Whether to Pay Off Home Equity Line?

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Whether to Pay Off Home Equity Line?

Postby jervalaw » Mon May 06, 2013 1:26 pm

Bought townhouse secured by home equity line for $450,000 at 2.2% good for one year then variable. Sold old house and netted about $500,000.00 (basis was $330,000). Also bought beachcondo and have 30 year mortagage at 3.89% with a principal of $550,000.00. My original intent was to pay off home equity line due to the rate only being good for one year. Currently, I am paying about $1,000 in tax deductible interest on the home equity line and $3,300 in mainly tax deductible interest on the condo beach mortgate.

So, should one pay off either one of these with the proceeds?

I guess one could invest the $500,000 and hope to do better than whatever the interest rate turns out to be on the home equity line.

My wife and I both work. Combined income of $200,000.00 with about 2.5 million in retirement savings and $500,000 in other savings. I am 64 and my wife is 58. I intend to retire in 5 years and my wife in 7 years.
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Re: Whether to Pay Off Home Equity Line?

Postby G-Money » Mon May 06, 2013 1:46 pm

What's the margin after the first year of the HEL? How long is the term of the HEL?

If you have a sweetheart deal of, say, Prime - 1% for a 30 year loan, I'd at least consider keeping it. If it's Prime + 1%, I'd pay it off. If it's in between, and you have adequate liquidity, I'd probably pay it off.

Wiki article link: Paying down loans versus investing
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Re: Whether to Pay Off Home Equity Line?

Postby jervalaw » Tue May 07, 2013 7:21 am

The home equity line goes to a 3.9% APR on October 1, 2013.
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Re: Whether to Pay Off Home Equity Line?

Postby ruralavalon » Tue May 07, 2013 7:35 am

Payoff one, double down on the monthly payments on the other.
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Re: Whether to Pay Off Home Equity Line?

Postby YDNAL » Tue May 07, 2013 8:03 am

jervalaw wrote:Bought townhouse secured by home equity line for $450,000 at 2.2% good for one year then variable. Sold old house and netted about $500,000.00 (basis was $330,000). Also bought beachcondo and have 30 year mortagage at 3.89% with a principal of $550,000.00. My original intent was to pay off home equity line due to the rate only being good for one year. Currently, I am paying about $1,000 in tax deductible interest on the home equity line and $3,300 in mainly tax deductible interest on the condo beach mortgate.

So, should one pay off either one of these with the proceeds?

I guess one could invest the $500,000 and hope to do better than whatever the interest rate turns out to be on the home equity line.

My wife and I both work. Combined income of $200,000.00 with about 2.5 million in retirement savings and $500,000 in other savings. I am 64 and my wife is 58. I intend to retire in 5 years and my wife in 7 years.

Let me summarize what I understand.
    1. Owned a $X house that "netted" about $500K (basis $330K) - that doesn't say anything about previous debt (if you had some).
    2. Bought a $Y townhouse and owe $450K line of credit, variable interest after 1 year.
    3. Bought a $Z beach condo and owe $550K, 30 years, 3.89%.
    4. Savings (investments) of $3 Million.
Presumably, using other funds for down payment, you bought 2 properties (#2, #3) and have $500K net proceeds from previous home equity.
  • Is this right ?
  • Is current $1M in debt comparable to previously ?
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Re: Whether to Pay Off Home Equity Line?

Postby G-Money » Tue May 07, 2013 9:56 am

At 3.9% variable, if you have money sitting around in taxable, I'd pay off the HEL. If you have additional liquidity sitting in taxable after paying off the HEL, I'd consider going to work on paying down the mortgage. As you're approaching retirement, there's little sense in paying 3.9% for the privilege of investing on bonds paying less than 2%.

This assumes you are already maxing out all tax advantaged accounts. If you need to dig into your tax advantaged savings to pay off the loans, I would probably wait until retirement to (gradually) pay off the loans, when you'll likely be in a lower tax bracket and will suffer a smaller tax bite when taking the distributions.
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Re: Whether to Pay Off Home Equity Line?

Postby YDNAL » Tue May 07, 2013 10:10 am

G-Money wrote:At 3.9% variable, if you have money sitting around in taxable, I'd pay off the HEL.

I was waiting for confirmation of my understanding before posting, but the above is wrong.

The home equity line is 2.2% and moves to variable after 1 year. The beach condo has a 30-year fixed [presumably], 3.9% mortgage.
jervalaw wrote:Bought townhouse secured by home equity line for $450,000 at 2.2% good for one year then variable. <snip>.... Also bought beachcondo and have 30 year mortagage at 3.89% with a principal of $550,000.00.
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Re: Whether to Pay Off Home Equity Line?

Postby G-Money » Tue May 07, 2013 10:49 am

YDNAL wrote:
G-Money wrote:At 3.9% variable, if you have money sitting around in taxable, I'd pay off the HEL.

I was waiting for confirmation of my understanding before posting, but the above is wrong.

The home equity line is 2.2% and moves to variable after 1 year. The beach condo has a 30-year fixed [presumably], 3.9% mortgage.
jervalaw wrote:Bought townhouse secured by home equity line for $450,000 at 2.2% good for one year then variable. <snip>.... Also bought beachcondo and have 30 year mortagage at 3.89% with a principal of $550,000.00.

My apologies for the lack of precision. I was typing on my phone and was aiming to be as brief as possible. I meant to say OP should pay off the HEL when it goes to 3.9%. In fairness, OP already knows when his/her HEL hits the variable 3.9% rate, so I'm not too worried about misleading him/her when I said to pay off a 3.9% variable loan. The HEL is not a 3.9% variable loan yet.

I also think it would also be reasonable to immediately pay off a loan fixed at 2.2% for only 5 more months, but that's a much closer call, and my post above was not addressing that.
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Re: Whether to Pay Off Home Equity Line?

Postby jervalaw » Fri May 10, 2013 9:31 am

To clarify (GMoney and YDNAL) we are debtfree except for the home equity line on townhouse for $450,000.00 at 2.4% (my 2.2% was an error) and the $550,000 owed on the beach condo at 3.9% with a 30 year fixed mortgage.

The 2.4% on the townhouse is only good until the end of September 2013 then it goes to 3.99% at a minimum so it seems to make sense to use the proceeds from the sale of the family home to pay off this equity line prior to September 30, 2013 as noted it is not possible to get better than 3.99% from bonds at present.

So, it appears the advice is to pay off the equity line.
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