Refinance or HELOC? What's your advice?

**anonymous_saver** · 01-25-2008, 10:15 AM

Option C: Neither option A or B.

It is not a good idea to take a HELOC in order to pay off your school loans, you are putting your house in danger!

Instead, consider getting rid of your car, and buying a cheaper car. Do you really need a car that costs $20,000+?

This also depends on your income level, but your mortgage is pretty high, so I'm assuming you make a good income...

How much extra money do you have left each month?

**nolegs** · 01-25-2008, 10:36 AM

I would agree if taking out the HELOC would make my debt greater than the value of the condo, but since the house is valued at $400k+ and I already have $100k in equity, I don't think taking out a $35k loan would put it in jeopardy.

As for the car, that's a personal preference that I enjoy. Of course I don't NEED it, but I don't NEED half the stuff I have.

I have about $1.5k left a month, but most of that goes to other expenses.

I'm looking at this as more of a strictly financial decision. Does it make more sense to get the HELOC or the Refi?

**sweeps** · 01-25-2008, 10:44 AM

What do you predict interest rates will do in the future? Your HELOC is variable so that makes a difference in the calculation.

Also is the car loan relevant here? Are you planning on paying that off with your refi or HELOC?

P.S. Your student loan interest may be tax deductible as well.

**Broken Arrow** · 01-25-2008, 10:48 AM

Hello nolegs. Welcome to the forums. Strange name by the way.

Your student loan is not tax deductible? I'm quite positive that it is.

In your case, I don't see the point in using a HELOC to pay off your student loans. In fact, you'd only make it worse by turning a loan that isn't secured to anything that can be repossessed to one that is! (Unless you're this one guy I know of who has a 13+% interest rate. That's a different story.)

Option B may (or may not) be worth looking into. Here's a blog entry that I think is relevant to the topic at hand. If you have any specific questions, you can ask her there and I'm sure she would be happy to assist.

**nolegs** · 01-25-2008, 11:03 AM

The car loan likely isn't relevant here. Though under what circumstances would I wrap that in, too?

My student loan isn't tax deductable because I make over $65k.

(from IRS website)
You can claim the deduction if all of the following apply:

1. You paid interest on a qualified student loan in tax year 2007
2. Your filing status is not married filing separately
3. Your modified adjusted gross income is less than $65,000 ($135,000 if filing jointly)
4. You and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return

Let's assume interest rates will stay in the 5-6% range.

**jIM_Ohio** · 01-25-2008, 12:18 PM

You need to compare the total payments and what you will do with money you save (on cheaper new payment).

HELOCs have yearly costs to maintain (keep credit line open).
2nd mortgages do not (but closing costs might be higher?

Are you in a cash flow crunch?

Now:
Pay 2k to mortgage, pay $845 to student loans, $700 to car. What are repayment periods on student loans and car? 5 years, 10 years, 30 years?

Do you itemize your income taxes?

Cash flow can improve by doing this. What will you do with freed up cash?

Buyer beware:

if $845 payment is for a 5 or 10 year period and HELOC is for a 10 or 15 year period, of course the payment will be cheaper, but that does not make it a good choice.

If you can keep repayment period the same (if you are on pace to pay off car in 3 years and student loans in 7, then make sure you send enough to keep repayment period the same- the next 3 years pay a large amount (close to $1500), then reduce this amount once 3 years elapses and the car is effectively paid off.

My suggestion- if you are good at spending and managing cash flow... do the HELOC with the following personal contraints:

Keep the $1545 payment to HELOC for next 3 years. The balance will start at 55k. In 3 years, the hope would be you would have this down to 25k or so.

In these 3 years, your cash flow improves only from increase in tax return. Effective interest rate in 25% tax bracket is (1-.25*7.75=5.8125%). You should get 25% of the interest paid back on tax return.

After 3 years, you can lower the payment some, but still make sure HELOC is paid off within 5-7 years of opening it. reasons

1) if you move, the HELOC comes due. If HELOC is paid off, that is tax free money in your pocket
2) refinancing whole house forces you to pay for house over 35 or 40 years (assuming current mortgage has been around for 5-10 years).
3) HELOC is still there if you need it. if you refinance whole thing, you need to close another loan to tap home equity for house improvements, emergencies or other. If you open HELOC now, you can use it whenever you want.
4) the 5.75% rate you have on your first mortgage is too good to give up for a short term loan. I would only refinance if you save 8% on loan payment (keeping the same repayment period you have now).

**safari** · 01-25-2008, 01:21 PM

Financially speaking, the best scenario would be to refinance at 5.625% with cash out, so you could roll your student loan and car loan into your mortgage. Your cash flow will improve greatly, and you will be able to save more money every month. In addition, rolling your car loan into mortgage will make it tax deductible. That will require adding $55K to your mortgage, which will make it $352K. Considering that your condo is only worth $410K (might be even lower now), that puts your equity below 20%, so that won't work. If you only roll your student loans into mortgage, it will put you at $332K, while the maximum mortgage for you would be $328K (80% of the condo value). Might be worth a shot, but everything will depend on the appraisal.

**nolegs** · 01-25-2008, 01:44 PM

This is some good and actionable advice. Thanks.

I am in a cash flow crunch in that I'm not really saving anything outside my condo investment and 401k. The money saved will be invested.

The auto loan was for 5 years and I'm 2.5 years into it.
The grad school loan was for 10 years and I'm 2.5 into it.

Why does it matter if I itemize my income taxes? I didn't last year, but I didn't really have much to itemize as I didn't purchase my condo until March of last year.

I will go with the HELOC, but should I pull from the HELOC to pay off just my grad school loan or should I pay off the car loan, too.

The grad school loan is a no-brainer since the rates are the same but the HELOC is tax deductible. But the car loan is only 5% and it's due to be paid off in 2.5 years anyways.

As you suggest, I plan on maintaining the same payments per month. It would just go to the HELOC rather than the grad school loan (and possibly car loan). The savings would come in the tax return.

if it makes a difference, my income is 100k+ so I think that puts me in the 35% tax bracket.

**safari** · 01-25-2008, 02:00 PM

By the way, why are you even considering a HELOC with the interest rate higher than prime? I've seen offers at 0.5% below the prime rate.

**nolegs** · 01-25-2008, 03:07 PM

hmm... I guess I've been looking in the wrong places. Can you recommend a site or company that offers below prime HELOC's? I have a 700+ credit score.

**jIM_Ohio** · 01-25-2008, 07:35 PM