Comments on: Pay Down Variable HELOC or Fixed Mortgage?

By: Suzie

Suzie — Sat, 27 Feb 2010 17:41:40 +0000

I think there’s one more complicating factor. Let’s assume, as Steve said, he puts more into the 4.4% mortgage payments, and leaves the HELOC pretty high. That’s fine as long as the HELOC rates are lower. But, when HELOC gets higher, he won’t have the ability to cut his mortgage payments! The bank requires the minimum mortgage payment, even if you’ve cut the principal. So, at some point he may still have to make the minimum mortgage, but now have to also pay off as much of the higher HELOC as possible. If you have enough income to cover, great. But, if not, in long run you’ve dug yourself a deeper hole.

Suzie

By: Monevator

Monevator — Sat, 27 Feb 2010 09:38:02 +0000

@Monevator, Gosh, apologies I've just re-read the post (I skimmed it due to talking about HELOC and other US terms I don't really use) and assumed it was a pay off the 4.4% or save at 2.2% type question. Re-reading and making assumptions about tax, I think he should pay off the higher rate loan first. My final answer! ;) .-= MonevatorÂ´s last blog ..Why does Joe Public love sweatshops? =-.

By: Monevator

Monevator — Sat, 27 Feb 2010 09:35:02 +0000

@Daniel, Wow, you guys need to get rid of mortgage tax relief. We ditched it in the early 1990s. It's unfair to penalize renters just for making a different consumption choice. My view anyway. Anyway, as you say you must take tax into account with these 'foregone savings' type equations (and tax will offer differ from person to person). .-= MonevatorÂ´s last blog ..Why does Joe Public love sweatshops? =-.

By: Financial Samurai

Financial Samurai — Sat, 27 Feb 2010 07:10:51 +0000

Definitely pay off the higher interest rate first. I think the variable HELOC loan will be sub 3.5% for a long time. Rates aren’t going much higher.

I have a similar structure where I’ve arbitraged $100K of a HELOC at 3% to pay down my primary loan principal by $100K.

Rates are so freaking low right now, it’s awesome!
.-= Financial SamuraiÂ´s last blog ..The Curse Of Making Too Much Money And Not Pursuing Your Dreams =-.

By: steve

steve — Fri, 26 Feb 2010 23:00:42 +0000

First, HELOC is the same as a mortgage in terms of tax credit. Both are deductible. So, the actual interest rate on the home mortgage is about 3-3.2% depending on tax bracket, and the HELOC now is about 1.6-1.7%. I don’t understand the recommendation to put money in savings at 2% – remember, you do pay taxes on the interest earned, so the next is about 1.4-1.5%. Why not just pay off the higher 4.4% rate as quickly as possible, and then just switch and pay off the HELOC at whatever point in the next couple of years that it shoots above 4.4%

Steve

By: Daniel

Daniel — Fri, 26 Feb 2010 19:35:06 +0000

@Paul @ FiscalGeek, Awesome, I like your plan, it's fantastic to hear from someone who is having the same experience. Thanks!

By: Paul @ FiscalGeek

Paul @ FiscalGeek — Fri, 26 Feb 2010 19:12:43 +0000

I'm in the exact boat with my 2nd mortgage. I'm hoarding cash to build a full emergency fund on 4 months expenses then I'll attack my fixed rate first. If interest rates get crazy then I'll go after the variable portion. I think they key I would get across is to not even be contemplating the idea of using that home equity account as your buffer. Get it done close it and move on. .-= Paul @ FiscalGeekÂ´s last blog ..Quicken Essentials for Mac Review =-.

By: Little House

Little House — Fri, 26 Feb 2010 17:51:59 +0000

I'm not a financial wiz, but because his HELOC is at such a low interest rate, I think it would better for him to pay it down. That way it will be less debt hanging over his head. He also mentions that the HELOC is at a variable rate, meaning it might increase later in the year. Since his 4.4% mortgage is fixed for 15 years, he has time to pay more towards it down the road. .-= Little HouseÂ´s last blog ..How to Find the Best Place =-.

By: Daniel

Daniel — Fri, 26 Feb 2010 15:55:58 +0000

@Monevator,

Paying off the mortgage is worth LESS – you receive tax benefits on the mortgage interest. That’s an imprtant point, the 4.4% interest rate on the mortgage is probably slightly lower. Still, the question is still a little difficult – variable or fixed?

By: Monevator

Monevator — Fri, 26 Feb 2010 15:35:20 +0000

Hi Daniel,

You need to take tax into account too, from my reading of the situation.

Paying off the mortgage is worth more than 4.4% because the ‘saving’ being made isn’t taxed (though it might be slightly different with you guys in the US, since you get tax relief on mortgages I think?)

In contrast, his 2.2% savings will presumably be taxed?

I agree you don’t want to have no cash though – some liquidity is important, even if as I read this the mortgage payments can effectively be taken back out if a need for cash arises.
.-= MonevatorÂ´s last blog ..Why does Joe Public love sweatshops? =-.