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Pay off mortgage with HELOC
Old 04-24-2014, 11:28 PM   #1
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Pay off mortgage with HELOC

I refinance in 2010 November, for the amount of $376,000 at 3.625% 15 years, last month March 2014, I make a one time payment of $200,000 to pay down my mortgage and it is down to $107,000, would it make sense to use my home equity line of credit to pay off the remaining balance, the term is 1% for the 1st year, 2% for the 2nd year, and 4.5% after the 2nd year, no closing cost and early prepayment, my intention is to pay off the loan within the 2 years period to take advantage of the low initial percentage? Anything I have to be aware of? Thanks in advance
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Old 04-25-2014, 07:03 AM   #2
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If the HELOC minimum payment after year two greatly exceeds the current mortgage payment, think through how you would handle the cash flow requirements in the event of a financial disaster: loss of job, disability, etc.

I did something somewhat similar to what you propose three years ago, refinancing a mortgage balance into a 5-year Penfed HE loan. (currently offered at 3%.)

Payments went up significantly, but I was enticed by the idea of a forced march to paying off the house in 5 years. Unfortunately, last year my wife left her part-time job and we faced unexpected cash flow needs. I was able to refinance one more time to get back to a monthly payment that better fit our revised budget, but this would not have been possible if I had been the one with a health issue and no job.

YMMV, particularly if you have liquid resources in taxable accounts that are comparable to your mortgage balance.
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Old 04-25-2014, 10:55 AM   #3
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We did this in early 2000's, maybe 2003, I think. We had a 7% mortgage with only $20,000 or so left on it and the rates had dropped. I called our mortgage company and they said they didn't refinance such small amounts but suggested that a HELOC would be a low rate with no closing costs. I shopped around and we ended up paying off our very small mortgage with a 3.5% variable HELOC. After a few years the rate climbed up and we paid off what was left with a low rate credit card, 2.99% for a year and then dropping to 1.99% for the life of the balance. Paid that all off rather quickly.

The only catch to a HELOC is that they are usually variable rates. Ours stayed nice and low for a while and then climbed every quarter until it no longer made sense to keep it. With ours the minimum payment was just the interest. We always paid it like a regular mortgage payment.

One more thing. If your current mortgage payment includes property taxes and home owners insurance paid to an escrow account you will need to take care of those things yourself. I set up a monthly transfer to an online savings account for the amount equal to 1/12th of the taxes and insurance so that it felt just like the when it used to be included in the mortgage payment. Also, let your county and insurance company know to send the bills to you instead of your mortgage company.
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Old 04-25-2014, 11:23 AM   #4
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One other consideration....it may not apply to you, but might.

You may want to expand the scope beyond optimizing the mortgage and consider the larger tax picture.

For instance, if paying more on the house now would cause you to pull more money out of a traditional IRA or 401k, it might not be a good move. For instance, say you could spend out of after-tax accounts for 10 years if you 'paid as agreed' on your current mortgage, but that duration would shorten to 5 years if you paid off the house. That would move you from having 10 years of the highest flexibility to manage income to only 5 years. When I say "manage income", I mean converting traditional IRA to Roths, getting ACA subsidies, etc.

When you look at the big picture, you may decide a cash-out refi is in order, hehe.
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Old 04-25-2014, 01:36 PM   #5
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Thanks for all the excellent tips.
My intention is to paid off my loan within the first 2 years introductory rate, 1% 0-12 months, 2% 13-24 months, so I should never see the 4.5%, I am planning to pay ~$5,000 per months towards the loan.

As for the retirement contribution, I max out my ROTH and 401k for the last 20 years, in fact, in 2012, I contribute too much towards the 401k, I cannot make any contribution on my last 2 paycheck and I miss out the company's 6% matching and loose a couple hundred dollars.

Also after the loan is payoff, I should be close to 50 years old, and I will be eligible for the catch up contribution on both the 401k and ROTH IRA.
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Old 04-25-2014, 07:02 PM   #6
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quote I contribute too much towards the 401k, I cannot make any contribution on my last 2 paycheck and I miss out the company's 6% matching and loose a couple hundred dollars.//quote
To solve that problem reduce your payments in the middle of the year to the 6% matching level then increase them so you hit the max contribution on your December payment.
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Old 04-25-2014, 08:28 PM   #7
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Originally Posted by lemming View Post
quote I contribute too much towards the 401k, I cannot make any contribution on my last 2 paycheck and I miss out the company's 6% matching and loose a couple hundred dollars.//quote
To solve that problem reduce your payments in the middle of the year to the 6% matching level then increase them so you hit the max contribution on your December payment.
On that particular year, by the time I realize I contribute too much, it is too late already, so last year and this year, I start off low and will increase it towards the end of the year.

BTW, I just went down to the bank and do all the paper work for the HELOC.
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Old 04-25-2014, 09:45 PM   #8
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On that particular year, by the time I realize I contribute too much, it is too late already, so last year and this year, I start off low and will increase it towards the end of the year.
Does your 401k allow after-tax contributions? If so, that may help fix your matching problem. Our plan automatically converts to after-tax after the pre-tax amount is reached.

It will also allow for the after tax contributions to be converted to a Roth IRA. The beauty is that the IRS lets you contribute up to $52,000 per year to a 401k after-tax. That is a lot of money to funnel to a Roth IRA.

-gauss
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Old 04-28-2014, 11:09 AM   #9
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Who is the lender with 1% for months 1-12, 2% for 13-24%?

Pretty good deal, though I don't love the 4.5% thereafter.
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Old 04-28-2014, 02:19 PM   #10
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