Using Home Equity Credit To Pay Mortgage
REM # A587
By Ilyce R. Glink
Summary: The writer asks about using a home equity line of credit to pay off a mortgage. After analyzing the numbers, Ilyce feels this is a good deal.
Q: I owe about $29,000 on my home mortgage. It is a 15-year at 6-7/8 percent, with a monthly payment of about $1,000. I have about 7 years left on the loan.
Should I pay off the mortgage with my home equity line of credit? My bank is quoting 5 percent.
A: I think you have a unique opportunity to pay off this loan by the end of 2006, that’s 2 years instead of 7 years. Let’s look at the numbers.
If you use your home equity line of credit and structure the repayment period for 7 years, your payment falls from $1,000 to $409 per month. If you use your savings of about $600 per month to prepay this loan, you'll have paid off the $29,000 before the end of 2006, or almost 5 years sooner than if you keep the loan you currently have.
There is a small amount of risk. The risk is that the interest rate will go up and you’ll pay a little more. But since you’re going to pay off this debt in two years, it’s a very small risk to take for a huge upside.
I'd take your bank up on their offer. Ask for a home equity line of credit that can be opened without any fees and start paying off this debt.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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