Should I pay off my HELOC, Refinance or Invest

[Learningandliving]

About Us
42, 39 (50-52 Fire Goal)
2 Children (13 and 14)
HCOL Area (Bay Area)

Income
$415/year Gross Salary (45% net savings rate)
$750k/year net stock buy out for next three years

Assets
Retirement - $400k
Taxable - $350k
529 - $200k
Home Value - $1.5M
Home Balance - $850k (Primary $589,000 4% 30yr fixed, $247,000 7% interest only HELCO)

I'm contemplating paying off the HELOC or Refinancing, but I guess another option would be to invest the $247k and do nothing with the HELOC but that feels like the wrong thing to do. Thougths?

[SRenaeP]

At 7%, yes, pay off the HELOC. Where is the $247k coming from though? If taxable, perhaps spread it out between this year and next to avoid a huge cap gains hit all at once.

[delamer]

Our HELOC’s interest rate has gone up 0.5 percentage points this calendar year alone.

Given that yours already is 7%, get rid of it.

[ChinchillaWhiplash]

I second paying off the heloc. I'm assuming it is not a fixed rate. Also, when is the maturity date? Plus you would be lucky if your investments beat the 7% rate.

[Learningandliving]

Thanks, I have the cash to pay it off so sounds like that is the best thing to do. I have the ability to refinance into one loan, probably at 4% or so. Does that change your opinion at all?

[Jablean]

Paying off your HELOC is a 7% gain on that money. That's a hefty return with no market risk.

Rolling both mortgages into one at 4+% will give you a whopping gain of <3% on the $250,000 you roll while the half mill mortgage will now cost at least a 1/2 point higher, since it's twice as big as the 250k let's even it out and say that's a -1% equivelent. Add those together and rolling to a new mortgage gives you a 2% return. Sound like a good deal?

[Compound]

Add my vote to the chorus: get rid of that HELOC.

[grabiner]

Thanks, I have the cash to pay it off so sounds like that is the best thing to do. I have the ability to refinance into one loan, probably at 4% or so. Does that change your opinion at all?

Even keeping a 4% HELOC isn't a good deal. Paying off the 4% HELOC would be equivalent to buying a risk-free bond fund yielding 4% (tax-free unless you used the HELOC to improve your home), and you can't get close to that yield on an ordinary low-risk investment.

However, if paying down the HELOC would involve a huge capital gain, then it may be best to keep the loan at 4% but throw all spare cash, including dividends, at the loan to pay it off much faster.

The primary loan may be worth keeping. This is a 4% loan (below the current market rate on 40-years), mostly deductible (even under the new tax law, you can deduct about half the interest, or more if you make large donations to charity), deducted at a high tax rate (both federal and CA), and with a very long duration.

[Learningandliving]

Paying off your HELOC is a 7% gain on that money. That's a hefty return with no market risk.

Rolling both mortgages into one at 4+% will give you a whopping gain of <3% on the $250,000 you roll while the half mill mortgage will now cost at least a 1/2 point higher, since it's twice as big as the 250k let's even it out and say that's a -1% equivelent. Add those together and rolling to a new mortgage gives you a 2% return. Sound like a good deal?

Great job breaking it down, I see now I wasn’t looking at this the right way. Initiating the ACH now, thanks everyone!

[JoeRetire]

Paying off your HELOC is a 7% gain on that money.

Well, you have to consider the opportunity costs. It's 7% minus whatever gain you could get on that money.

Still most likely makes sense to get rid of a 7% loan. But it won't really be a 7% gain.

[cherijoh]

About Us
42, 39 (50-52 Fire Goal)
2 Children (13 and 14)
HCOL Area (Bay Area)

Income
$415/year Gross Salary (45% net savings rate)
$750k/year net stock buy out for next three years

Assets
Retirement - $400k
Taxable - $350k
529 - $200k
Home Value - $1.5M
Home Balance - $850k (Primary $589,000 4% 30yr fixed, $247,000 7% interest only HELCO)

I'm contemplating paying off the HELOC or Refinancing, but I guess another option would be to invest the $247k and do nothing with the HELOC but that feels like the wrong thing to do. Thougths?

Refinancing your loan when you want to retire in 8 - 13 yrs is a BAD idea. That would restart the clock and extend the number of years you have a mortgage (assuming you choose the same term for the mortgage). But you definitely want to pay off that HELOC - especially if there aren't significant tax consequences to do so.

