Debt consolidation

[golfnut]

Just wondering if this is a good idea. We have a 15 yr. mortgage with a rate of 4.75% fixed. We are 6 1/2 years into it and the balance is $63,000.

Also, we have equity line of credit with a balance of $20,000 at 3% variable rate.

Would it be a good idea to pay off the mortgage with the equity line of credit?

Note we have the cash to pay off the all these debts ($83,000) but I do like keeping the cash for the rainy days that might crop up in the future?

Any insights here would be most appreciated.

Thanks,
Golfnut

 

[Major Tom]

Beware of variable interest rates for the simple reason that they vary. Is there a cap on how high the interest rate on that equity line of credit can go? Sounds to me like there is potential for it to be much higher in the future than the 4.75% you're currently paying on your mortgage.

Look at the terms of that equity line of credit and make your decision from there. If you'd prefer to keep the 83K in cash, then from the info you have given us it sounds like the best way to go is to keep things as they are and keep paying that mortgage.

You can always make slightly bigger mortgage payments in order to pay it off faster if you like.

 

[golfnut]

Beware of variable interest rates for the simple reason that they vary. Is there a cap on how high the interest rate on that equity line of credit can go? Sounds to me like there is potential for it to be much higher in the future than the 4.75% you're currently paying on your mortgage.

Look at the terms of that equity line of credit and make your decision from there. If you'd prefer to keep the 83K in cash, then from the info you have given us it sounds like the best way to go is to keep things as they are and keep paying that mortgage.

You can always make slightly bigger mortgage payments in order to pay it off faster if you like.

Thanks for the response. You must have the right answer since you are the only one that responded.

 

[Gumby]

I have been asking myself the same question. (5% mortgage, 6 years remaining, $96k balance; a (currently zero balance) variable rate HELOC [prime minus 0.75%, with a 3.25% floor -- where it is now -- and 18% ceiling]; and could easily sell stock in sufficient amount to pay off the loan). Ultimately, I decided that the risk of a HELOC rate increase outweighed the potential interest savings and I didn't want to be forced to sell stock in a rising interest rate environment.

If you do contemplate going ahead on this, you should check your HELOC note to ensure that paying off the first mortgage does not result in acceleration of the HELOC. If that proves to be the case, then the scheme won't work.

 

[golfnut]

Gumby,

Thanks for the advices. BTW, are you the same Gumby that posts on the Boglehead forum? Just wondering.

 

[Gumby]

I limit my online activity to this forum. Since I am still w*rking, I don't really have the time to do more.

 

[survivor1998]

The advice they have given you seems sound. The interest deduction is one tax advantage that you will lose; however, I have been told to pay off your mortgage before you retire. SS is decreasing and will eventually become obsolete for those of us under 55 so we will be forced to have our mortgages paid off.

 

[chinaco]

On the variable rate heloc as rates move up, so will your interest rate.

What do you think will happen to variable rates in the next 2 or 3 years?

It is anyone's guess... but I figure they are as low as they will be and they will head upwards.

I was in a similar situation. I had a sizable emergency fund (earning little)... I paid off the house. However, I still maintained some emergency money.

Conventional wisdom on emergency funds is around 6 mos of expenses. Of course, it always depends on ones situation.

It seems that financial emergencies are unexpected expenses or interrupted income (sometimes they are short-term in nature... cash crunch).

If you paid off the fixed loan, the loan payment would not be an obligation if your emergency were income interruption... thereby reducing recurring expenses.

If you emergency were unexpected expenses, and you are still working... you could possibly us a HELOC to get money (at a decent rate).

If you lost your job and got hit with high unexpected expenses (perfect storm)... then cash is often the best solution.

You could take a middle ground approach and pay down the 4.75% loan (say by 1/2). If the variable rate loan increase above the 4.75% in the next year or so... pay it off.

 

[jasg]

Mortgage vs Line of Credit

Hello,

I'm pretty naive when it comes to credit use, have always been more of a saver than a borrower. I've only owned one home and tend to keep cars for a long time so I rarely have much in the way debt payments.

My question is "Should I pay off my mortgage with a LOC I just opened?".

Five years left on the mortgage, LOC has a much lower rate (by nearly 2%) so I would save roughly $5k in interest - at current rates.

I see a risk if interest rates rise since the LOC will ratchet upwards, but is there anything else to worry about?

