off your debts sooner.
  • Peace of mind: Debt is a source of stress for many people. Repaying your debt sooner can decrease stress and give you peace of mind because you will be free to spend your money the way you would like and not have to worry about paying any more debt.

Should You Invest Your Money or Use It to Pay Off Debt Sooner?

Should you invest your money or use it to pay off debt sooner? There is no definite answer that can be given to this question because it depends on your individual circumstances.

One thing you can do to help you determine which option is best is to ask yourself questions that will help you get a better idea of your financial health.

  • What types of investment opportunities are you interested in?
  • How much can you potentially earn from investing?
  • Is there a chance of losing your money if you invest?
  • How much debt do you owe?
  • How soon would you be able to pay it off?
  • How much would you save by paying off your debt sooner?

There are ways you can benefit from investing, and there are ways you can benefit from paying down your debt sooner. Remember that what may be a smart move for one consumer may not benefit you in the same way. Regardless of which option you choose, you have to be the one to decide if it would be a smart move for you.

Source: creditabsolute.com

Pros and Cons of Debt Consolidation

Considering Debt ConsolidationBetween student loans, credit cards, and more, many Americans have managed to rack up thousands of dollars of debt. Regardless of how the debt has accrued, it must be paid, which is why many people who find themselves struggling to repay these debts turn to debt consolidation.

Debt consolidation can help people rid themselves of debt, but consumers who are considering this debt relief option should be sure they understand the pros and cons before taking this route.

Pros of debt consolidation

The pros of debt consolidation include:

  • One monthly payment: Debt consolidation reduces the number of monthly payments to one, making it easier for people to manage their debt.
  • Debts are repaid sooner: Debt consolidation allows consumers to pay off their debt using a loan, so as soon as they receive the loan funds, they can pay back their debts.
  • Low-interest rate: When compared to an interest rate on a credit card, the interest rate of a debt consolidation loan will likely make a debt a bit more affordable and save people money.
  • Improve credit: Since consumers will have one affordable monthly payment to make, they will have a positive payment history reported to the credit bureaus, which will ultimately lead to a score increase.

Cons of debt consolidation

The cons of debt consolidation include:

  • Fees: Many lenders will require borrowers to pay fees, such as application, origination, and late fees.
  • Increase debt: If someone fails to pay off their debt with the debt consolidation loan, or continue to accrue debt on their open accounts, such as credit cards, they are simply adding to their debt rather than reducing it.
  • Risk of losing assets: The debt consolidation loan may be a secured loan, which will require collateral. If the debt consolidation loan is not repaid, the borrower could their collateral.

What should be considered when applying for a debt consolidation loan?

When applying for a debt consolidation loan, there is a lot to consider. The goal is to get out of debt, so it is important for consumers to be realistic about whether or not a loan is a solution to their problem.

  • Amount of debt
  • Loan amount
  • Fees
  • Interest rate
  • Repayment schedule
  • Monthly payment amount
  • Collateral

Once the above has been considered, consumers will want to make sure they can actually afford what they may be asked to pay their potential lenders every month. If affordability is an issue, debt consolidation may not be the best option because instead of relieving the person’s debt, it will only add to it.

Alternatives to debt consolidation

The goal of debt consolidation is to reduce debt. Although consumers may find debt consolidation appealing, it is not the only option consumers have when they want to lower their debt and become debt-free.

  • Snowball method: Make small payments to clear away their smallest debts one at a time. Any additional funds can be used towards the balance due to get it paid down faster.
  • Budget: Prioritize and eliminate expenses to free up extra cash that can be used to pay down balances.
  • Bankruptcy: File bankruptcy to eliminate debt or repay the debt according to a specific plan.

With debt having a negative impact on a person’s life, it is easy to understand why people will try anything to get relief. Luckily, there are a number of ways for people to relieve their debt, and exploring these options will help them make an informed decision that will improve their financial situation. Depending on their circumstances, debt consolidation could be the perfect help them reach their goal of being debt-free.

