Debt Management Advice

My wife and I are in the process of purchasing our first home and could use the groups thoughts on debt management.

We have no other debt except our car loans. I currently pay 8.6 - 9.0% on both of those loans and have about 3.5 years left. The balance of the loans totals $35K. We are putting almost 40K down on our house (which I understand to be "instant equity"). The interest rate on our mortgage is 6% if it matters.

I am wondering if we would benefit by immediately taking out a HELOC and paying-off the car loans to reduce interest expense. Can we take a HELOC this soon? What kind of interest rate can we expect (similar to our mortgage or more)? Are there substantial closing costs that would consume any savings? Is the HELOC interest deductible like our mortgage interest?

There are no penalties for paying-off the car loans early. Does it matter that I would be paying-off depreciating assets and increasing debt on an appreciating asset? Am I neglecting other factors?

Thanks in advance.

Reply to
kastnna
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It matters only in the sense that if you then pay the equity line over

10 years, you will have done a bad thing. If you arrange the line and tap it to pay the car loans, and then make the same payment, you should fine that you come out ahead, and turned the interest into a deduction.

A few years back when I refinanced, short term rates were 1% or so, and I decided to pay the mortgage principal down, while arranging an HELOC. Since then, I refinanced the first mortgage another two times while preserving the HELOC. The mortgages and HELOC were all no point/no closing. What is missing from this is the risk that HELOCs bring. Easy access to money with low payments. If used wisely, it can get you through a (short) period of unemployment, or get a cash price for a car, etc. If used wrecklessly, it can get you a 10 year payout on big TVs and expensive clothing.

Often, the bank providing the first mortage is the best place to start. JOE

Reply to
joetaxpayer

Thanks for the info (you too jIM). As JOE pointed out, I am looking to minimize overall debt expense, not lower my monthly payments. I would obviously need to continue (or hopefully shorten) the loan repayment schedule that I currently have in place.

I was mainly thinking that aside from closing costs an 8.6% HELOC repayed in 3.5 years would be better than a 8.6% auto loan repayment for 3.5 years simply because the interest expense is deductible on the HELOC and not on the auto loan.

One more line of questions. I have secured financing on our new home, but we haven't closed yet. If the other variables make the HELOC an advantageous plan for us, can I reduce or eliminate closing costs on the HELOC by having it done along with the mortgage that is currently in the works? Is that even an option the bank will consider? Am I being foolish to think the HELOC may be 9% or lower?

Reply to
kastnna

Here's an additional line of thinking that you guys might be able to help with.

We are using an 80-10-10 loan to avoid PMI. We are putting 10% down out-of-pocket, the mortgage is for 80% and a second loan for 10% dodges the PMI requirement of 20% (this last 10% is essentially a HELOC isn't it?). The mortgage is at 6% and the second loan is at 8%.

However, we have the option of paying only 5% out-of-pocket and taking

15% on the 2nd loan. This would essentially give us an extra $20K in cash to pay the car loans, but increase the 8% loan by $20K. maybe this is the route I should explore?
Reply to
kastnna

Find out what the HELOC terms are- we got a 15 yr ARM on our HELOC which was prime+1. 7.25% looked good when we closed, but it jumped once per year and is at 9.25% now. (Hence the reason we wanted to refinance).

Our 15 yr ARM was really 10 yr interest only, then last 5 years ammortizes the remaining balance. I caught this after year 1 when doing a financial checkup over the holidays. A 30 yr fixed second mortgage with a 15 yr fixed payment is much better financially for us. 15 yr fixed was a lower payment than the 15 yr ARM, so decision was a no brainer.

Our refinance would have been cheapest if we stayed at our current lender, but our current lender could not get us the competitive interest rates lending tree.com could.

HELOC closing costs will exist, but probably won't be the large part of the closing costs. Most money at closing will be associated with first mortgage (is my experience).

Reply to
jIM

and > We are using an 80-10-10 loan to avoid PMI. We are putting 10% down > out-of-pocket, the mortgage is for 80% and a second loan for 10% > dodges the PMI requirement of 20% (this last 10% is essentially a > HELOC isn't it?). The mortgage is at 6% and the second loan is at 8%. >

First, my current HELOC is now 7.74% (I think that's prime -1/2%). Getting the HELOC along with the first is probably a good idea, but with your further note, I think you are getting a bit tight on loans to value ratio. When I started the refinancing, the 1st mortgage was about 50% of the home's value, and HELOC, another 10% or so. With no other debt, and retiring the car loans, the bank may not have an issue with this, I can't say. (good luck, let us know how it goes) JOE

Reply to
joetaxpayer

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-HW "Skip" Weldon Columbia, SC

Reply to
HW "Skip" Weldon

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