Get rid of home equity or car loan?

getoutofdebt · #1 (**permalink**) 11-11-2006, 08:45 AM

I've been reading some other posts about getting rid of debt before accumulating too much money in savings. 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?

vishenda · #2 (**permalink**) 11-11-2006, 09:45 AM

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.

Hope this helps, have a super day!

Ima saver · #3 (**permalink**) 11-11-2006, 09:54 AM

I would pay off the home equity loan first. Then I would take that payment and add it to the car payment. You should move your cash into an account that is paying at least 5%. I can get 5.25% locally with at least $50,000 in the account.(with a brick and mortar bank)

ren · #4 (**permalink**) 11-11-2006, 02:25 PM

Going contrary to the tide: If you deduct the interest on the home equity loan, it may actually have a lower interest rate.

For example, if you're in the 25% tax bracket:
7.25% x (100% - 25%) = 5.4375%

This would also make a smaller dent in your savings. Of course, if you don't do deductions, paying off the home equity loan before the car note is the better option due to the higher interest rate.

LuxLiving · #5 (**permalink**) 11-11-2006, 05:04 PM

I'd ask what shape is the automobile in?? What are your plans for when it's caput?

getoutofdebt · #6 (**permalink**) 11-11-2006, 06:32 PM

The car is in excellent shape and we plan to keep it the rest of its life hopefully. If anything happens, we'll get another more reliable used car.

One other thing, because of the new baby on the way, we probably will be buying another used car for $20000 loan.

creditcardfree · #7 (**permalink**) 11-11-2006, 08:13 PM

Did you accumulate the $90k by saving it? If the answer is yes, that tells me you have the ability or income to save more in the future. Is the money for the business, or live off while you start the business or both?

Personally, I would pay off all the debt, buy the 2nd vehicle with cash (possible a less expensive vehicle) and then save like crazy to accumulate more cash to start the business. I think you put yourself in a better position when starting a business to have no debt in your personal life...less stress the better when starting a business.

Broken Arrow · #8 (**permalink**) 11-11-2006, 09:03 PM

This is just me, but I would have paid both off. Your overall liabilities isn't the only thing that will improve by doing this, but your overall monthly budget as well. Not having to pay two additional bills each month would help ease things, no?

Also 90k is way too much too be put in a savings with only 3-4%. 5% minimum is what I would aim for at this point in time.

As for the second vehicle, I would try to find a way to make do without it. However, if you do decide to get one, I agree with paying it off in cash.

getoutofdebt · #9 (**permalink**) 11-22-2006, 10:18 AM

Thanks so much for the advice. So I have paid off for the car loan and bought the new vehicle cash. I went to seek "professional" advice from my bank's financial advisor. Their recommendation is that they can consolidate my 1st and second mortgage into another mortgage with 6.125% fixed interest and another 30 year term.

Is this really a good idea? I've been paying the first mortgage and home equity loan since I've had the house for 4 years and the first mortgage has already a fixed rate of 6.375%. Why would they recommend refinancing instead of just paying off the home equity loan? I feel like I'm getting the run around because I've already paid 4 years worth of interest on the 1st mortgage to get into another one for the same term and not much saving in the interest rate?

tinapbeana · #10 (**permalink**) 11-22-2006, 10:30 AM

Quote:

Originally Posted by getoutofdebt

Is this really a good idea? I've been paying the first mortgage and home equity loan since I've had the house for 4 years and the first mortgage has already a fixed rate of 6.375%. Why would they recommend refinancing instead of just paying off the home equity loan? I feel like I'm getting the run around because I've already paid 4 years worth of interest on the 1st mortgage to get into another one for the same term and not much saving in the interest rate?

my guess is they're making money on the fees for the consolidation and hoping that you'll be awed by the 0.2% interest rate reduction! if it were me i'd just pay off the equity loan, and then roll the payments you'd been making on that onto the regular mortgage...

HalMd · #11 (**permalink**) 11-22-2006, 10:54 AM

Pay off 2nd mortgage. Get HELOC for emergency fund. Try to borrow to start your business, instead of pay cash. Move half of your savings into a money market account earning 5%, put the other half into mutual funds.

disneysteve · #12 (**permalink**) 11-22-2006, 01:54 PM

Quote:

Originally Posted by getoutofdebt

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?

I would pay off the car loan first and strive to never have a car loan again. Ideally, you shouldn't borrow money to purchase a depreciating asset. I can't help but wonder why you still owe $9,500 on a 7 yr old car. How long was your loan and how much is the car worth?

What I would do after paying off the car would really depend on your overall financial situation. Are you saving enough for retirement? Do you have any other debt (credit cards, student loans, etc.)? Without knowing that, I can't recommend paying extra on the home equity loan (what was that loan for, by the way?).

