Does it make sense to payoff my HELOC?

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Contango1025
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Does it make sense to payoff my HELOC?

Post by Contango1025 » Wed Sep 26, 2018 1:49 pm

I had a $50K HELOC used to close on our home three years ago (80/10/10). I have a $20K balance currently. DW and I are looking to move into a larger home that better suits our needs in roughly two years and we've been stockpiling cash in preparation for a 20% down payment. If I have the ability to easily pay off the balance today, does it make sense to do so to avoid $4K in interest over the next two years versus holding on to that cash as part of my future 20% down payment?

Am I correct in thinking I could always re-tap the line of credit if I needed it to put down on the next house?

Jack FFR1846
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Re: Does it make sense to payoff my HELOC?

Post by Jack FFR1846 » Wed Sep 26, 2018 1:52 pm

I've paid my HELOC to zero in the past and kept it open. Mine is still open today. I opened it over 20 years ago and I think I used it once to buy a car. I hate paying interest.
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JoeRetire
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Re: Does it make sense to payoff my HELOC?

Post by JoeRetire » Wed Sep 26, 2018 2:07 pm

Contango1025 wrote:
Wed Sep 26, 2018 1:49 pm
If I have the ability to easily pay off the balance today, does it make sense to do so to avoid $4K in interest over the next two years versus holding on to that cash as part of my future 20% down payment?
If paying off the HELOC means you won't have 20% down for your next house purchase, then it makes no sense to pay off the balance.

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Artsdoctor
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Re: Does it make sense to payoff my HELOC?

Post by Artsdoctor » Wed Sep 26, 2018 2:14 pm

I don't think there's one right answer here. A couple of things to consider, although you can make an argument in either direction.

I am a big proponent of decent cash flow and being able to pull from a variety of sources for emergency cash, so there's that.

If you have a very specific purpose for savings within a couple of years, it's most likely "savings" and not "investments." For you, that most likely means that your savings is not earning much. Although there are attractive HELOC rates out there, it's unlikely that your savings rate would be comparable to your HELOC. Consequently, you'd be better off taking those savings dollars earning very little and paying off the HELOC.

Additionally, fewer people will be itemizing so you'd want to quantify exactly how much that HELOC is costing you. Will you be deducting the HELOC interest or not? If not, my argument above would be more compelling.

Finally, if there's an economist's bone in your body, you'd probably agree that money is fungible. Therefore, you could argue that if you need the HELOC in preparation for your purchase of a bigger home, you probably are doing yourself a disservice by buying something that is a stretch financially.

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Watty
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Re: Does it make sense to payoff my HELOC?

Post by Watty » Wed Sep 26, 2018 2:17 pm

Contango1025 wrote:
Wed Sep 26, 2018 1:49 pm
I have a $20K balance currently.
If you make the minimum payments what will the balance be in 2 years when you are ready to buy your next house? What will the totals of the payments and interest be?

bradpevans
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Re: Does it make sense to payoff my HELOC?

Post by bradpevans » Wed Sep 26, 2018 2:20 pm

Will your HELOC be available when you sell your current house?

Contango1025
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Re: Does it make sense to payoff my HELOC?

Post by Contango1025 » Wed Sep 26, 2018 2:38 pm

Thanks for all the replies. A few more details to answer some of your questions.

It's an IO variable rate HELOC, so the first ten years are interest only payments. I have obviously been paying significantly more as I've paid down $30K of it over the last three years. If I make the minimum payments for two years, my balance will still be $20K.

In regards to stretching on the next bigger home, it's only an issue if I choose to buy and then sell my current home (which I'd prefer to do out of convenience with 2 toddlers). I have about $80K of equity in the home right now (combination of down payment + principal paid down to date). I have also basically gutted and remodeled every room on my own over the last two years. We recently had the home appraised by our realtor and I would expect another $80K of sweat equity. If I were to sell my home first and use my projected available cash in two years I'd be able to put down over 40% on the next home. It's really more of a timing issue (at least I think it is).

My monthly cash flow would easily allow me to cover two mortgage payments while I wait for our current home to sell. The cash I currently have earmarked is earning 2.5% at a local bank.

Edit: I'm assuming the HELOC will be open when I sell but I need to review the paperwork to confirm I suppose.

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Artsdoctor
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Re: Does it make sense to payoff my HELOC?

Post by Artsdoctor » Wed Sep 26, 2018 3:57 pm

It sounds as if you have plenty of cash and easy access to money. Try as I might, and I feel like I'm taking one of the standardized tests here, I can't find, and definitely can't calculate, the interest rate you're paying on the HELOC. You say you're paying $4,000 on a $20,000 balance over two years, which is the closest I can get to estimating your rate--and it's more than your current 2.5% savings interest rate.

Based on what you're detailing, I can't really come up with a reason why you'd want to carry your HELOC.
Last edited by Artsdoctor on Wed Sep 26, 2018 4:54 pm, edited 1 time in total.

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Meg77
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Re: Does it make sense to payoff my HELOC?

Post by Meg77 » Wed Sep 26, 2018 4:00 pm

Hi there, I'm a banker and I think you should definitely pay off the HELOC as long as the draw period is set at 10 years. You can call your bank and ask to make sure it will remain open if you pay it down. It definitely makes sense to just pay it down and then draw it up again when you get ready to buy the new home. You're surely paying more interest on the loan than you're earning in your savings.
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Contango1025
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Re: Does it make sense to payoff my HELOC?

Post by Contango1025 » Tue Oct 02, 2018 11:47 am

Just to provide some closure in the event someone stumbles upon this post with a similar situation, I confirmed with my bank I have the ability to re-access the credit line at any point in the future if I pay off the entire balance today.

As a result, I've decided to pay off the entire balance and if I need the additional cash on a short term basis (i.e. between buying the next house and selling my current) I will re-tap it.

Thanks for the feedback!

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