Trade mortgage for home equity line of credit | Scott Burns
With interest rates so low, it may pay off to replace a first mortgage with a home equity line of credit, which could cut the monthly payment quite a bit.
Q: I am an 81-year-old divorcee with no children and in relatively good health.
I have $72,000 in an income-producing account (ha), from which I receive about $170 a month.
I also receive $1,350 per month from Social Security.
I have a $24,000 IRA account from which I make a mandatory withdrawal of $1,300 per year.
But I also have a $65,000 home mortgage at 5.75 percent with a monthly payment of $411 a month, excluding escrow.
My question: Do I pay off my mortgage?
I pay no income tax due to the level of my income.
A: Paying off the mortgage would make a material difference in your life, but it also presents a hazard.
The material benefit is that you’d no longer have a mortgage payment of $411 a month.
Since some of the cash for the payment is the $170 a month you are taking from your $72,000 savings account, your spendable income would rise by the difference, $241 a month.
That would make it a lot easier to get through the month.
The hazard is that paying off the mortgage would reduce your financial assets quite a bit — it would take your savings account down to $7,000 from $72,000.
Your only other financial resource is your $24,000 IRA account.
Even so, it’s probably a reasonable trade-off. If your mortgage and other resources were larger, you could be less all-or-none about the results of the transaction.
You could, for instance, refinance to a smaller mortgage at a lower interest rate so your monthly payment would be lower.
Unfortunately, the cost of a small first-mortgage refinancing is prohibitive.
If the value of your house is a good deal greater than your $65,000 mortgage, I’d like to suggest another path.
This would be to pay off the mortgage with a home equity line of credit (also known as a HELOC) in the same amount.
These are available in the current market, interest only, for as low as 3.5 percent.
They generally can be done without paying any costs.
So you could replace the first mortgage with an interest-only line of credit.
This could reduce your monthly payment from $411 to an interest-only payment of about $190, a savings of $221 a month.
Then you could use a portion of your $72,000 in savings to reduce the balance, lowering your interest expenses still further.
Currently, credit unions are the best source for these low-cost loans.
The catch here is that home equity lines of credit are variable-rate loans, so the interest rate could rise.
But it could rise a good deal before you’d be paying more in interest than you are currently paying on your mortgage.
Universal Press Syndicate