Home Equity Loan
Get rid of home equity or car loan?
I have a dilemma. We have a $14,000 home equity loan at 7.25% apr, a car loan on a 7 yr old car for $9500 at 5.99% apr and $90000 in savings at 3-4% interest rate. We are currently having a baby and have short-term goals of starting a business so we don't want to get rid of too much cash. We probably will only be in this house for another 3-5 yrs. Should we pay-off the home equity loan or the car loan or both? Thanks for your replies.
Public Comments
- Ask an accountant. Often you can deduct home equity loans and rarely can you deduct car loans plus paying interest on a depreciating asset (car) is something I was tought was sinful. What I'm saying is pay off the highest rate first, but in deciding which is, you need to look at the after tax (or tax deduction) rate, plus at whether one is variable and likely to vary, so to speak.
- Working at a bank, I am inclined to tell you to pay off the high interest loan first. First of all, you are missing out on equity in the house. Second of all, there is no point in paying interest if you have the money sitting in a savings account! I realize that you are looking to start a business, but it sounds like you won't be doing that until you are settled with the baby. So instead of making payments on a high interest loan out of your checking account... pay off the home equity in one lump some out of your savings, then (I'm sure your bank has this option) set it up so that there is an automatic deposit made directly from your paycheck into your savings account every week. This way you are not making a payment to pay off interest, you are making a payment to earn interest! You may lose out on some liquidity, but you are putting yourself in a better position debt-wise.
- I would defiantly not pay the car loan just because of the depreciation of vehicles. The $9500 that you use to pay the car is now $6500 or so. The money would only be worth what the car is worth. I would pay down the mortgage because its not like getting rid of the cash is in a line of credit so if you ever need it you can get it back. I always would try and keep as much liquid as possible.
- Home equity loans are deductible for tax purposes so if you are itemizing your taxes your home equity loan rate will be less than 7.25% depending upon your tax rate. So if you have a 7.25% interest rate and you are in the 25% tax bracket your effective interest rate is 7.25% multiplied by (1-.25) or 5.44%. I don't know your tax bracket so that is just an example but at this rate your car should be paid off first then the home equity loan. You aren't earning much on your savings so I would consider paying off all loans with your savings. The monthly payments that you were paying should go into savings.
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- Keep it simple......$90K in the bank liquid.....debt of $23K....pay off both...that's just over 20% of your nest egg..... Think about how much extra (each month) you can immediately put back into the bank freeing up two payments each month. MOVE the remaining 65K into (at the very least) a CD LADDER....a 9 month CD at 5.05% will earn you a quick $2,509!!!!
