Home Equity; should I pay off with CC, Advice needed!!

bnewsoFebruary 25, 2006

What should we do? We are trying to get out of debt. We never miss payments and our credit is excellent, just want to be out of debt. We have about $27,000 on our Home Equity at 10.875% interest. Should we pay it off with a lower interest credit card at 4.9 % or continue paying it and taking the interest write off on taxes at the end of the year? Thanks in advance.

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That sounds like a very high rate for a Home Equity loan. Could it be refinanced at a lower rate? Interest on HE loans can often be tax deductable whereas CCs are not, and CCs often have the ability to up your interest rates if you blink funny or sneeze on a Wednesday.

    Bookmark   February 25, 2006 at 9:25PM
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If your credit is excellent there's no way that you should be paying that rate. Most HELOC's and HE loans are priced at the prime rate, which is currently 7%. Refinance it and continue to take the tax deduction.

    Bookmark   February 26, 2006 at 7:25AM
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The introductory rate on the HE was around 3% then after so many months the rate went up. We have a variable rate which caps out at 12 %. To refinance, we are at 90% of our assesssment value and most companys will not refi unless you have 80 %. I just wonder if it would be best to transfer the loan to a low balance transfer card with automatic payment (so I don't blink funny or sneeze on a Wednesday):-). We get offers all the time for 0% transfers, so it is hard to pass them up.
Thanks for your assistance.

    Bookmark   February 26, 2006 at 9:04AM
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When the credit card people offer these low rates - for what duration?

Usually for only a few months.

And what are their normal rates?

Do they have a rule that you must pay off all of the transferred amount before you start paying on any new purchases that you may make? Many do - which means that the amount that's eligible for the low rate diminishes over a period, but the newly purchased stuff is carrying a high rate.

So if that's the case, and you choose one of the low rate offers, be sure not to charge any new purchases on it.

Be sure to read all of the fine print - *before* you sign on.

I too think that you should be able to arrange a HELOC with a mainstream lender for much better terms.

Do you have a shrewd relative or friend who knows his/her way around money management who could offer some useful direction?

Good wishes for finding the most advantageous way through the situation.

ole joyful

    Bookmark   February 26, 2006 at 1:59PM
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To figure out which would be cheapest, you have to calculate your after tax interest costs. Since each dollar of interest on your HE loan reduces your taxable income by one dollar, the true cost is the nominal interest rate times one minus your marginal tax rate. If, for example, you were in the 25% bracket, your after tax rate on HE loan would be .75 times 10.875, or 6.56%. If you can borrow money at less than that rate, pay off the HE loan and forgo the tax deduction.

The zero percent transfers are usually a come on, and only last a brief time.

I'm still curious about how your variable rate shot up so high. Variable rate loans are priced at some fixed margin over a benchmark rate, like the prime rate or LIBOR (London Interbank Offering Rate). Your rate is almost 4% over prime, which is normally what someone with very poor credit would pay. If you don't understand how that rate was arrived at, I'd question the lender.

    Bookmark   February 26, 2006 at 2:03PM
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As an alternate option, could you make bimontly payments or pay a little extra each month? You will pay it off sooner and save yourself an enormous amount in interest. Go to HSH and use their amortization calculator to see the effect of prepayments. I would be skeptical of putting it on a credit card, mainly because I don't like credit cards. Also, reducing your amount of available credit on your card might ding your credit rating. Your credit score will drop as your available credit does.

Here is a link that might be useful: HSH

    Bookmark   April 14, 2006 at 4:15PM
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