All Current Debt By Paying It Off With The Low Interest Heloc?
Q: Here is my breakdown: HELOC $2600 (no time limit, $50 per month minimum payment) Credit Card $210 ($10 per month minimum payment) Spouse's Student Loan $8700 (years to go...$144 pr/mo) My Student Loan $9944 (years to go...$111 pr/mo) Car #1 Loan $10,200 (4.5 years to go, $201 pr/mo) Car #2 Loan $11,400 (2.5 years to go, $277 pr/mo) Total debt: Total monthly payments for all of the above debt is $733. I have Approximately $50,000 in equity in my home, and was wondering the following: Should I increase my HELOC maximum amount to $40,000 and then consolidate all current debt by paying it off with the low interest HELOC? I would like to sell my current home and buy a bigger home within 4 years, so I don't think this makes sense to consolidate because I would lose all of my equity for the new home. Thoughts?
A: You don't give all the details, so I am going to have to make some assumptions. I'll assume that your student loans are very low interest, perhaps in the 3% range. It doesn't make sense to re-fi them at a higher rate, so I'd leave them as-is and pay them off on schedule. The credit card bill is normally the one you want to re-fi since they are usually at 10% to 20%. But you have only a trivial amount of debt here, so simply pay it off and avoid the interest fees. Just get rid of it and don't worry about it any longer. Your H/E loan of $2600 is also a trivial amount. You should be able to knock that one off in a month or two if you put your mind to it. What remains are the car loans. I really hate to see people turn a short term debt into a long term debt. Put another way, it is dumb to pay for an item that lasts 4 years with a 15 or 30 year mortgage. What you end up doing here depends on the interest rates. If they are a high rate, say above 6% or so, then use the H/E loan, and work like crazy to pay it off before you go into your next home. If the rates are zero or low, then you are better off to leave the loans as-is, but still work like crazy to pay them off early. When getting your next mortgage, debt is debt. It doesn't matter where the debt is, it still counts against your ability to borrow. Your best bet is to pay it off. That means maybe going without for now, and working extra hard to pay it off. But that will put you in a far better financial position later on, and perhaps get you a better loan on your next house.