should I pay down my home equity loan or pay off credit cards?

Question

Hi. My home equity loan is an interest only adjustable and I am currently paying something like 7.02 (I have a rate of 1.25 below prime). I also have credit card debt on two cards, but they are fixed at 4.02 and 4.99. I know its usually better to not have the credit card debt, but since the rates are fixed and lower than my heloc, should I work on paying the heloc off first (I owe twice as much on my heloc as I do on my credit cards). Thanks.

Answer 1

Let's take a look at the rates after taxes as interest on the HELOC is tax deductible:

This assumes you are in the 25% bracket.

HELOC = 7.02%
Tax Benefit = 1.76%
After Tax Effective Rate = 5.26%

Credit Cards = 4.02% and 4.99%
Tax Benefit = %0
After Tax Effective Rate = 4.02% and 4.99%

These are the rates you should be comparing. Even with tax benefit factored in, you are still paying more for the HELOC but the rates are very close. Bottom line, pay off what you are most comforable paying off. Personally, I would pay off the credit card with the lowest balance first ......but that is just me.......

Answer 2

Wayne Z is dead on here. You get to deduct the interest on the HELOC so it is debt that is actually earning you some money back in the end. I also feel that it is a lower risk loan. If you get sick or lose your job, you can always sell your house and pay off all of your home debt. You cannot do the same with credit cards since they are all unsecured.

Answer 3

Personally I think it would be wiser to pay extra on the HELOC and get it paid off soonest because it can go up in its rate. Also it will still be there if an emergency comes up. Pay what you can on the credit cards but try to pay more than the minimum and discipline yourself to not use them except when you absolutely must. Once the HELOC is zero you can bunch up on the cards and wipe them out faster. Takes a few years, but it can be done if no disaster strikes!

Answer 4

An interest only loan won't always be interest only. There's usually a time limit before you have to start paying on the principal. That's the kind of loan we usually take out when we KNOW we will pay it off before it goes to making payments on the principal, which would be considerably higher payments. I'd tackle that one first. But you need to be making payments on all of them, as you know.

Answer 5

I would pay off the helocsince it is tied to your home credit card debt is usually unsecured and in case you lose job and can not pay do not want your home in jeopardy

Answer 6

Pay off your credit cards first.