What Is the Smartest Way to Pay Off a Debt?
By RONDA KAYSEN
Q. My wife took out a $30,000 personal loan from a colleague whom she would like to pay back now. To get the funds, we could either refinance the mortgage on our co-op in Jackson Heights, Queens, or take out a home equity line of credit. Given the current mortgage rates, which would be the wiser option?
A. Many homeowners look to the equity in their homes to pay for things like home improvements or college tuition, or to pay off credit card debt. You can tap that equity by refinancing your mortgage or opening a home equity line of credit (often referred to as a Heloc), which works something like a credit card, since you can keep drawing down money and repaying it as you go. Current interest rates and your personal situation will dictate which choice is best.
To decide, you should consider how much you owe on your existing mortgage, how much you need to borrow and how the interest rate on your current loan compares with today’s rates. Your decision “will depend on where rates are at” when you apply for the new loan, said Richard Davidman, a senior vice president at Element Financial Group, a wealth management firm.
If your interest rate is at least a half a point higher than today’s rates, it may make sense to refinance regardless of how much cash you need. However, if your current interest rate is lower or about the same as the current rates, you need to consider the closing costs, which are usually around $3,000 on a co-op, said Daniel Shlufman, managing director of Classic Mortgage. On a $30,000 loan, that amounts to a 10 percent charge — a huge sum. However, if you needed to borrow, say, $100,000, those closing costs would be more reasonable.
Which brings us to Helocs, which usually do not have closing costs. The interest rate on a Heloc is adjustable, not fixed. Since interest rates are rising, expect Heloc rates to trend up in the near future. Still, paying a higher rate might make more sense than paying closing costs, particularly if you don’t need to borrow all that much money and plan to pay it off relatively quickly. Before you go shopping for a Heloc, know that most banks do not give lines of credit to co-op shareholders, Mr. Shlufman said. So a home equity loan may not even be an option.
Source: The New York Times, What Is the Smartest Way to Pay Off a Debt?
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