Source: creditabsolute.com

Tips to Consolidate Credit Card Debt

How to Consolidate Credit Card Debt – SmartAsset

Tap on the profile icon to edit
your financial details.

Editorial Note: This content is not provided by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the issuer.

If left unchecked, extensive amounts of credit card debt can cripple your finances. The good news is there are many ways to handle debt, though each requires a dedicated effort on your part. But if you can manage to consolidate credit card debt, you will reduce your burden relatively quickly. In the process, you’ll avoid the exorbitant interest rates that accompany most credit cards. Below we take a look at some of the most effective techniques you can use to make this goal a reality.

Find Out Your Credit Score

Before you can work on improving your credit and minimizing your debt, you have to know where you currently stand.

Many credit card issuers allow cardholders to see their FICO® credit score free of charge once a month, so check out if any of your cards include that free credit score. The three major credit bureaus – TransUnion, Experian and Equifax – also give out free annual credit reports. If that’s not enough, websites like Credit Karma™ and Credit Sesame provide a free look at your credit score and reports as well.

It is vital to review your credit report with a fine-tooth comb to ensure the accuracy of the information. If you find errors be sure to let the credit bureau in question know so the issue can be eradicated as soon as possible.

Zero Interest Balance Transfer Cards

Although it might seem counterintuitive to apply for another credit card to lessen your debt, a zero interest balance transfer card could really help. These cards typically include an introductory 0% balance transfer Annual Percentage Rate (APR) for six months or more. This ultimately allows you to move debt from one account to another without incurring more interest. However, once the introductory offer concludes, any leftover balances will revert to your base APR.

These offers aren’t totally free, though. Most cards also charge a balance transfer fee that’s usually between 3% and 5% of the transfer. Even with this initial payment, you will almost always still save money over leaving your debt where it stands currently.

If you want to consolidate credit card debt, here are three different balance transfer credit cards you could apply for, with varying introductory interest rates and transfer fees:

Balance Transfer Credit Cards
Chase Slate 0% APR for first 15 months; then 16.49% to 25.24% Variable APR, depending on your creditworthiness No fee for first 60 days; then $5 or 5% of each transfer, whichever is greater
Citi Double Cash Card 0% introductory APR for 18 months from date of first transfer when transfers are completed within 4 months from date of account opening; then 15.49% to 25.49% Variable APR, depending on your creditworthiness $5 or 3% of each transfer, whichever is greater
BankAmericard® credit card 0% APR for first 15 billing cycles; then 14.49% to 24.49% Variable APR, depending on your creditworthiness No fee for first 60 days; then $10 or 3% of each transfer, whichever is greater

Take Out a Personal Loan

The thought of taking out another loan probably doesn’t sound too appetizing to consolidate credit card debt. But a personal debt consolidation loan is one of the speediest ways to rid yourself of credit card debt. More specifically, you can use it to pay off most or all of your debt in one lump sum. That way, your payments are all merged into a single account with your lender.

The APR and length of the offered loan and the minimum credit score needed for approval are the main factors that should go into your final decision on a lender. By concentrating on these three components of the loan, you can map out what your monthly payments will be. As a result, you can more easily implement them into your financial life.

Applying for a personal consolidation loan can have a detrimental effect on your credit. Unfortunately, most institutions will run a hard credit check on you prior to approval. However, many online lenders don’t do this, which might ease your mind depending on the severity of your debt situation.

These loans are available through a wide variety of financial institutions, including banks, online lenders and credit unions. Here are a few examples of some of the most common debt consolidation lenders:

Common Debt Consolidation Lenders
Banks Wells Fargo, U.S. Bank, Fifth Third Bank
Online Lenders Lending Club, Prosper, Best Egg
Credit Unions Navy Federal Credit Union, Unify Financial Credit Union, Affinity Federal Credit Union

Auto or Home Equity Loan

If you own assets like a home or car, you can take out a lump-sum loan based on the equity you hold in them to consolidate credit card debt. This is a great way to reuse money you paid toward an existing loan to take care of your debt. When paying back your auto or home equity loan, you’ll usually pay in fixed amounts at a relatively low interest rate. Even if this rate isn’t great, it’s likely much better than any offer you’d receive from a card issuer.

