| Payoff Mortage or HELC first? |
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LouM
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| Payoff Mortage or HELC first? |
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I currently have $185,000 mortgage balance at 6.125% and $95,000 home equity line of credit at Prime + 1%.
We cannot refinance since the house is worth $280,000 (100% loan to value).
Which loan should we try to pay down first? We have approximately $2,000 available per month for debt reduction.
Any help is appreciated.
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Fri Jul 15, 2011 12:52 pm |
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littleroc02us
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So if you have no debt and only this Heloc and Mortgage left then I would continue on with my belief of the Snowball method, which is to get rid of the smallest debt first which according to my math if you pay 2k a month it would take you 47 months. Also, how is your house really valued at 280k and if you owe 185k you have almost 95k in equity which would be enough to refinance. But you have a heloc which isn't a mortgage you just borrowed against your home, so you would have had equity.
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Fri Jul 15, 2011 1:12 pm |
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LouM
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littleroc02us,
Thank you for the quick reply. You are correct we have no other debts.
The house is valued at $280,000 and we owe $280,000. We tried to refinance last year and the mortgage companies wanted us to have 20% equity in the combination of the 2 loans.
I'm confused with your statement that we have $95k in equity. Please clarify. Were we talking to the wrong mortgage companies? We would love to refinance into a 15 year loan since we can afford the payment.
Pardon my ignorance but can you also explain why you would pay off the lower interest rate loan.
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Fri Jul 15, 2011 2:08 pm |
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oldguy
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quote:
Which loan should we try to pay down first? We have approximately $2,000 available per month for debt reduction.
I see no reason to prepay either loan, why not keep the loans and invest the $2000/m for your future? That $24,000/yr is the kind of seed money that fortunes are made of (mine included). How old are you - how many years left to invest?
In a few years, your house will probably appreciate some, and your loan balances will be lower. That may be a good time to refi - consolidate both notes into a single 30 yr fixed rate loan. (You can prepay a 30-yr later if you wish to - avoid the 15-yr loans, you want to lock up the inexpensive interest rates for as long as you can.)
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Fri Jul 15, 2011 2:22 pm |
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LouM
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I'm 39 years old and own a company with 10 employees. My earning potential is very promising. I currently make $120k-140k per year. My wife and I have around $60k in savings and no debt. My wife is a stay-at-home mom but will return to work in 2 years when both of my kids are at school full time.
The HELC was taken 6 years ago when I started my company. Mostly it was used for the business's cash flow and my first year salary. The business started gaining momentum in 2008 when the economy crashed. My company like most small businesses suffered tremendously and was at the verge of closing.
In 2008, I was on the verge of beginning paying down the debt. It never happened and we also did not have a personal budget or plan.
Thanks to Dave Ramsey and Clark Howard, we finally see the light about over spending and the imprisonment with debt.
So, my strategy is to pay down the mortgages just enough to refinance into a 15 year with low APR. That is why I'm seeking advice on which loan to reduce first in reaching my goal. Savings & retirement will increase when my wife returns back to full time work.
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Fri Jul 15, 2011 3:06 pm |
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oldguy
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quote:
we finally see the light about over spending and the imprisonment with debt.
Good, that's a giant step. Consumer debt - revolving credit cards, car loans, boats, yada - is the failure of so many families.
The next level, equally liberating, is to understand the concept of leverage - ie, using low cost nonconsumer debt as a tool to create wealth.
Congratulations on managing your business thru the recession - and at the young age of 39 you have decades of opportunity & growth to look fwd to.
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Fri Jul 15, 2011 3:29 pm |
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coaster
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quote:
Originally posted by oldguy
using low cost nonconsumer debt as a tool t.
Nice point .... a distinction not often made. Not all debt is created equal.
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Fri Jul 15, 2011 4:54 pm |
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littleroc02us
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quote:
Originally posted by LouM
littleroc02us,
Thank you for the quick reply. You are correct we have no other debts.
The house is valued at $280,000 and we owe $280,000. We tried to refinance last year and the mortgage companies wanted us to have 20% equity in the combination of the 2 loans.
I'm confused with your statement that we have $95k in equity. Please clarify. Were we talking to the wrong mortgage companies? We would love to refinance into a 15 year loan since we can afford the payment.
Pardon my ignorance but can you also explain why you would pay off the lower interest rate loan.
You stated in your original post that you had a 95k home equity loan which means you borrowed money against your home for some reason. (IMO never a good idea.) YOu also stated that your home is valued at 280k, tell me if I'm wrong but if you hadn't taken out the equity loan then you would have 95k in equity right? (280k value of home minus 185k left on your mortgage=95k equity.) But since you borrowed the money against your home you owe more.