Based on the size of your nest egg, it looks like you have only recently started to invest at a high rate. Otherwise you would have a much bigger nest egg considering the long bull market. You are close enough to your desired retirement date to start doing some serious planning to see if your goal is achievable. It might be eye opening to calculate how much you need to have saved to be able to retire as early as you would like with the life style you want.

[User35]

Not to hijack, but I have a very similar question. The choice for me is between taxable vanguard index funds and a tax deductible HELOC @ 5.6%.

Any calculators or graphs out there that can help me decie at what rate I should keep the HELOC and invest vs paying it off based on my tax/market assumptions?

[delamer]

Not to hijack, but I have a very similar question. The choice for me is between taxable vanguard index funds and a tax deductible HELOC @ 5.6%.

Any calculators or graphs out there that can help me decie at what rate I should keep the HELOC and invest vs paying it off based on my tax/market assumptions?

As I mentioned earlier, our HELOC rate has gone up by 0.5 percentage points in the last 5 months.

Assuming your rate is adjustable, take that into account in any planning.

[grabiner]

Not to hijack, but I have a very similar question. The choice for me is between taxable vanguard index funds and a tax deductible HELOC @ 5.6%.

Any calculators or graphs out there that can help me decie at what rate I should keep the HELOC and invest vs paying it off based on my tax/market assumptions?

See Paying down loans versus investing on the wiki.

The fair comparison is a low-risk bond investment with the same duration; you might earn more with more risk by investing in stock, but you can also earn more with more risk even if you pay down the loan, by moving existing money from bonds to stock. If your loan has a floating rate, the fair comparison is to short-term bonds; if your loan has a fixed rate, the fair comparison is to bonds with less than half the loan term, since you will be making payments every month.

At 5.6%, even if the loan is still tax-deductible (unless it was used to improve your home, it is no longer deductible in 2018), you will do better with a bond investment.

(edited to fix typo)

[Learningandliving]

About Us
42, 39 (50-52 Fire Goal)
2 Children (13 and 14)
HCOL Area (Bay Area)

Income
$415/year Gross Salary (45% net savings rate)
$750k/year net stock buy out for next three years

Assets
Retirement - $400k
Taxable - $350k
529 - $200k
Home Value - $1.5M
Home Balance - $850k (Primary $589,000 4% 30yr fixed, $247,000 7% interest only HELCO)

I'm contemplating paying off the HELOC or Refinancing, but I guess another option would be to invest the $247k and do nothing with the HELOC but that feels like the wrong thing to do. Thougths?

Refinancing your loan when you want to retire in 8 - 13 yrs is a BAD idea. That would restart the clock and extend the number of years you have a mortgage (assuming you choose the same term for the mortgage). But you definitely want to pay off that HELOC - especially if there aren't significant tax consequences to do so.

Based on the size of your nest egg, it looks like you have only recently started to invest at a high rate. Otherwise you would have a much bigger nest egg considering the long bull market. You are close enough to your desired retirement date to start doing some serious planning to see if your goal is achievable. It might be eye opening to calculate how much you need to have saved to be able to retire as early as you would like with the life style you want.

Yes we're starting late. Previously carried debt and made a few other bad decisions investment wise. Current estimates with $400k+ a year in savings for 3 years and $150k/year past that seems to work out for our goals.

[TheAncientOne]

Someone correct me if I'm wrong but it was my understanding that HELOC interest is no longer tax deductible under the new law. Assuming that's correct, I'd be paying down that loan ASAP because a 7% after tax return will be hard to match with any alternative investment.

[delamer]

Someone correct me if I'm wrong but it was my understanding that HELOC interest is no longer tax deductible under the new law. Assuming that's correct, I'd be paying down that loan ASAP because a 7% after tax return will be hard to match with any alternative investment.

From the IRS;

“The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer's home that secures the loan.”

So it depends.

[cherijoh]

Someone correct me if I'm wrong but it was my understanding that HELOC interest is no longer tax deductible under the new law. Assuming that's correct, I'd be paying down that loan ASAP because a 7% after tax return will be hard to match with any alternative investment.

From the IRS;

“The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer's home that secures the loan.”

So it depends.

Yes it can be a bit confusing. A home-equity loan could be taken out to add an addition on to your house, in which case it would be qualified "acquisition" debt that would be deductible. On the other hand, a regular mortgage refinance with a "cash out" component would only be deductible to the extent of the original remaining debt - the remainder would be considered "home equity" debt.

[soccerrules]

Thanks, I have the cash to pay it off so sounds like that is the best thing to do. I have the ability to refinance into one loan, probably at 4% or so. Does that change your opinion at all?

another vote for the risk free 7% return -- pay it off!