This second reason is basically eliminated with Charitable Gift Funds. There is lots of flexibility as to when you make the tax deductible contribution as well as when the proceeds are distributed to the charitable organization. They can be completely independent.
Gene E. Utterback, EA, RFC, ABA wrote:
Many years ago, I took an excellent course in starting a business. One of the key points was "When you need to borrow money, you can't." Lenders don't lend to people who need the money, they lend to people who can pay it back.
You can't borrow your way out of trouble, especially in this credit market. Paying off a mortgage at the expense of an adequate emergency fund is risky at best.
-- Doug
I think we all agree on the necessity of an emergency fund, the larger the better. I agree that it would be risky to use money to pay down or pay off a mortgage if it means being without any emergency fund. The whole idea of a mortgage in the first place is to make home ownership affordable while using income for other things as needed, and those other needs include an emergency fund, as well as contribution to pension plans and so on.
Where I jump ship is the idea that, when extra money is available, over and above those needs, it would be better to invest it in some risky venture or even a questionable financial product that might or might not lead to superior future gains. I say pay off the mortgage first and leave anything having substantial risk and uncertain yield until last.
My HELOC lender just recently sent an offer to pay me $100 for each $10K I agree to reduce my available equity line (max $60K), with an extra $250 if I agree to close it out completely. My balance is below $2,000 right now so it's tempting.
The other thought I had, why not max out the HELOC and use that plus other cash to completely pay off the first mortgage? This would be like refinancing into a much smaller balance and would also lower monthly payments significantly (variable interest for next 4 years, then converts into 10-yr fixed loan at then-current rates), with no bank or appraisal fees. But it would mostly wipe out current cash and also leave only credit cards for emergency borrowing. And, to get at enough additional cash would involve taking early withdrawal penalites on some CD's.
Decisions, decisions!
Because the variable rate on the HELOC is just that - variable. Rates are low now, but there's no guarantee how long they'll stay low. If anything, check out current *fixed* rates and consider, if your credit is good and your equity is good, and your current fixed rate isn't that low - refinancing your primary mortgage. It may make sense to lock in these low rates for as long as you can. It's the cheapest money you'll ever borrow.
Whether that makes sense or not, of course, depends on a whole host of variable which are specific to your own situation.
If my warnings that an available HELOC is a terrible substitute for an emergency cash fund weren't loud enough, then I'll have to get on top of my house and scream at the top of my lungs how a credit card is an even worse substitute for it. Here: A credit card with available credit is NOT a substitute for an emergency fund. The thing which makes an emergency fund what it is is *guaranteed liquidity* - ie. no matter what happens, you have available cash. HELOCs and credit cards absolutely positively do NOT guarantee that you have cash available in the event of said emergency.
There may be suitable times and situations for folks to prepay their mortgages. Really. I especially like for retired folks to own their homes outright. But if you're in the middle of your best earning years, have a long time until retirement, have a good mortgage interest rate and an easy time making your current mortgage payments, there are a whole host of things more important then paying down that mortgage - starting with that emergency fund and paying off anything else you have which has a higher interest rate, especially credit cards and car loans.
Not true, my mortgage is a 30yr fixed 5.25%, refinanced last year, and right now my HELOC is 3%. When my HELOC goes over 5.25%, I'll look at alternatives, but I don't see that happening for a few years.
Ques: When a loan is taken out on the HELOC, does the interest rate stay the same as that particular day until the it is payed off or does interest adjust w/ the HELOC?
Chip
When your HELOC goes over 5.25%, what do you think 30 year rates will be? 5.25% on a 30 yr fixed is a *steal*. The last time rates were that low was in the
1950's. I'd hang on to that loan with all I've got. -- Doug
That's the point. When your HELOC rate goes up, you almost certainly won't have any alternatives which are cheaper than your current mortgage.
HELOCs - Variable interest rate lones - are RISKY.
It adjusts up and down on your whole balance, though you may with some loans "carve out" a fixed-rate portion. That fixed rate will NOT be some low teaser rate, though. It'll usually be higher than a similar fixed-rate regular mortgage would be at that same time.
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