Should I liquidate assets to pay off my Credit Card debt.

cartmanJune 4, 2006

Here is the situation I own my own home valued at $800,000. I owe $515,000 on the 1st mortgage with a variable interest rate and $65,000 on a HELOC (the HELOC is also on an APR and currently its at 9% and rising).

I own another piece of property which I am renting. ItÂs valued at $500,000 and I owe $285,000 on the 1st mortgage with a fixed interest rate and $30,000 on the HELOC (the HELOC is also on an APR at 9% and rising).

I have $25,000 in Credit Card debt. The rate at which itÂs being charged is 8.9%

I have $100,000 in liquid assets (i.e., stocks and mutual funds), and $15,000 in cash.

My main goal is to trim the credit card debt. The credit card debt is at a fixed rate of 8.9%, but is the interest is not deductible. The HELOC is adjustable and probably going to go up before it goes down. What should I do? Besides borrowing more, should I sell stocks or use cash to pay off the credit card debt and both HELOCÂs, or just pay off the credit cards and keep writing off the interest each year.

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steve_o

Lots of stuff we don't yet know ... like your income situation beyond renting, how steady the rental occupants are, etc.

The first thing you should do is make sure you have enough money readily available (cash, CDs, sometimes even unused lines of credit) to pay your expenses for 3-6 months (the longer it's likely to take to replace your income, the more you need to have available). That argues against liquidating your equities or cash.

Once you're past that, you can decide what you want to do. I am no tax expert, but it seems to me you're paying 9% interest on just about all your debt; the only difference is that some of it can be written off (I don't know if you can write off the interest on the rental property). Can you borrow more cheaply than the 9% you're paying now (including any application or closing costs)? Can you get a rate fixed at that level or are you simply buying time until that rate goes up, too?

Frankly, knowing what you've told us, I'd bite the bullet and just pay off the CC as fast as you can without incurring more debt.

    Bookmark   June 5, 2006 at 8:26AM
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Aunt_Jemima

I say pay off the credit cards also, but I'm certainly not a financial expert.

In my own case, I paid off all our credit cards "before" I started buying stocks, putting money into our IRA's and mutual funds.

Good luck!

    Bookmark   June 5, 2006 at 3:43PM
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celticmoon

I would be *much* more concerned about the $600,000 in variable interest loans (the 2 HELOCs at "9% and rising" and the primary 515k variable on your home) over time than the 25K in cc debt. You realize that that your home mortgage of 515k at, say, 6% (approx 3087/month) becomes $3778/month at 8% and $4143/month at 9%? A boost of 8-12K a year for the whole life of the loan makes the 25k in cc debt minimal by comparison.

What is your long range plan and how prepared are you for rising rates? Can you at least fix the primary on your residence? A refinance to fixed may be your best use of cash resources right now.

Agree fully with steve o that you also need to hold back emergency funds. So cutting back spending to pay cc may be best.

    Bookmark   June 6, 2006 at 1:12AM
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lithigin

Here goes with my financial advice. I believe it's simpler than it sounds and just requires you to get your interest rates from all of your accounts in order to make your choices.

First suggestion: do as celticmoon suggests and fix that $515K first mortgage immediately! As I'm sure you're aware, the fixed variable rates of now are worse than a year or two ago, but much better than the 12-19% that they were in the past. In my opinion, fix it now and pay for any closing costs out of your savings, which is presumably earning the worst interest rate.

Speaking of....what savings rate is your $15K earning? If it's less than 9% (almost a sure bet), and you have liquidatable cash in assets (which you say you do) to cover an emergency fund, then using that cash to invest in your house is giving you a 9% rate of return in your house investment, which is far better than the 3-4% of a typical savings account. If you choose not to do that, then I present my second suggestion (which I still think you should consider, w/ or w/o the $15K in the equation)

DH and I just went through a similar process, although with one house, and we paid off a motorcycle and a timeshare (each at ~9%), rather than CC debt. This plan mirrors our own, with different dollar amounts:

Roll both HELOCs into one and LOCK your rate up now. In my opinion, it's only going to go up. You should be able to get a much better rate with a higher consolidation balance (we got 7.5% by consolidating our two loans along with our original HELOC). 65K + 30K = 95K = 11.9% of the first house or 19% of the second house. If you keep your loan:value ratio below 20%, you'll get a better deal on rates. You may even ben required to keep it below 20%; I'm not sure.

Keep thinking about that. The next option is to add the 25K of CC debt into the HELOC figure, for a total of 65K + 30K + 25K = 120K = 15% of the first house. Close that loan and pay off the CC debt immediately. You're now transferring the 8.9% of wasted CC interest into an investment into your house, in addition to the tax writeoff.

The last think to consider is to stick with the 95K HELOC option and pay off the CC bill with your assets. Are any of your stock or mutual funds giving you returns better than 9%? If so, then keep them where they are and do the 120K HELOC option. If they're earning less than 9%, then I refer you back to the concept of my second paragraph. If you take your mutual fund money that is earning less than 9% and pay down your worst mortgage/HELOC/CC rate with that, you're making a huge investment in your house. Now, if you want to sit on your stocks, that's understandable.

I hope that my advice not confusing, and that it's helpful to you.
Lindsay

    Bookmark   June 7, 2006 at 12:58PM
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steve_o

Speaking of....what savings rate is your $15K earning? If it's less than 9% (almost a sure bet), and you have liquidatable cash in assets (which you say you do) to cover an emergency fund, then using that cash to invest in your house is giving you a 9% rate of return in your house investment, which is far better than the 3-4% of a typical savings account.

The only thing about which I'd be wary is tying up all of one's loose cash in the house. While reducing debt is admirable, flexibility is good, too. If the worst happens and I'm living off the emergency fund, it's good to be able to walk into the grocery store with cash in my pocket rather than trying to see if I can interest the cashier in trading my groceries for, say, my kitchen sink, because I put my entire emergency fund into my house.

    Bookmark   June 8, 2006 at 8:50AM
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