As for the pay off order, I use the snowball method, because of the win, win factor. To me it's more motivating to pay off the smaller debt regardless of the interest rate. You can do what you want but I wouldn't pay off the mortgage until the heloc is paid off.
You will get tons of opinions on borrowing against your house to invest, but I don't agree because of the risk factor. Plus if your house was paid off would you borrow against it to invest. No way!!!!
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Fri Jul 15, 2011 5:21 pm |
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littleroc02us
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quote:
Originally posted by LouM
I'm 39 years old and own a company with 10 employees. My earning potential is very promising. I currently make $120k-140k per year. My wife and I have around $60k in savings and no debt. My wife is a stay-at-home mom but will return to work in 2 years when both of my kids are at school full time.
The HELC was taken 6 years ago when I started my company. Mostly it was used for the business's cash flow and my first year salary. The business started gaining momentum in 2008 when the economy crashed. My company like most small businesses suffered tremendously and was at the verge of closing.
In 2008, I was on the verge of beginning paying down the debt. It never happened and we also did not have a personal budget or plan.
Thanks to Dave Ramsey and Clark Howard, we finally see the light about over spending and the imprisonment with debt.
So, my strategy is to pay down the mortgages just enough to refinance into a 15 year with low APR. That is why I'm seeking advice on which loan to reduce first in reaching my goal. Savings & retirement will increase when my wife returns back to full time work.
You state that you have no debt, but your heloc is debt.
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Fri Jul 15, 2011 5:23 pm |
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LouM
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[quote="littleroc02us"] quote:
Originally posted by LouM
littleroc02us,
You will get tons of opinions on borrowing against your house to invest, but I don't agree because of the risk factor. Plus if your house was paid off would you borrow against it to invest. No way!!!!
Unfortunately in the United States, the only way for a young entrepreneur to start a business is to use home equity loans. If you don't have a pile of cash or assets then banks will not give you a business loan.
Also, financial assistance from the government is only given to minorities and women owned entities.
I have no regrets whatsoever using a home equity loan to start my successful business.
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Fri Jul 15, 2011 5:42 pm |
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oldguy
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quote:
Unfortunately in the United States, the only way for a young entrepreneur to start a business is to use home equity loans.
True enough - altho I wouldn't call it 'unfortunate'. The US mortgage is currently one of the best sources of capital in the world. Nearly all of the other 192 nations require high down payments, and they require that you periodically reset/reapply for a new rate, usually in 10 yrs or less.
But in the US, almost any wage earner can wander into his local bank and ask for $200,000 or so. And insist on paying only 4.5% or 5% for the use of that capital. And then insist that he gets 30 years to pay it off. And he wants the rate to be fixed for 30 years.
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Fri Jul 15, 2011 6:21 pm |
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oldguy
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BTW Lou - what business are you in? (If you don't mind sharing).
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Fri Jul 15, 2011 6:23 pm |
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littleroc02us
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[quote="LouM"] quote:
Originally posted by littleroc02us
quote:
Originally posted by LouM
littleroc02us,
You will get tons of opinions on borrowing against your house to invest, but I don't agree because of the risk factor. Plus if your house was paid off would you borrow against it to invest. No way!!!!
Unfortunately in the United States, the only way for a young entrepreneur to start a business is to use home equity loans. If you don't have a pile of cash or assets then banks will not give you a business loan.
Also, financial assistance from the government is only given to minorities and women owned entities.
I have no regrets whatsoever using a home equity loan to start my successful business.
I don't agree at all, businesses can be started with cash and a small start up setup. You can start any business in the basement on a card table and grow it slowly. Do you realize that Dave Ramsey went bankrupt because he leveraged all of his real estate deals and then they called the loans. He started over by doing a radio show from a small room. Now he's rich as heck and is debt free.
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Fri Jul 15, 2011 8:45 pm |
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oldguy
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quote:
He started over by doing a radio show from a small room. Now he's rich as heck and is debt free.
And Ray Kroc, a high school drop out, founded McDonalds and made a fortune.
But naming the few exceptions doesn't eliminate the fact that millions of others became rich in the conventional way. Ie, the businesses calculated the risks and borrowed capital to start businesses. And they got good educations.
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Fri Jul 15, 2011 9:59 pm |
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scot184
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Try to pay the first down to the point where you can refinance it (loan-to-value wise)...then by that time you might be able to consolidate the two loans or start cracking away at the second before it rises with the Prime Rate...
Save money the easy way with
credit card balance transfer offers.
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Fri Jul 15, 2011 11:53 pm |
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