What's The *Smartest* Way to Pay Off This Loan

[Christine]

Several years ago, when the interests rates were really low, I took out a Home Equity Line of Credit (HELOC), to get hardwood floors put in my whole house, the driveway fixed, etc. The amount that I used was approximately $23,000. I have been paying on this for about 3 years and have made a few smaller home improvements with it here and there. I now owe about $16,500. Problem is, with short-term interest rates rising, my interest rate has gone to 7.25% on this loan. Paying this kind of interest kills me and I feel like I'm just not making any headway on this debt. I currently pay $400 per month on this and cannot pay anymore due to other expenses.

In the meantime, I am maxing out my 401K ($15,000 per year) in order to get the tax break. I also have a good amount in my 401K.

But this HELOC is bothering me.

Should I just continue to "chip away" at $400 a month.

Should I reduce my 401K contributions and try to pay more and just take the tax hit.

Should I take a loan from my 401K and pay off this "monkey on my back?"

What do you think?

 

[BillSears]

Should I take a loan from my 401K and pay off this "monkey on my back?"

I'd advise not doing this. From what I've heard taking a loan on your 401K should only be a last resort otherwise you're paying double taxes on it. For example:

$10,000 goes into your 401K tax deffered(it's really not tax free). You borrow that $10,000. Now you earn money that is taxed and you pay back that $10,000 with money that has been taxed. Then when you pull the $10,000 out at retirement you pay taxes on the $10,000 you've taken out. So you end up paying tax twice on that $10,000.

I'm in a similar situation. I've got that darn HELOC that I took out without really knowing what I was doing. I should have taken a fixed rate home equity loan instead. What I'm doing is just paying it off as fast as I can. The fees involved with refinanceing would eat up whatever I'd save in interest rates and the loan should be paid off in about 14 months. But it's annoying to see that interest rate.

 

[Christine]

I'd advise not doing this. From what I've heard taking a loan on your 401K should only be a last resort otherwise you're paying double taxes on it. For example:

$10,000 goes into your 401K tax deffered(it's really not tax free). You borrow that $10,000. Now you earn money that is taxed and you pay back that $10,000 with money that has been taxed. Then when you pull the $10,000 out at retirement you pay taxes on the $10,000 you've taken out. So you end up paying tax twice on that $10,000.

I'm in a similar situation. I've got that darn HELOC that I took out without really knowing what I was doing. I should have taken a fixed rate home equity loan instead. What I'm doing is just paying it off as fast as I can. The fees involved with refinanceing would eat up whatever I'd save in interest rates and the loan should be paid off in about 14 months. But it's annoying to see that interest rate.

Thanks!

If I thought I could pay mine off in 14 months, it probably wouldn't bug me. But this is looking like it's going to take at least 3 years (it's like having another car payment).

When I first got the loan, I was able to pay $600 per month, but my DH's truck failed and we ended up having to add on another car payment. I really hate to cut the kids' music lessons....

 

[DawnCt1]

Before you consider that loan a 7.25% loan, first factor in what your "true loan rate" is. Consider your tax bracket. If you are in the 28% tax bracket, you are paying closer to 5%. The market is doing well right now so I don't doubt that you are earning more on your 401K contributions than 5%.

 

[hiwaygal]

I'm certainly not financially minded...AT ALL!!!

But, what kind of interest are you paying on your mortgage? Would it be possible to refinance your mortgage and put the HELOC into that?

Of course, that option would only be a "good" one if you've had your mortgage for awhile (built up equity, and maybe able to lower your interest rate).

I am in the process of doing this and it's saving me about $500 a month!!! And it will be tax deductible.

 

[Christine]

I'm certainly not financially minded...AT ALL!!!

But, what kind of interest are you paying on your mortgage? Would it be possible to refinance your mortgage and put the HELOC into that?

Of course, that option would only be a "good" one if you've had your mortgage for awhile (built up equity, and maybe able to lower your interest rate).

I am in the process of doing this and it's saving me about $500 a month!!! And it will be tax deductible.

My mortgage rate is at 5.12% I already thought of that and the only way for me to go is "up" in interest.

 

[golfgal]

Can you refinance that line of credit into a fixed rate loan for a better interest rate? Maybe spread it out over 5 years for the loan and pay extra against the principal, thus paying it off faster? I don't have exact numbers but say you spread that loan out over 5 years reducing the monthly payment to $200 or what ever, then take the extra $200 you are already paying and make a principal only payment with that. You will probably pay less in interest and have it paid off in a couple years.

 

[Christine]

Can you refinance that line of credit into a fixed rate loan for a better interest rate? Maybe spread it out over 5 years for the loan and pay extra against the principal, thus paying it off faster? I don't have exact numbers but say you spread that loan out over 5 years reducing the monthly payment to $200 or what ever, then take the extra $200 you are already paying and make a principal only payment with that. You will probably pay less in interest and have it paid off in a couple years.

Hmmmmm....I'll have to query the credit union on this one.