Equity loans are technically a second mortgage or loan, meaning your house or car will become the loan’s collateral. That means you could lose your house or car if you cannot keep up with your equity loan payments.

Create a Budget

To build a budget, you first need to figure out your approximate monthly net income. Don’t forget to take into account taxes when you’re doing this.

You can then start subtracting your variable and fixed expenses that are expected for the upcoming month. This is where you will likely be able to identify where you’re overspending, whether it’s on food, entertainment or travel. Once you’ve completed this, you can begin cutting back where you need to. Then, use your surplus cash to pay off your debt one month at a time.

It shouldn’t matter if you’re dealing with substantial credit card debt or not. A monthly spending budget should always be a part of how you manage your finances. While this is likely the slowest way to eliminate debt, it’s also the most financially sound. At its core, it attempts to fix the problem without taking funding from an outside source. This should leave very little financial strife in the aftermath of paying off your debt.

Professional Debt Counseling

Perhaps since you’ve found yourself in serious debt, you feel like you want professional help getting out of it. Well the National Foundation for Credit Counseling® (NFCC®) is available for just that reason. The NFCC® has member offices all around the U.S. that are certified in helping you consolidate credit card debt.

These counselors won’t only address your current financial issues and debt. They’ll also work to create a plan that will help you avoid this situation again in the future.

Agencies that are accredited by the NFCC® will have it clearly displayed on their website or at their offices. If you’re not sure where to look, the foundation created an agency locator that’ll help you find a counselor nearby.

Borrow From Your Retirement

Taking money early from your employer-sponsored retirement account obviously isn’t ideal. That’s means borrowing from your retirement is a last-ditch alternative. But if your credit card debt has become such a handicap that it’s affecting all other facets of your life, it is a viable option to consolidate credit card debt.

Because you are technically loaning money to yourself, this will not show up on your credit report. Major tax and penalty charges await anyone who has trouble making payments on these loans though. To make matters worse, if you quit your job or are fired, you’re typically only given 60 days to finish paying it off to avoid incurring a penalty.

Tips To Consolidate Credit Card Debt

  • If you take the time to come up with a budget, don’t let it go to waste. While you might find it tough to stick to, especially if you’re trying to cut back, it is the best way to manage your money correctly. Even if a budget becomes habit, stay vigilant with where your money is being spent.
  • Although a financial advisor will cost money, he or she might be able to help you keep your finances in check while ultimately helping you plan for the future as well. However, if this isn’t an option for you financially, stay on track with your NFCC® debt counselor’s plan.
  • There are so many ways to gain access to your credit score that there’s virtually no excuse for not knowing it. It doesn’t matter if you do it through one of the top three credit bureaus, FICO® or one of your card issuers. Just remember to pay attention to those ever-important three digits as often as possible.
Chris Thompson, CEPF® Chris Thompson is a retirement, savings, mortgage and credit card expert at SmartAsset. He has reviewed hundreds of credit cards and loves helping people find the one that best matches their financial needs. Chris is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. He graduated from Montclair State University where he received the Journalism Achievement Award. Chris’ articles have been featured in places like Yahoo Finance, MSN and Bleacher Report. He lives in New Jersey and is a Mets, Jets and Nets fan.
Read next article

Categories

Source: smartasset.com

How to Avoid Racking Up Debt During the Holidays

The holidays bring a lot of excitement and cheer. But is also a time characterized by a lot of spending. Statistics show that holiday spending goes up every year in the last few years. Unfortunately, holiday expenditure can take a big chunk out of your credit card.