(I am 61 and semi-retired at the moment - looking for employment, but don't expect things to change quickly)

TIA, jasg

 

[brewer12345]

The risk is that short term rates start rising and the rate on the LOC ramps up. Do you want to take this risk? The reward is a 2% rate reduction.

Personally, I chose to refi from a 15 year fixed mortgage to a 5/5 ARM. I got a large rate reduction, a much lower scheduled payment, and I expect to pay the mortgage off completely a bit after the rate adjusts.

 

[Animorph]

I like the lower interest, but there is obviously some interest rate risk there. Good luck trying to predict when rates will rise. If the LOC rate lasted for one year and then started to rise, could you pay off the entire amount?

I think my prefered path would be to keep the LOC in reserve and invest it if the market tumbles within the next year.

 

[Gumby]

I merged these two closely related threads.

 

[golfnut]

The risk is that short term rates start rising and the rate on the LOC ramps up. Do you want to take this risk? The reward is a 2% rate reduction.

Personally, I chose to refi from a 15 year fixed mortgage to a 5/5 ARM. I got a large rate reduction, a much lower scheduled payment, and I expect to pay the mortgage off completely a bit after the rate adjusts.

Thanks for the response. My equity line of credit is Prime minus .25%. We do have the cash to pay it off if the Prime spiked up. Just curious if anyone knows what the largest single day spike in the prime has been?

 

[growing_older]

You mention that your mortgage only has 5 years left to go. So assuming you are going to pay it off in 5 years or less, you can use the HELOC to pay it off now and effectively convert your 5 year fixed rate loan to a 5 year (or less) variable rate loan, current interest rate 2% lower than your old rate. I have to believe that in the current situation, rates have no where to go but up, but I'm not so sure that they are shooting up anytime soon. Probably you have a year before they move much. In a year you can pay the HELOC down as much as possible and so even when rates start to rise you may be so far ahead that it won't hurt you. It's a risk, certainly. OTOH if your longer term goal is to pay off this mortgage (not all that long term, only 5 years) then by switching to a HELOC you give yourself a break on interest rates AND an incentive to pay it down as fast as you can to avoid the rising rates you expect will eventually come. Personally, I'd do it. You may have to consider if having the HELOC would help or hinder your efforts to reduce and ultimately eliminate debt. Some people find it difficult to avoid taking more money out of a HELOC once it is available, which would defeat the whole plan and make the specter of higher rates even more frightening.

 

[growing_older]

I think my prefered path would be to keep the LOC in reserve and invest it if the market tumbles within the next year.

I'm having trouble understanding this strategy. I think it hinges on being uncertain about interest rate movements in the future, so avoids the move into a variable rate for home mortgage. But it also presumes that there is some ability to predict price movements in the equity markets, so the increased debt can be used to take advantage of equity buying opportunities. My inclination is to assume that I cannot predict either of these markets, although I do believe that interest rates will eventually have to rise, as there isn't any lower left for them to go. Maybe deflation, I suppose. Taking on new debt to bet on equities scares me more than trying to guess how soon interest rates will rise. Perhaps the potential reward is also greater, but the risk is too much for me to sleep well.

 

[Finance Dave]

I'm having trouble understanding this strategy. I think it hinges on being uncertain about interest rate movements in the future, so avoids the move into a variable rate for home mortgage. But it also presumes that there is some ability to predict price movements in the equity markets, so the increased debt can be used to take advantage of equity buying opportunities. My inclination is to assume that I cannot predict either of these markets, although I do believe that interest rates will eventually have to rise, as there isn't any lower left for them to go. Maybe deflation, I suppose. Taking on new debt to bet on equities scares me more than trying to guess how soon interest rates will rise. Perhaps the potential reward is also greater, but the risk is too much for me to sleep well.

I agree. IMO using a LOC to invest in the market is akin to gambling. Very risky. The LOC is secured by your home. Putting up a secured asset to invest in the market ....not something I would do....but to each his/her own.

 

[ERD50]

IMO using a LOC to invest in the market is akin to gambling. Very risky. The LOC is secured by your home. Putting up a secured asset to invest in the market ....not something I would do....but to each his/her own.

OK, but I think it is different under this scenario....

We do have the cash to pay it off if the Prime spiked up.

it is still a 'gamble' as to whether your investments will out pace the cost of the money, but I don't see it as especially 'risky'.

-ERD50

 

[BUM]

As an old fogie my attitude is no debt is better than any debt, especially when planning retirement.
A simple strategy (DW and I did this) is make double or triple payments. You'll be debt free in a few years. Its a good feeling.

