# Should we pay down our HELOC or pay extra towards our mortgage?

We have a mortgage at \$207K at 5%, a HELOC balance of \$7500 at 3.25% and a credit card balance of \$3300 at 13.9% APR.

In savings we have \$116K and in a mutual fund we have \$21K

My plan was to take from savings and pay off the credit card and the HELOC and then take the money I would be paying those each month and put it back into savings. I figure I would get back to the current balance in 7.5 months.

My wife thinks it's best to pay off the credit card, pay the minimum on the HELOC and pay extra towards the mortgage and take \$10K and put it into the mutual fund.

Whose plan is better?

Subjective I know but I figure I'd throw this out there.

• Never forget to factor in risk when doing your calculations. If I was making the decision, I'd keep six months living expenses in the savings account, pay off the credit card and the heloc and throw the rest of the 116K at the mortgage. Security and peace of mind that comes from having a paid off home has value too. Aug 15, 2012 at 21:44
• I should have mentioned that we'll be looking to buy a new home in the next year so we need to have some cash on hand, not just the value of our home.
– Tom
Aug 15, 2012 at 23:28
• Are you underwater on the mortgage? If you are then you have to figure that into the equation. If you sell the house in a year you might have to bring money to the table. In any case you will, have to settle the HELOC when you sell the first house.. Aug 17, 2012 at 0:21
• Keep the HELOC open if you can at \$0, as emergency money. May 1, 2018 at 5:15

Oh, don't expect us to take sides, we love both our parents the same!

As to the pragmatic decision making - simple math. The disagreement is whether to pay off the HELOC or to invest into the mutual fund instead. Well, check the yield of the fund, compare to the costs of keeping the HELOC balance, and see which one makes more sense.

Just compare the expected payments and gains for each of the scenarios and you'll get your answer.

Does your company offer matching on 401(k) deposits? Are you depositing at least to the match? If not, that should be priority one. Kill the card, never pay that kind of interest. Ever. Why are you paying 5%? The 30 year rate is 4% right now, and even if you pay some closing costs, you'll recoup the money quickly. In general, borrowing to invest is a losing game. I agree, get rid of the HELOC as well. If you refine to 15 years, you can get 3.5%, and in 16 years won't regret the decision.

• Yes, both our companies offer full matching on our 401(k) deposits. We refinanced at 5% a couple of years ago, I guess we should look into it again but we're also planning on buying a new home in the next year or so.
– Tom
Aug 16, 2012 at 0:16
• Understood. Search for no point/no closing. Even if it's 4.5% (30 yr) it's worth the paperwork to save \$1000/yr interest till you move. Other than that, my vote is for littleadv response. Aug 16, 2012 at 1:37

The mortgage has a higher interest rate, how can it make sense to pay off the HELOC first??

As for the mutual fund, it comes down to what returns you are expecting. If the after-tax return is higher than the mortgage rate then invest, otherwise "invest" in paying down the mortgage. Note that paying down debt is usually the best investment you have.

• The only caveat I have to the mortgage issue is that we plan on buying a new home in the next year or so, so paying it down to zero isn't an absolute priority at the moment.
– Tom
Aug 16, 2012 at 0:22
• paying HELOC first is IMHO better, because in case of need you can recover the money. Paying the mortgage back makes it much more difficult (apply for refi/new HELOC etc). Aug 16, 2012 at 0:54
• @littleadv With \$116K in liquid savings I wouldn't worry about needing to recover the HELOC money. Aug 16, 2012 at 19:30
• @littleadv That's true, but the HELOC will have to be closed when they buy the new house anyway. Aug 16, 2012 at 21:14
• I didn't read it like that. Aug 17, 2012 at 3:23

Taking a slightly different approach, I would have the following priorities:

1. Make sure you are taking full advantage of your company's 401K matches. Really, they are like free money.
2. Pay off the credit card.
3. Work out how much money you will need to put a down payment on the house you want to buy in a year, preferably so that you can pay 20% down. Add on something for buying new furniture etc. and a bit for safety. Make sure you keep that in liquid savings.
4. Ordinarily an emergency fund would be good, but the liquid savings from stage 3 should be enough. Accept the fact that if you lose your job you won't be able to upgrade the house.
5. Make extra payments on the mortgage, since it's the highest interest rate, to pay it down as much as possible. Use money from the HELOC if necessary. I have some sympathy with the idea of paying down the HELOC in order to give yourself borrowing room in an emergency, but if the funds from step 3 are sufficient I wouldn't worry.

I'm not sure it's worth the hassle to renogotiate either the HELOC or the mortgage if you think you are only going to have them for a year. If you can renegotiate the HELOC with the same lender that might be worth it.

I'm not a financial expert...

In my opinion it might be best to have as much in savings (aka being liquid and the funds are insured by the FDIC) as possible for a couple of reasons.

If you lose your job, your equity line could then get frozen if the bank finds out. What you want to avoid is only owing 20 grand on your home (because you paid a chunk off with your savings) but because you lost your job you can't take any money out of your home and suddenly you are equity rich, cash poor, and jobless, that is a potential for big trouble.

I'm curious why you borrowed on the Heloc since you seem to have a significant amount in savings anyways. What you really might want to look into is lowering your mortgage interest rate to around 3.5%

I would use the credit card debt as a reality check. Make sure every month you are making at least a 10% to 15% of the total due payment. This dilutes the interest rate charge and lets you see the true "drag" credit card debt payments really have on your life.

I don't know this for sure but the higher amount credit card payments you make probably reflects well on your credit score, and of course, never be late with the credit card payments either.