Dear Dr. Don,
My husband, 47, and I, 44, have no kids and are absolutely debt-free except for our home. We’ve had a $100,000 home equity line of credit in place since 2003. We currently have about $140,000 equity in our home. We plan to stay in our home forever.

We’ve heard about how unused HELOCs are being taken away, so we recently applied the $100,000 to our mortgage principal and had the bank recalculate our mortgage. Our current first mortgage rate is fixed at 5.87 percent and we have 25 more years to pay that off. Our HELOC is a variable-rate loan, currently at 2.74 percent. As a result of all this, we have approximately $500 extra each month.

We have a six-month emergency fund already in place in a high-yield money-market account, but we do not fully max out our 401(k) and/or our Roth IRA because we both have taken huge losses on these recently.

What do you advise we do with the extra $500 each month? Currently, we use it to make additional principal payments on the first mortgage.
— Barbara Balances

Dear Barbara,
You’ve made some smart financial moves, assuming you can accept the risk of the adjustable-rate HELOC. By using an attractive rate on your HELOC to pay down the principal balance on the first mortgage, you recast the first mortgage to get a lower monthly payment while keeping the same 25-year remaining term on that mortgage. You’ve got a solid emergency fund in place to help you navigate rough financial times.

I’d like to see your contribute at least up to the limits of any corporate match on the 401(k) plans — if you’re able to do so — because of the high return you get from the company match. Your retirement account may have taken a big hit, but that’s not a reason to stop investing in the account, although it may be a reason to change how that account is invested.

There’s an argument for using the $500 a month to pay down the HELOC because it would mitigate the interest rate risk in that loan. With such a rate disparity between the first mortgage and the HELOC, however, I don’t see the harm in using the money to pay down the first mortgage.

If fixed rates get low enough, you may want to consider refinancing your first and rolling the second back into the first mortgage. That’s a reason to keep chipping away at the mortgage balances. You can keep an eye on where mortgage rates are headed by reading Bankrate’s weekly “Rate Trend Index,” and “Mortgage Analysis.” I have copies delivered to me as an e-mail every Thursday morning. You can, too.