Should I pay off my mortgage with an equity line?
Filed under: Debt, Home, Mortgage Confidential
With equity line rates lower than mortgage rates, some readers are wondering if it would be better to pay off their mortgage using their equity line. In some cases that might be true, especially since I expect interest rates to stay low for at least a year. But, if you do decide to use this strategy, be ready to jump back into a fixed rate loan when interest rates start to go back up.Here's a good question on the topic by one of our readers:
My husband is 72 and I'm 66. We have $69,000.00 left on a mortgage with 8.5% interest and a home equity loan with $95,000.00 available with a very, very low interest rate. Our home is worth (on a good day) about $850,000.00. Is it wise for us to pay off the mortgage with the home equity loan? Is interest on the home equity loan tax deductible?
We took out the mortgage to help out a daughter buy a house only to have the husband run off leaving us with the mortgage to deal with. Barbara
Barbara, sorry to hear you're stuck with debt, but in your case based on the information you've given me it would be a good idea to pay off the 8.5% mortgage loan with a low interest equity line. That way you could avoid the costs of refinancing the 8.5% mortgage. Home equity loan interest is tax deductible in most cases up to the value of the home. But, do keep your eye on interest rates. If you do see them creeping up before you are near to paying off that debt, then think about applying for a fixed-rate loan.
If you are considering paying off a high-interest mortgage with a low-interest equity line, here are some things you should review first:
1. How much interest are you actually paying on your mortgage? You pay a large portion of the interest on an amortized loan like a mortgage during the first half of the loan. As you get nearer to the end of the loan, you may be paying primarily principal. So compare your anticipated monthly interest costs of the equity line with the monthly interest costs of your current mortgage. If you don't get a monthly statement showing the amount you are paying toward principal and the amount your are paying toward interest, ask your bank for the breakdown.2. Does your equity line or loan have a fixed or variable rate? Most equity lines have variable rates. So, while rates are very low right now, don't expect the Federal Reserve to leave the rates this low for long. You can probably count on about one year at most before you'll see the Fed start raising rates.
3. Would it make sense to lock in a low fixed rate mortgage rather than use an equity line? While equity line rates look low right now they won't be for long. A fixed rate for 15 to 30 years will look a lot better in a year or two as interest rates creep back up. You probably won't see 4.5% to 4.75% fixed-rate loans for long. So if you do have a sizable mortgage debt, you probably would be better off locking in a fixed rate.
Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score."
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Reader Comments (Page 1 of 1)
1-27-2009 @ 1:00PM
Tim said...
I have a $65,000 mortgage 6.13% and $25,000 that I used for home remodel on a credit card @ 2.99% both fixed rates. I can currently obtain a 2.60% or prime - .60% for $90,000 home equity line and pay off my first mortgage. I intend to pay off the equity line with the same monthly payment as my first morgage an pay it off in about 5years if the rate stays under 5%. Do you think this is resonable and should I consider doing it next month?
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1-27-2009 @ 10:19AM
George said...
Tim, I would recommend doing just that however, I would encourage you to apply the money you are presently paying towards your credit card and pay that towards the home eq as well. This will allow you to pay off the eq within 48 months. Keep in mind that I don't expect that the rates will increase much within the next 24 months. By that time you will have eliminated enough of the principle that when the rates do increase it should not be significant enough to effect your monthly cost. Three thoughts to help you meet your goal: Sacrifice, do without today. Discipline, stay with your plan. Patience, consider the end results.
1-27-2009 @ 5:21PM
frannk said...
I HAVE A BALANCE OF $82.000 ON MY MORTGAGE,THE HOME VALUE IS $185.000
THE LOAN RATE IS 6.80% FIXED FOR 30 YEARS.
I HAVE THE CASH NOW TO PAY THE LOAN.
DO I PAY OFF OR KEEP MONEY ON A CD??
Reply
1-27-2009 @ 11:39AM
Karen said...
Unless your CD is paying better than 6.8%, you should pay it off now. Why make $100.00 interest only to pay %150 on mortgage interset. Always pay off the mortgage if you are backwards.
1-27-2009 @ 1:32PM
nicky said...
I am going back to school in September. I also have a school loan for $10,000 - which I just started paying off at $82/month. I have a condo valued at $350,000 with a mortgage of 6.275%. I have $89,000 left on my mortgage to payoff. I currently work for a temp agency - not regular income. I have an equity line of credit worth $150,000 at 3.75%. I would like to use some of my line of credit to go back to school, and pay off my credit card bills. Do you think I should touch my line of credit. I am really confused and could use some help.
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1-27-2009 @ 2:11PM
Lois said...
My husband is unemployed, at this time, and is going to school.
We have a first mortgage, with a balance of 116,000. The house is valued at 360,000. The interest rate is 5.75, and we are 5 years into the 30 year loan. We have an interest only home equity loan of 50,000. We have another 166,000, that we can pull out of the home equity loan. My husband is getting unemployment at this time, and is going to school. Would it make sense for us to pull out the rest of the money, and pay off the first mortgage, and use the rest for helping us with his school tution, and living expences. He may need to go to school for 1 1/2 years, for a degree, and he just started 3 weeks ago. We really need help, with this decision.
Reply
1-27-2009 @ 2:27PM
lois h said...
My husband is unemployed, at this time, and is going to school.
We have a first mortgage, with a balance of 116,000. The house is
valued at 360,000. The interest rate is 5.75, and we are 5 years
into the 30 year loan. We have an interest only home equity loan of
50,000. We have another 166,000, that we can pull out of the home
equity loan. My husband is getting unemployment at this time, and is
going to school. Would it make sense for us to pull out the rest of
the money, and pay off the first mortgage, and use the rest for
helping us with his school tution, and living expences. He may need
to go to school for 1 1/2 years, for a degree, and he just started 3
weeks ago. We really need help, with this decision.
Reply
1-27-2009 @ 2:31PM
lois h said...
My husband is unemployed, at this time, and is going to school.
We have a first mortgage, with a balance of 116,000. The house is
valued at 360,000. The interest rate is 5.75, and we are 5 years
into the 30 year loan. We have an interest only home equity loan of
50,000. We have another 166,000, that we can pull out of the home
equity loan. My husband is getting unemployment at this time, and is
going to school. Would it make sense for us to pull out the rest of
the money, and pay off the first mortgage, and use the rest for
helping us with his school tution, and living expences. He may need
to go to school for 1 1/2 years, for a degree, and he just started 3
weeks ago. We really need help, with this decision.
Confirmation Link
Reply
1-28-2009 @ 11:37AM
JoAnne said...
What is the actual difference between a normal 30 year mortgage and a 30 year fixed equity loan??
I have 2 offers I am contemplating
30 yr fixed @ 5.375 1 pt and clsoing fees
or 5.499 NO points or closing fees
Reply
1-28-2009 @ 11:38AM
Joanne said...
What is the difference between a 30 year fixed rate mortage and a Home Equiy LOAN with 30 year fixed rate?
I have 2 offers on the table
30 year fixed rate 5.375 WITH 1 point AND closing fees
or a
30 Year fixed rate 5.499 Home Equity Loan with no points and closing fees with a different bank
Reply
3-22-2009 @ 7:16PM
Ann said...
If you have money to pay off your mortgage do it! How much is going to be the income from a cd? and how much money you are going to save per month compared with your mortgage payment? You can also live some cash on hand just for an emergency. But having your mortgage paid, it's a thrill.
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