Also, there is no way you should be keeping $90,000 earning only 3-4%. That is ridiculous in today's world. You should move all of it to a high yield account. There are plenty paying 5.25% with little to no minimum balance. Then, with whatever portion of that exceeds your short-term needs, start dollar-cost averaging into a couple of good mutual funds to boost your returns.

sakigt · #13 (**permalink**) 11-22-2006, 01:57 PM

Quote:

Originally Posted by getoutofdebt

Thanks so much for the advice. So I have paid off for the car loan and bought the new vehicle cash. I went to seek "professional" advice from my bank's financial advisor. Their recommendation is that they can consolidate my 1st and second mortgage into another mortgage with 6.125% fixed interest and another 30 year term.

Is this really a good idea? I've been paying the first mortgage and home equity loan since I've had the house for 4 years and the first mortgage has already a fixed rate of 6.375%. Why would they recommend refinancing instead of just paying off the home equity loan? I feel like I'm getting the run around because I've already paid 4 years worth of interest on the 1st mortgage to get into another one for the same term and not much saving in the interest rate?

Not to mention the closing costs you would have to pay. Doesnt sound worth it to me.

Im with ima. Id pay off the home equity, make double payments on the car, and move the savings into an ING account. If you arent comfortable with moving all of it there, move some of it to try it out.

disneysteve · #14 (**permalink**) 11-22-2006, 03:17 PM

Quote:

Originally Posted by sakigt

move the savings into an ING account

ING is only paying 4.4%. There are numerous banks paying 5.25% or more that are just as safe and convenient as ING so there is no reason to settle for that low a rate, especially when you are talking about a substantial amount of money ($90,000).

Harrison · #15 (**permalink**) 11-22-2006, 09:10 PM

For me, I will pay off the home equity and the car loan. There are 2 reasons I will do this:

1. If you going to start a business soon, then you must secure you and your family from debt.
2. After this, you can save up the monthly payment for home equity and car loan and you will have extra money, every month, to start your business or invest it or prepare for an emergency fund.

Quote:

Originally Posted by getoutofdebt

Thanks so much for the advice. So I have paid off for the car loan and bought the new vehicle cash.

From what I undertand, you buy a new car right? I think buy a new car is not the correct way to manage your money in personal finance. Just my personal opinions

disneysteve · #16 (**permalink**) 11-23-2006, 09:05 AM

Quote:

Originally Posted by Harrison

From what I undertand, you buy a new car right? I think buy a new car is not the correct way to manage your money in personal finance. Just my personal opinions

The OP said, " we probably will be buying another used car for $20000 loan." So I think they meant "new" as in new to them, not brand new.

I agree with you, though, that buying a new car isn't generally the way to go. And taking a $20,000 loan to buy a car, new or used, absolutely isn't the way to go. If you need to borrow 20K to buy a car, you are shopping well out of your price range. There are loads of quality used cars costing far less than that. In fact, there are plenty of new cars that don't cost that much.

The OP did say they paid cash for the "new" vehicle, so no additional debt there which is the way to go.

Tree0164 · #17 (**permalink**) 11-26-2006, 05:24 AM

I would pay off both the car and home equity loans. You are losing out on money by leaving so much in a savings account.

zabbkoff · #18 (**permalink**) 11-28-2006, 09:21 PM

I see I'm a bit late to the original post, and you've already paid off one car and bought another in cash. Less debt = good.

The consolidating mortgage idea does not seem like it's in your best interest.

Check out this site to see if it's good for your particular case. It would only make sense if you absolutely knew that you weren't going to move or refinance for quite a while.

However, regarding starting your business, I think it's important to look at the risk it involves, especially with upfront costs. If, unfortunately, it were to go belly up in 6 months or so, how much money do you estimate that would you lose? How does it compare to the amount you have left in savings? Are there lost wages from the venture? Also, what is the potential upside/profit?

Of course, these may be very difficult to answer, but I guess the bottom line is if you could lose your business and still be in good financial shape, then maybe you should take the plunge sooner rather than later. If things did work out you might have years worth of extra income. But since you have a family to take care of (Congratulations!!! I'm a proud new father of a 4 month old!) you have to be careful about not running your families finances into the red.

I'm assuming you've thought about all this, but since I didn't see it mentioned, thought I'd throw it into the mix. Regardless of what you choose, good luck!

Elgin526 · #19 (**permalink**) 11-29-2006, 08:36 AM

First, I think you need a financial advisor. Find a fee based one, don't talk to the bank about financial planning, I'm sure they are very nice but they are biased! A fee based financial planner will have impartial advise on how to manage your money. They'll look at your total finanical picture (assets, debt, income) and then your life goals (having kids, opening your own business, retirement planning, saving for college) and really help get you on the right track.

Off hand, based on what you said, I'd pay off both the HEL and the car loan, buy a 2nd used car for around $10,000 cash ($20,000 for a used car is way too much, IMO). Then, I'd take what I was paying per month towards the the HEL and car loan and put that into savings, you should get your savings back up again in no time. I'd also move the savings to a higher yeild savings account.

Being debt free before having kids is great, you just never know what will happen, if (heaven forbid) something were to go wrong, you'd have the ability to focus solely on your family and not have to worry about making loan payments!