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There is enough equity in my mortgage to cover my line of credit - when is it a good idea to pay off my credit by increasing my mortgage?

  • What's the balance and current interest rate of both of the loans? – Move More Comments Link To Top Dec 11 '10 at 5:56
  • The real answer is that you should never run your line of credit up high enough, long enough, that this is worth doing... – keshlam Aug 6 '15 at 3:40
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There two answers, either never or now; which one is correct for you really depends on how you view the debt, and your discipline of paying it off.

As mentioned by @Vitalik, your absolute cheapest alternative may well be to keep the debt in your line of credit and merely pay it off. The fact that it is a higher interest rate than your mortgage may help to focus your pay-back to as short a time as possible.

If you pay back the debt over say a year, the overall paid interest may well be lower than if you had instead increased your mortgage. You could do a simple interest-rate calculation to determine if this is the case, using the difference between your credit-line rate and your mortgage rate. (Also to take into account, is any tax implications - I understand that in the USA mortgage payments are somehow tax deductable?)

If on the other hand, you do not plan to pay back the debt quickly, then you are certainly better off getting it moved to the lower-rate mortgage right away.

Do be aware of a subtle trap, however: you may lull yourself into a false sense of security as to the absolute amount of money you can borrow and owe. If you were to again run up your credit line, because it is available, you may find yourself in a worse situation than you meant to.

Doing this kind of credit-line to mortgage probably makes sense for durable assets, like a house addition or renovation, but I would personally recommend against it for even something like a car purchase, as you can end up paying more over time.

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    I see - so the main dangers with moving with my mortgage are that (a) I won't pay off my mortgage as quickly (since I have the option to pay over 30 years) and (b) I can run up my credit line again, and end up in more debt than I started with. What if, once I pay off my credit line, I remove it (or cap it at a very small amount)? – blueberryfields Dec 10 '10 at 14:53
  • @blueberryfields - exactly the problem. I personally view a credit line as an insurance policy. If I have an unexpected large expense, I can float it for a few months at lower rates that my credit cards. So lower it or cap it if that will help your financial discipline. – sdg Dec 11 '10 at 14:10
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if you are not planning to pay it off any time soon you might as well do it now. Mortgage is probably a low fixed rate. Refinance does cost money and getting a new 30 year mortgage may look attractive in a short term but will definitely cost you a lot in the long run.

I wouldn't do it but rather try to pay it off as soon as possible.

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  • My line of credit, though, has a higher interest rate on it than my mortgage does. – blueberryfields Dec 9 '10 at 22:49
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    Still better to pay off a 10% line of credit in 2 years rather than convert it into a 30 year 5% mortgage. – Vitalik Dec 9 '10 at 22:52
  • Isn't it better to pay off credit at 5% in 2 years, than to pay it off at 10% in 2 years? – blueberryfields Dec 10 '10 at 19:32
  • are you going to take a 2 year mortgage? did you take a refinance fees and taxes into account? – Vitalik Dec 10 '10 at 20:20
  • The mortgages that are available to me do not force me to keep paying them off over 30 years - I can pay them off in 2 years, or 6 months. Is that different where you live? Also, the refinance fees at my local banks are negligible. Which taxes should I be worried about? – blueberryfields Dec 11 '10 at 4:43
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Part of the answer depends on the various interest rates, fees and balances involved. For instance, refinancing often involves up front fees which mean that it isn't worth it even if you can get a lower rate by doing so. Exactly where the cutoff point is depends on your specific situation.

Perhaps more importantly, though, is what the line of credit was used for. Remember, by placing it on the mortgage, you are guaranteeing this debt with your house. Would you want the bank to foreclose on your house because of this debt?

Securing debt with your house makes sense for certain debts, such as purchasing the house itself, performing renovations, landscaping and home improvements, and purchasing major appliances which are reasonably considered part of your home. For other large purchases (vacations, cars, miscellaneous credit cards) you should carefully consider the pros of a lower interest rate against the con of placing an additional lien on your home.

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