It may feel great while the holidays last but the feeling may not last when you find yourself up to your neck in debt accrued during the holidays. Debt can mess up your life and interfere with your plans especially at the beginning of the year. The question is; can you still enjoy the holidays and still manage to keep off unnecessary debt? Yes indeed! Here are proven ways on how to avoid racking up debt during the holidays.

Avoiding Debt During the Holidays

Work with a Budget

A budget helps you to plan for the available resources and keeps you from doing spontaneous shopping. In your budget, categorize your spending and set money allocation for each item. This can help you have a general figure of the amount that you want to spend and also help you to know where to give more weight. A budget would be worthless if you don’t stick to it; be sure to strictly adhere to it and you will be grateful.

Use Cash to Pay for Expenses

Holiday debts result from credit cards and other loans. Research shows that people who use credit cards for shopping are likely to use many times more money than those that pay cash. There are different ways in which you can put aside some cash for the holiday:

  • Sell stuff that you don’t need in the house. This can be furniture, play gear for kids, electronics, kitchen gadgets, etc. As long as they are in good condition and someone can put them into good use, they are better off bringing you some cash.
  • Set up a holiday account early in advance
  • Use your Christmas bonus to boost your expenditure.
  • Cut cost on your normal expenditure to save for the holidays

Adopt Cost-Effective Holiday Events

Taking your family for a cruise around the Caribbean Islands and lodging in 5-star hotels is a great idea. However, if you will still be struggling to pay the debt come next year; it is time to re-evaluate your options. You can still have a memorable holiday with your family and friends without necessarily breaking the bank. Here are some cost-effective options:

  • Spend time with your family and friends at home and in the process share meals and gifts
  • Plan for traveling at a time when it is likely to be less expensive and save towards it
  • Consider Picnics and Parties

Save on gifts

Buying gifts for all your family, friends and other important people in your life can turn out to be one big expensive affair and especially if you don’t have enough cash set aside to cater for this. However, you can also make the gifts genuine, thoughtful, and memorable at a relatively low cost using the following tips:

  • If you are in the service industry, offer a free session of your services as a gift
  • Get creative and make gifts such as cards for your children’s teachers, boss, workmates etc.
  • Instead of buying a gift for each of your friends, bring them together and cast lots where each buys a gift for one and gets one from another
  • When coming up with a list of gifts to buy, include other options of about the same cost to avoid spending more in case the first choice goes out of stock or is unavailable

Shop Early

Shopping early helps to spread out your spending and also gives you time to shop for great deals. Since holidays are already fixed, come up with a list of everything you need to buy and start buying. Be on the lookout for discounts and offers such as the end of summer sales and stock up on items with the best deals.

The Bottom Line

The Holidays don’t have to leave you with the bitter after taste of racked up debts. With proper planning, a few adjustments, and being flexible enough to accommodate cost-effective ideas, you can still enjoy your holiday without disrupting your future financial plans.

Source: creditabsolute.com

Should You Pay Down PMI or High-Interest Debt First?

Should homeowners eliminate their Private Mortgage Insurance (PMI) payment or focus on high-interest balances? Getting it right is essential to a healthy financial bottom line.

By

Laura Adams, MBA
February 26, 2020

buy a home or refinance an existing home loan, the last thing you want to hear is that you have to pay an additional charge, called private mortgage insurance or PMI. You might feel even worse when you find out that this insurance protects the lender, not you!

Borrowers have to shell out for PMI when they get a conventional mortgage but can’t put at least 20% down. The amount you borrow to buy a home is called the loan-to-value (LTV) ratio. For example, if you borrow $180,000 to buy a home valued at $200,000, you have a 90% LTV ($180,000 / $200,000 = 0.90)

Borrowers have to shell out for PMI when they get a conventional mortgage but can’t put at least 20% down.

When your LTV on a home mortgage is higher than 80%, lenders consider you to be a bigger risk than if you borrowed less. The lender mitigates that risk by requiring you to purchase PMI. The policy would cover a portion of their loss if you didn’t pay your mortgage and foreclosure proceeds don’t cover your outstanding loan balance.