 

[W2R]

As an old fogie my attitude is no debt is better than any debt, especially when planning retirement.
A simple strategy (DW and I did this) is make double or triple payments. You'll be debt free in a few years. Its a good feeling.

This has been my approach as well. I'd prefer to buckle down and get out from under ANY debt, to worrying and stressing over which kind of debt I'd prefer. But 99.999999% of Americans seem to think that anyone with this type of thinking must be from outer space.

 

[Meadbh]

Just wondering if this is a good idea. We have a 15 yr. mortgage with a rate of 4.75% fixed. We are 6 1/2 years into it and the balance is $63,000.

Also, we have equity line of credit with a balance of $20,000 at 3% variable rate.

Would it be a good idea to pay off the mortgage with the equity line of credit?

Note we have the cash to pay off the all these debts ($83,000) but I do like keeping the cash for the rainy days that might crop up in the future?

Any insights here would be most appreciated.

Thanks,
Golfnut

Golfnut, I'm guessing that since you live in the US, your home mortgage interest is tax deductible. I'm going to assume that makes it about 1/3 cheaper, meaning that your real interest rate on the home mortgage may be of the order of 3%. Now you are comparing a fixed mortgage at a real rate of 3% with a variable rate HELOC at 3%. Is the interest on the HELOC also tax deductible? If it's not, then the loan I would pay down is the HELOC. Interest rates in the US are at historic lows and there is a 99.9% probability that they will go up. In Canada we have had two rate hikes already, each of 25 basis points.

I would see the variable rate HELOC as the first priority to pay down ASAP, followed by the fixed 4.75% fixed mortgage as circumstances allow.

I myself have a variable rate HELOC and several fixed rate mortgages on investment properties (all interest tax deductible) and I am gradually whittling away at the HELOC first while its interest rate remains lower, because I see it as a ticking time bomb.

 

[growing_older]

You can use that "ticking time bomb" as motivation. I paid off my mortgage with a HELOC and got a great - but variable rate. OMG, I was very motivated to pay that thing off before rates shot up and hurt me.

 

[rayvt]

This has been my approach as well. I'd prefer to buckle down and get out from under ANY debt, to worrying and stressing over which kind of debt I'd prefer.

Worry & stress? If you are on top of things, there's little of that. And I would guess that most people who are serious about FIRE are on top of things.

Mortgage at 4.25%
Car loan at 3.99%
Portfolio of dividend-paying & preferred stocks yielding 8.9%.

Monthly SS checks go to on-line checking account, from which:
automatic bill-pay sends payments to mortgage & car lenders.

For other living expenses:
Monthly pension check goes to a credit union checking account.
Monthly dividend income automatically gets sent to same account.

All done automatically without any manual intervention.
No buckling down necessary.

 

[golfnut]

I did some legwork on refinancing. Presently have a 3.0% equity line and balance is now around $19,000 and a fixed 15 yr mortgage with a rate of 4.75%, $62,700 balance. On the equity line we pay $500 per month and on the the fixed loan we pay $972 per month.

Bank is offering a 10 yr fixed at 3.75%. I'm tempted to roll all the above into this loan. cost of this loan is $1,700 which could be rolled into loan bringing the total to $83,400.

Good idea or bad? Comments would be welcome.

Thanks,

Golfnut

 

[brewer12345]

The only thing I don't like about it is the 1700 of costs. The other possible sticking point is the higher minimum payment. If this payment might cause you cashflow stress, it might not be worth doing.

Alternatively, Pen Fed offers a HELOC that is fixed for 5 years and adjusts once every 5 years thereafter. They quote the rate at 4.12% and AFAIK the eat all of the origination costs.

I wold plug some alternatives into the Mortgage Professor calculators and see what look best.

 

[golfnut]

The only thing I don't like about it is the 1700 of costs. The other possible sticking point is the higher minimum payment. If this payment might cause you cashflow stress, it might not be worth doing.

Alternatively, Pen Fed offers a HELOC that is fixed for 5 years and adjusts once every 5 years thereafter. They quote the rate at 4.12% and AFAIK the eat all of the origination costs.

I wold plug some alternatives into the Mortgage Professor calculators and see what look best.

Brewer, thanks for the response. Note with the 10 yr fixed at 3.75%, the monthly payment would be $845 with the $1,700 rolled into the loan amount. Presently we are paying $972 + 500 or $1,472 monthly.