Advice Needed for Best way to Pay Off Mortgage & Home Equity Loan.

[Mahogan]

I am trying to pay off my debts. I have a 30 year mortgage about 10 years into it ($95K), the rate is 5.625%. A couple years ago I got a home equity line of credit 15yr ($78K) (I know big mistake), the interest rate is variable at prime, today it is 2.79%. My mortgage payment is $855, the HELOC is $185 of which $176 is interest (interest only loan), I have the option to lock in this loan while Prime is low and it will be about 2-3% over prime, I still have not opted for this. With that background.... My home value is approx $175K. My question is: would I be better off making large payments on the Mortgage to get it paid off first, while making moderate payments on the HELOC, or the other way around? Or would it be best to refinance and combine the two loans? If anyone on this forum is a financial genius, I would appreciate advice on how would the best way to get out of this debt?

[tim_v]

...
My question is:
(1)would I be better off making large payments on the Mortgage to get it paid off first, while making moderate payments on the HELOC, or the other way around?
(2)Or would it be best to refinance and combine the two loans?
If anyone on this forum is a financial genius, I would appreciate advice on how would the best way to get out of this debt?

I'm not a genius but ...
1) I wouldn't make extra payments to the HELOC while its interest is so much lower but I wouldn't recommend making extra payments to the first mortgage while you have a variable rate loan out. How's your emergency fund? You may want to add to it.
2) What are the costs involved? Those vary significantly between states. CA is pretty cheap and I think you could combine the loans at a rate under 5% which seems pretty good to me. But in Minnesota the refinance costs would probably be over $5000 which I don't think would be worth it. In that case I would lock in the HELOC if those payments are affordable for you. That's a personal opinion as I'm not comfortable with variable rate loans.

[4jacks]

Like Tim said, I would put an emergency fund in place first.
Then I would consider the costs to lock in the loan.

There are two schools of thoughts on which to pay off first.

1) Traditional - pay off the highest interest rate first. This will mathematically save you the most money.
2) Dave Ramsey - Pay off the lowest loan amount first. This will give you some motivation as you see the amounts go down and then see a loan go away.


I think the Dave Ramsey method works best when you are making serious financial changes in your life. If you are already solid financially, then it wouldn't hurt to use the Traditional method.

[Axel]

the second school of thought is mostly preferred as it seems flexible and is reliable in all aspects also .Las Vegas Retirement Community

[MortgagesByMark]

Hi Mahogan,

You have a few options as I see it, but I think the best option is for you to stay with what you have and really focus on pounding down on the HELOC. It's low interest now, but it won't stay that way forever. As recently as 2007 prime was over 8%, so I see that as your largest risk over time. If the rate returned to where it was in 2007, your HELOC payment would be in the neighborhood of $520 - $550. I don't see that happening right away, but if it's going to take you years to get the HELOC paid off, it would be good for you to keep that on your radar.

As for refinancing, I'm not sure that's going to benefit you because you are likely going to end up with a higher overall payment, higher rate, or both. Plus, you could pay closing costs to get the better rates, and I'm not sure that is going to be beneficial if you have a shorter time horizon for your payoff.

I don't know your financial situation, but if you can aggressively get that HELOC paid down over the next few years (think "gazelle intensity", as Dave Ramsey says), don't close it out once you get it paid off if prime is still very low. Start using it to pay off bite-size chunks of your 1st mortgage (payoff no more of the 1st than you can clear from the HELOC in a short time). The benefit is that you will accelerate the payoff of your first mortgage and help keep your overall interest expenses lower. When you pay off chunks of the 1st like that, a larger portion of each subsequent payment will go to principal. If you use this technique you can lower your overall interest expenses and pay off both loans much more quickly. If you're good with Excel, it might be worth crunching the numbers to see how things would work.

Best of luck to you!

MBM

[Maurice111]

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[Denilson]

It is a good way to get out of this debt and also you can avoid if you don't make extra payments while you have a variable rate loan out.
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[johnmathews]

I have $30K cash savings in addition to my 1-year salary cash savings. I am thinking or paying off my $200,000 15-year mortgage, which is 4.375% for 15 years. My calculations are such that it will save me about $50,000 over 15 years, guaranteed. So technically speaking, my $30K investment will give me $20K income over 15 years, fax free. This is huge compared to my the rate of return of my Vanguard investments, which is 1.3% for 3 years, and 2% for 5 years, taxed an investment income!

So thumbs up if you think my calculations are correct, and thumbs down if I am wrong.