What Debts to Pay Off

Question: My husband and I will receive about $50,000 inheritance. He wants to use the whole sum to pay down our mortgage. I argue that we should pay down the higher-interest credit cards and car loans (about 6k in the former, 28k in the later). He argues that the sooner we build more home equity, the better. I say that we're losing lots of money on these higher interest products. I'm right? He's right? Split the difference? We're in our 40's, both employed in education, and have (hopefully) good retirement accounts. Nancy, Columbus, OH

Answer: First of all, in this case neither of you is wrong--or right. You'll be better off financially whether you decide to pay down the mortgage, get rid of credit card debts and car loans, or compromise on a mix of the two strategies. The bottom line is that you're getting rid of debt and your household balance sheet will be healthier.

That said, I'm with you on this one: From a financial point of view the best use of the money is to get rid of the credit card debts and car loans. Both have a higher rate.

Now, you'll still have some inheritance money left over if you eliminate the short-term debt. You could put that toward principal on your home. Or, in light of the recession, you might want to consider setting it aside in a safe place just in case you need it. You can always invest it in your home once the economy looks better.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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