However, there’s a bright side to paying PMI. It makes it possible for many borrowers who can’t afford to put 20% down to buy a home. And it can be eliminated at certain LTV thresholds, which we’ll cover.  

What’s the cost of PMI?

The cost of PMI varies depending on many factors. These include the type of mortgage you get, how much you put down, where the property is located, your credit, your loan term, and how lenders structure your PMI fee. In general, there are three ways lenders charge PMI:

  1. Monthly payments – which get added to your monthly mortgage payments. The premium could range from 0.2% to 1.5% of the balance on your loan each year. The annual cost is typically divided into 12 premiums and added to your monthly payments.
     
  2. Lump-sum payment – is a one-time premium that you pay upfront at closing. You may also pay both upfront and monthly premiums.
     
  3. Higher interest rate – a lender may charge a higher interest rate instead of itemizing separate PMI charges.

Monthly payments are the most common way that borrowers pay for PMI. Let’s say you get a 30-year, fixed-rate mortgage for $180,000 to buy a home valued at $200,000. With a 90% LTV and good credit, your PMI could cost about $100 per month.

Paying monthly PMI gives you the most transparency about the charge. It gets itemized on your mortgage statement, so you know exactly how much you’re paying. And more importantly, you can see when it finally gets eliminated, which we’ll cover next.

If your lender offers more than one way to pay PMI, ask for a detailed pricing comparison so you can weigh the pros and cons.

If you make a lump-sum PMI payment, it could turn out to cost more or less than the other options, depending on whether you choose to pay off your mortgage ahead of schedule. If you sell your home after just a few years or pay off your mortgage early, you don’t get a return of any PMI premium.

Since mortgage interest is tax-deductible, the option to pay a higher interest rate instead of separate PMI payments could cost less on an after-tax basis. Also, PMI is currently a tax-deductible expense, although there have been periods when it wasn’t. At the end of the year, lenders send out Form 1098, which lists how much PMI and mortgage interest you paid during the year so that you can claim it on your tax return.

However, you can only claim these deductions if you itemize them using Schedule A. When your total itemized deductions are less than the standard deduction for your tax filing status, you’ll save money claiming the standard deduction instead.

As you can see, knowing which option is best for paying PMI can be a bit complicated. If your lender offers more than one way to pay it, ask for a detailed pricing comparison so you can weigh the pros and cons and consider which option may cost less.

Rules for eliminating Private Mortgage Insurance

Now that you understand why and how lenders charge PMI, let’s review the rules for getting rid of it. That will help you know how high a priority it should be.

You should receive an annual notice from your mortgage lender that reminds you about your options to have PMI eliminated under certain conditions. Here are the ways you can get rid of monthly PMI payments.

When your mortgage balance reaches 78% of the original value of the property, PMI must automatically be canceled.

Request cancelation. After you pay down your mortgage balance to 80% of the original value of your home, you can ask for PMI to be canceled. Your original value can be either the price you paid for your home or its appraised value when you bought it (or refinanced it), whichever is less.

Your lender will require you to pay for a property appraisal to verify that your home’s value is the same or higher than when you purchased it. The appraisal fee could range from $300 to $1,000, depending on the size and location of your home.

Automatic termination. When your mortgage balance reaches 78% of the original value of the property, PMI must automatically be canceled. In this case, you don’t have to request it or pay for an appraisal.

Midpoint termination. When your mortgage balance reaches its midpoint, PMI must be automatically canceled. For example, if you have a 30-year mortgage, your lender must cancel your PMI after 15 years.

But keep an eye out for situations that might allow you to cancel PMI early, like when your home value appreciates due to market conditions. When your home value goes up, it lowers your LTV. Likewise, if you make additional mortgage payments that reduce your principal loan balance, it lowers your LTV. The faster you get to the 78% threshold, the sooner you can request a PMI cancellation.

