Debt relief using your home equity : Bad Credit Advisor

Debt relief using your home equity

This lady is screaming "debt relief", and she is right, but her husband needs some encouragement.

Q: I and my husband have good credits and make $175,000 a year. We own a gorgeous house that is worth around $325,000. The mortgage is under $110,000 and it is 20 year fixed rate at 5.0% which we got over 2 years ago, thanks to me. We have very little outstanding debt except few credit cards, and my husband's student loans where balance now is about $92,000. It was consolidated at the rate of 8.375% somewhere in 2000 or 2001. How did he get the rate that high, don't know, we didn't know each other back then. Anyway, I am trying to convince him to use the home equity to get rid off these stupid school loans, but he doesn't want to do it, partly because of the great rate we have now and also, I think, doesn't quite understand how it works. He is the musician and quite aloof from everyday money matters. Will you help me to convince him, please! Another thing, the school loans are held by Citibank, and I don't like this bank. I don't want our money filling its pockets.

A: Well, I can't agree with you more, the best way these days to get a debt relief is by using your home equity in either way, taking cash out by refinancing, or getting home equity line of credit.

In your case, the home equity line of credit makes sense, as it will be impossible to get 20 year fixed mortgage rate with anything even remotely close to what you have now. The best you can get for 20 year fixed is 5.875%, and 5.75% or may be 5.625% for 15 year fixed and even that is a stretch. Plus you have to pay the closing costs, something like $1,500 to obtain those rates.

Home equity credit line (HELOC) comes free of any closing costs, sometimes you can pay $300 and get .25% off the interest rate. You have an option to pay interest only. Or you can prepay as much as you want. The best thing is the interest is practically always tax deductible, unlike the student loan's one. The rate is variable and follows the prime which has been going up steadily. I personally don't think it will go much higher, maybe another .5% over the next 3-5 months. Right now, you can get the rate around 6.5% plus/minus .25% depending on few factors. One thing to remember is that it HELOC is repaid over 10 years and any unpaid amount is due on the 120th month. You can always get a new HELOC to pay an old one off.

Now to the numbers: Your student loan is likely amortized over 30 years and I would think that initial amount was around $96,000. So at 8.375% you pay $729 a month with over $600 going to the interest. No tax breaks, remember. Ah, you do remember.

With HELOC, you would pay $1,044 a month, if you pay the full amount. Only less than $500 would go for tax deductible interest and again, that is another payment option you have - paying interest only. With your tax bracket, you will get back probably $120 - 150 for each $500 of interest paid from IRS, but consult your accountant please. And of course you can pay it off any time you want. Makes sense? Makes perfect sense to me.

Wed Jan 18, 2006 03:01PM by Tony | More in Debt Relief |

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