EchoBay Expert: I'm wondering if using a home equity credit line or home equity loan to pay off my current mortgage is a wise decision. I looked at refinancing my current loan but the closing costs seem too high in relation to the small amount I have left on my loan. I owe $19,000 on my mortgage and the interest rate is 7.70%. Thanks.
Loyal Reader: For small amounts, such as yours, a home equity loan or home equity credit lines can be a sensible way to pay off your first mortgage. By paying off the debt with this type of loan, you will also still maintain the ability to deduct the interest.
If rates are much lower than your current loan, you could also stand to save thousands in interest. Home equity loans and home equity credit lines also generally have very low closing costs and you can find deals with no closing costs. Do be vigilant in your research of no closing costs loans though.
In all likelihood, the lender is making up for the fee in other ways. Since you owe so little, it is also likely you could pay off other debt by rolling it into the loan and taking advantage of the lower interest rate and larger tax deduction. If you owe a large amount on a mortgage, refinancing into a home equity line of credit may not be best for you.
Rates on HELOCs are generally variable and will fluctuate over time. While you may have several years of low rates and therefore a nice amount of savings in interest, you will likely experience times when rates soar and along with it your payments and the amount of interest paid.
For long-term loans, a variable rate is a risky endeavor to undertake. When you are faced with the possibility of losing your home if you cannot make the payments, a fixed rate and a fixed payment plan is the way to go for long-term debt.