Is it better to take $20,000 cash and pay down a home equity line or take out a CD?

Question

Is it better to take $20,000 cash and pay down a tax-deductible home equity line of credit or put that cash in a 1-year CD yielding 5.5% interest? The monthly payments on the home equity $20K would be more than the interest earned but since they are tax deductible, does this make more sense?

Answer 1

reducing your debt load is always a good idea

Answer 2

A home equity line of credit is really nothing more then a 2nd mortgage that you can borrow against at will. If anything should happen to your income you could loose your house. From this perspective pay it off. You would be better off in the long run. While you do get a tax break on this line of credit you also have to pay interest on them that can really add up over time. How tight are your finances? How solid is your income? Do you have other savings or investments that equal out your mortgages total? These are things you need to consider. But if you are like most Americans and are living just barely within your means get that credit line paid up and leave it alone. It would actually save you more money in the long term then the CD or the tax break would. (a $10,000 HEL over 15 yrs would be paid back at about $24,000)

Answer 3

I would invest the money in the CD. Unless the $20000.00 would pay off the home equity line of credit, you would still have that monthly output with less to write off on your taxes at the end of the year. At the end of the 12 months you can re-evaluate the investment. If you don't anticipate needing the funds in the next 12 months, you may want to look at longer term investments with a higher interest rate.

Answer 4

From a tax perspective it may be a wash. You miss out on a deduction by paying down the home equity line but would have to pay tax on the CD's interest income. You'd have to crunch the numbers to see if it is worth it.

From a credit score perspective, it is much better to pay down the outstanding balance because it improves your score and allows you to have lower interest rates in the future.

Answer 5

This is a no-brainer!

It's almost a guarantee your home equity interest rate is way over the 5.5% interest you will earn from the CD. As for the savings from the interest, it won't make up the differance.

Pay off the loan.

Answer 6

Pay off the home equity line of credit. That way you will have more to invest in the long run and not have the payments to worry about.

Answer 7

You need to compare the after-tax interest rates. That depends on your tax situation, and the interest rate on the HELOC. From a financial perspective, if you earn more interest after taxes from the CD than what you pay after taxes on the HELOC, invest in the CD. All kinds of good financial info on fool.com

Answer 8

Take Frank B's advice....make sure you check the current rate on your HELOC (not the rate at the time you took it out) . HELOCS are almost always variable tied to the prime lending rate which is currently at 8.25% (your rate may be prime +/- a margin)....do the calculations based on your tax rate (consider tax decuction on interest paid but also tax obligation on interest earned) It looks to me like you would be a lot better off paying down the HELOC.

Answer 9

I think that while the rate may favor the CD, paying down debt is always a good idea.

That's my two cents.

Answer 10

Absolutely take the money and pay down the HELOC. (It is the better thing to do, however, if you feel more comfortable, use 15K of it that way and deposit the other 5K) leaving you an amount of money available in ase of emergency.

Answer 11

If you have 20000 reduce your debt by 19000 and take the 1000 and have a kick *** night out on the town to congratulate yourself on doing yourself a favor.