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Dear Dr. Don,
My banker is advising me to use a home equity line of credit to pay off my mortgage and car loan. Can I do this?
We are preferred clients and have checking and money market accounts with this bank. The HELOC is
called the equity optimizer and has a 3.75 percent variable rate. Is this a good option? There is also a "lock in
rate" option.
We owe $23,000 on the house and $24,000 on the truck. The home is worth about $107,000. The HELOC
would be for $50,000 from Compass Bank.
-- Connie Consolidate
Dear Connie,
Using mortgage debt, like a home equity line of credit, or HELOC, to pay off a car loan can reduce the interest rate
on the loan, and potentially generate a mortgage interest deduction. As long as there's no prepayment penalty on the
car loan, it can make sense.
Refinancing a conventional mortgage with an adjustable-rate mortgage shifts the risk of rising interest
rates onto your shoulders. The current adjustable rate of 3.75 percent is attractive, but you can't be sure how long
it will be with you.
Make sure you understand how an adjustable-rate loan resets over time, any interest rate floors or
ceilings and what index the loan is priced on. Also, make sure you both are willing and able to accept the interest
rate risk.
You can track most indexes on Bankrate's "Rate Watch: Track
leading interest rates" Web page. Locking in a rate for all or part of the loan can reduce the
interest rate risk.
You haven't given me the interest rates on your existing mortgage and car loan to use as a point
of reference, but I'll assume that the adjustable-rate loan is currently substantially below the fixed rate on the
two existing loans.
The Mortgage Professor's Web site has an "Interest Cost
Calculator" that lets you compare a fixed rate with an adjustable-rate mortgage with different
interest rate outlooks.
The other risk is you've securitized your car loan with your home. Miss a few car payments and
the lender repossesses your car. Miss a few HELOC payments and your lender can foreclose on your home.
This doesn't seem to be a major consideration in your situation but, if you have problems in
managing your debt load, then restructuring your debt as mortgage debt can be a mistake.
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