Keep an eye out for situations that might allow you to cancel PMI early, like when your home value appreciates due to market conditions.

However, be aware that your lender can deny your request for PMI cancelation in certain situations, such as if you’ve made late payments. You must get current on any outstanding payments to have PMI canceled either as a request or automatically. Also, don’t forget that taking out a home equity loan or line of credit increases your LTV.

When should eliminating PMI be a financial priority?

Now that you understand when you must pay PMI and when you can eliminate it, let’s turn to Danielle’s question. She’s considering whether to send extra money to her mortgage and get closer to canceling PMI or if it’s better to pay off her student loan or car loan faster.

First, I’d recommend that Danielle zoom out and look at any other top financial priorities. She didn’t mention if she’s regularly contributing to a retirement account or has emergency savings. If she doesn’t have a healthy emergency fund, or she isn’t investing a minimum of 10% to 15% of her gross income for retirement, that’s where her extra money should go first.

We know that Danielle doesn’t have any dangerous debts, such as accounts in collections, credit cards with sky-high interest rates, or expensive payday loans. If she did, those would need attention before addressing any other type of debt. As she mentioned in her question, it’s generally best to pay off debt in order of highest to lowest interest rate.

So, assuming that Danielle’s finances are in good shape, how does paying PMI compare with a student loan and a small auto loan balance? While ongoing PMI payments aren’t an interest expense, you can pretend that they are as a technique for understanding their place in your financial life.

Let’s say you borrowed $180,000 for a $200,000 home, giving you a 90% LTV. As I previously mentioned, you need a 78% LTV to request PMI cancellation. So, you’d have to pay down your mortgage to $156,000 to get there. If you’re at the beginning of a loan term, you’d need to shell out $24,000 ($180,000 – $156,000 = $24,000).

If you were paying $100 a month or $1,200 a year for PMI, you could calculate it as a proxy for annual interest on a $24,000 loan. That comes out to an effective interest rate of 5% ($1,200 / $24,000 = 0.05). That’s an amount you’re paying on top of your mortgage interest rate. So, if your mortgage costs 4% in this example, you’d really be paying more like 9% during the years that you pay PMI.

The benefits of accelerating mortgage payments to get rid of PMI decrease if you’re able to deduct mortgage interest and PMI on your taxes.

However, this is an imperfect calculation because it’s doesn’t account for many factors. These include how much extra you pay toward your principal mortgage balance, how quickly equity builds as you prepay it, and any home appreciation.

Also, the benefits of accelerating mortgage payments to get rid of PMI decrease if you’re able to deduct mortgage interest and PMI on your taxes. A fixed-rate mortgage that costs 4% may only cost you 3% on an after-tax basis, depending on your effective income tax rate.

In general, prepaying a mortgage to eliminate PMI ahead of schedule may not help you as much as paying down other types of debt. Depending on where you live, factors such as real estate appreciation and general inflation are likely to work in your favor, making you eligible for PMI cancellation sooner than you may think.

A super simple way to evaluate the interest rate you’re paying for a mortgage with PMI is to tack on a percentage point or two. For instance, if your pre-tax mortgage rate is 4%, consider it actually costing you 5% to 6% tops. Or if you deduct interest and PMI, don’t factor in the tax implications and just consider the mortgage costing you the same as its stated interest rate, or 4% in my example.

If your other debts cost more than these very rough mortgage interest calculations, I’d be aggressive about getting rid of them first. Again, go in order of highest interest rate to lowest.

However, if you have a small outstanding balance that you just want to wipe out, there’s nothing wrong with that. Even if it costs you slightly less in interest, sometimes it just feels good to get rid of a small debt that’s been weighing you down.

What’s most important is that you understand how much you owe, the interest rates you’re paying, and that you have a plan for eliminating debt. Even if you don’t have extra money to pay off debt ahead of schedule, tacking them in the right order helps you save the most interest so you can eliminate debt as quickly as possible.